Why is it cheaper to buy airline tickets on Tuesdays?

Gad Allon

By Gad Allon, The Kellogg School of Management at Northwestern University. Source: The Operations Room.

Why do firms dynamically modify their price? There several reasons, but the main goal of dynamic pricing is to allow for better allocation of products to customers according to their preferences while exploiting such differences to improve the overall profitability of the firm. (Prices may also reflect changes in the willingness to pay of customers or changes in the costs of providing the service).

The Wall Street Journal recently had an article (“Whatever You Do, Don’t Buy an Airline Ticket On … “) that made the case that one should not buy airline tickets over the weekend since these are consistently higher than the prices during the middle of the week, which, in my opinion, makes very little sense. Don’t get me wrong: it’s not that I am saying that it does not happen. I am merely saying that it makes very little sense to alter the prices so frequently, in a manner that seems to add very little value to the airlines. What kind of temporal differences does the airline exploit here?

The two main reasons that the article cites are:

When airlines want to push through a fare increase, marking up their basic prices across the board usually by $5 or $10, they often do that on Thursday night, then watch to see if competitors match and if the higher rates stick over the weekend. If competitors balk, prices can be rolled back by Monday morning.

And

In addition, airlines don’t manage their inventory as actively on weekends, so if cheap seats sell on some flights, prices automatically jump higher. Fare analysts may decide later to offer more seats at cheaper prices, but not until they come back to work on Monday, according to airline pricing executives.

But more than anything, it seems that this cycle is still a remnant from the times most of the sales were done through travel agencies, and airlines wanted sales out early in the week to generate buzz while customers could buy from travel agencies. At that time, sales launched on Friday may not get noticed. Is it possible that with all the sophisticated data analysis methods, airlines are still bound by these traditions?

Another thing that somewhat surprises me is the weekend effect. We live in a world in which people purchase tickets and communicate 24/7. Yet, airlines have to wait until after the weekend for managers to come and override the system’s recommendations. If this had to be done once or twice, I would understand. But it seems that this has to be done at the beginning of many weeks. Can’t someone fix it? Can’t one predict the impact of price changes? Maybe I shouldn’t be so surprised, as this may be another explanation why airlines do so poorly financially.

Quality Control and Printing Money, or, why Having an Helicopter is not enough

By Gad Allon and Martin Lariviere, The Kellogg School of Management at Northwestern University. Source: The Operations Room.

Gad Allon

Martin Lariviere

CNBC had an interesting article on the problems in the production of the new $100 bills. (“The Fed Has a $110 Billion Problem with New Benjamins“, hat tip to Ian Farrington).

Several years ago in a speech that earned him the nickname “Helicopter Ben” – Federal Reserve Chairman Ben Bernanke said that the government could easily reverse a deflation, just by printing money and dropping it from helicopters. Apparently, the government is not so good in printing money:

An official familiar with the situation told CNBC that 1.1 billion of the new bills have been printed, but they are unusable because of a creasing problem in which paper folds over during production, revealing a blank unlinked portion of the bill face. A second person familiar with the situation said that at the height of the problem, as many as 30 percent of the bills rolling off the printing press included the flaw, leading to the production shut down.  The total face value of the unusable bills, $110 billion, represents more than ten percent of the entire supply of US currency on the planet, which a government source said is $930 billion in banknotes. For now, the unusable bills are stored in the vaults in “cash packs” of four bundles of 4,000 each, with each pack containing 16,000 bills.

We tend to hear about quality problems when there is a recall (see Toyota, BMW, etc… ), but in this case, the product is still in the vault.  The interesting part though is that no one knows what’s causing the problem. And because they don’t know, they cannot figure out how many contain this issue, or even how to create a mechanism to sort the good bills from the flawed ones. Without a clear system, one needs to sort them by hand (which will take between 20- 30 years). Sorting them through an automated mechanism will take “only” a year. To get a sense for the loss in shredding the defective ones:

According to a person familiar with the matter, the bills are the most costly ever produced, with a per-note cost of about 12 cents—twice the cost of a conventional bill. That means the government spent about $120 million to produce bills it can’t use. On top of that, it is not yet clear how much more it will cost to sort the existing horde of hundred dollar bills.

Interestingly, the article says that more than a decade of research and development went into the new security features on the redesigned $100. Yet, as in many cases, we see that a lot of thought is given to the design of the product, but not so much time and attention are given to the production process.

The main question I have is why we have to print a whole batch of 1.1 billion bills before we subject these to rigorous testing.  I am sure that some (or maybe even extensive) testing has been done, but it seems that only inspection by people detected these issues. Unlike many products, allowing people to use a beta version of the product is not possible, but it is quite obvious that these issues had to be detected somehow before the large scale production and before the launch date. I am not familiar with the fixed costs associated with the production of these bills, but if this is not exorbitantly high, one may hope for a small run before full production begins.

For those worried about the prospects of our economy, the machines are still printing the old bills.

Lean Advertising

Gad Allon

By Gad Allon, The Kellogg School of Management at Northwestern University. Source: The Operations Room.

I have very few rules as a blogger and one of them is that whenever I get a reference to an article from two different former students I must post about it. I got this reference to an article that appeared on Advertising Age (“Why a Little Discipline Is Good for the Creative Process”) from two former students (hat tips to Debbie Mendel and Tania Martino) at the beginning of the summer, but only now got to post about it.

The article discusses implementing ideas from Six Sigma to more creative fields:

Companies that implement a methodical process, such as Procter & Gamble or Microsoft, tend to deliver consistently better communications and business results, and their brands enjoy greater value. They tend to beat competitors on such key attributes as “cycle time” and “speed to market,” and have a higher degree of success when it comes to new-product launches. Most important, a meticulously executed process can deliver savings of more than 30% and improve productivity, as the need for redirects and errors is minimized. In fact, much of the angst caused by contract renegotiations and the squeeze on agency fees could have been mitigated had marketers focused on fixing what’s “broken” (the process) and not what’s “convenient” (agency compensation).

While the author refers to this as Six Sigma, (and tries to coin the term Three Sigma to tone it down), I find most of the suggestions to be more related to lean operations.  Many of the tools suggested are important, but interestingly are not entirely well understood from the article. In particular, the author suggests to

Avoid the iterative process: The common practice of separating creation from production is unsound. Upstream production involvement in the process is necessary to avoid flawed hand-off, and budget boundaries must be defined upfront.”

In essence I agree with this point, but I think the main issue is not to avoid the iterative process, but make the iteration short and quick, which can be achieved by moving to a cellular layout and keeping a single-unit transfer (see implementation in software developments, such as Agile).  There are many other suggestions, many directed at thinking about the creative process as a process and using different tools and measurements to improve it.  However, one just has to scroll to the end of the page and read the talkbacks to get a sense of the level of debate in this field regarding these “techniques”:

Yeah, lets process the hell out of everything, measure every little detail and increase efficiency. This isn’t the manufacturing sector, there are no assembly lines, we aren’t making widgets.”

The words “methodical” and “meticulously” scare me. They sound like micro-managing, robot jargon.

The resentment is well understood and in my opinion stems from not understanding the core of these ideas, as well as pure resistance to change.

Part of the idea of lean was to take the basic methods of Taylor, but involve the employee and the customer in the continuous improvement process. Furthermore, one of the key ideas behind lean is of tailoring – no tool or process fits all environments. Out of the list of steps the author brings the one about continuous improvements is probably the most important one:

Improve continuously. The process is not linear, and it is not close-ended. The process should include client feedback, brand reviews and 360-degree audits, all providing the foundation for continuous improvement.”

We have devoted already several posts to the notion of lean as frequent and gradual improvement, both for startups and mature organizations, both in the service and the manufacturing sectors. For a creative process, if you take one things from this article, this should be it.



Managing inventory via Tweets

By Gad Allon and Martin Lariviere, The Kellogg School of Management at Northwestern University. Source: The Operations Room.

Martin Lariviere

Gad Allon

How can a retailer take the pulse of demand?  Is looking at sales enough? You can’t sell what you don’t have so you may never know how many customers came into the store liked a style but couldn’t find their size. Lululemon thinks they have a found a way to do just that (Tweet to Lululemon: Smaller sizes, please, Jun 10, Globe and Mail).

Instant feedback on Facebook and Twitter is helping the chief executive officer of Lululemon Athletica Inc. to figure out what items are hot with customers, and which ones are duds. Comments through social media about the chain running out of women’s size 4s and 6s, for example, are helping her adjust her product purchasing to ensure she’s in stock of those sizes rather than forfeiting sales, as has happened in the past. Identifying the high-demand products to carry for her “guests,” as the company calls its customers, is crucial for the purveyor of premium athletic wear.

“We learn more about that on Facebook and through social media: what are the guests really screaming for and so we actually use [the feedback] to get a little bit more indication,” [CEO] Christine Day said. The running line “really shifted our guest size profile down to the smaller sizes because we’re attracting a more athletic, fit guest which is perfectly in line with our target.”

This is an interesting twist on using social media. Obviously a challenge is getting enough feedback from customers.  I have to admit that I have rarely affiliated with a brand on Twitter or Facebook (i.e., I am old) so I am not sure how many people are inclined to provide meaningful feedback to the firm.  On the other hand, these are presumably Lululemon’s hardcore clientele so they are worth listening too. A second challenge is whether the firm has the operational capability to respond. Yes, customers are looking for more size 6 gear but apparel lead times are long. Will it frustrate customers if their complaints are heard but they only see the evidence of that next season?

A final question, what if what customers want is not completely in synch with the firm’s strategy?

Still, part of Ms. Day’s strategy is something she calls a “scarcity model.” She doesn’t want the stores to carry too many size 4s and 6s, to keep customers coming back.

“If you like size 6 or 4 in one of the colourways or seasonal styles, it’s never our strategy to be fully at demand level there. So there will always be a certain amount of noise that we expect but that helps keep the product and the brand strong, which is also part of our strategy,” Ms. Day said.

Lululemon wants to be a premium brand and that doesn’t align with a fire sale clearance at the end of the season. Scarcity of is part of the plan; turning away some size 6 demand is inevitable. Is that consistent with trying to solicit feedback over Facebook?