Resource Allocation
and
Contract Pricing
Brenda Dietrich
Outline
Motivation
Examples
Overnight Delivery
Business Recovery
Desk-side Service
IT hosting
Product Repair/Upgrade Services
Known
factors that could/should be considered
Scale, Variability, Predictability
Issues
and Opportunities
Motivation
Contracts,
especially contracts for services, are becoming increasingly
complex
bundling of goods and services
delivery over time/space
base cost, plus numerous adders
fixed + variable beyond some limit
rebates
The total value of the contract includes factor not explict in the contract
"drag"
after sale service and parts
PR
Services contract delivery terms
Goods
or services are to be provided over time
on a specified schedule
e.g. PC's, some application hosting
as required
business recovery, warranty service
as needed by your customer's customer
web catalogues,
video on demand
application hosting
transportation
Contract
may specify min and max, but allow flexibility in
timing
mix
location
Service levels and entitlements
Contracts
for services typically specify service levels and penalties for
not meeting them
Multiple service levels, with higher unit cost for premium services
Penalties for missed service
average service level (per defined measurement period)
penalty per miss above threshold (per period)
 Improvements over past performance, or against industry
benchmarks
Services
are marketed based on reliability and flexibility, as well as price
Contracts
may specify "entitlements" per measurement period
surplus may be forfieted
additional charges for exceeding entitlement
in supply chain "flexibility" may be a specified entitlement.
Role of Resources
Fulfillment
requires the deployment of resources, but there are choice
Which resources to use
When to use them
Typically
multiple contract are being fulfilled from the same pool of
resources
When
there are no scare resources: serve all contracts at maximum
profit or minimum cost
When
there are shortages:
select which penalties to incur or which requests beyond entitilemnt
to serve to maximize profit
define "profit" - current period, long term expected, ??
Resource allocation decisions can impact profit in operations.
Can resource allocation tools help in pricing?
Outline
Motivation
Examples
Overnight Delivery
Business Recovery
Desk-side Service
IT hosting
Product Repair/Upgrade Services
Known
factors that could/should be considered
Scale, Variability, Predictability
Issues
and Opportunities
TransportationContract Pricing
Problem:
Determine per lane, per unit price for a long term
contract, involving large, but unknown volumes and multiple lanes,
and service guarantees
Tools:
Customer demand models and resources optimization
Model the demand variability by day, based on similar customers
ƒ Evaluate many scenarios of demand to determine peak and likely resource
requirements
ƒ Rapidly solve large optimization models representing allocation of
resources against demand scenarios
ƒ
Benefits:
Accurate cost models for pricing of contracts, and fast
evaluation of opportunities.
ƒ
expected cost, confidence intervals, identification of risks
Issues:
Cost of new contract depends on current contract base
Business Continuity & Recovery Services
BCRS - insurance for computer facilities:
If customer's computer facilities are unavailble, IBM provides
comparable facilities for them
Also provides data vaulting, copies of application software, and testing
facilities
Cost of serving a customer depends on
their equipment
their applications
their geographic location
and the pool of customers already under contract
Pooling and redeployment of IBM resources is possible, given
adequate leadtime.
Business Continuity & Recovery Services
The system is modeled as a queueing system with 4 arrival streams
hurricanes, earthquakes, floods, power outages.
# of Computers
Exceedance Probability (in percentage)
Client server DEC
IBM Large IBM Midrange
-----------------------------------------------------------------------------1
47.60
3.20
91.72
98.28
2
30.64
1.44
77.64
96.72
......
6
6.28
0.12
25.08
71.08
7
4.72
0.12
19.96
61.16
8
3.44
0.04
16.60
52.68
Can compute the inventory risk exposure
Can Compute the target inventory levels
Can compare new customer to existing pool (.7x, 12.5x)
Can compare risk and inventory levels with and without new customer
Deskside Support Subject to
Multiple SLAs
Each
arriving call has a specific Service Level attached to it.
Contract specifies response times (x) and service levels (y) for each
class of calls
SLA specified as: Probability{time to service the call<=x} >= %y.
Penalties associated with not acheiving specified service levels
Cost is propostional to number of service technicians
Historical data on calls, some limits and averages specified in the
contract
Allocation
rules play a signifcant role in determining technician
requirements
dedicated "gold service" techs vs adaptive re-allocation.
ƒ solvable with queueing model
ƒ
Extensions
multiple skill classes
ƒ geographies - location
ƒ insert delay into schedulingt
ƒ
IT application Hosting
Large
enterprises haveing 100's of IT applications seek to reduce
costs by outsourcing the operation of some of these applications
For each application know:
HW requirements
Skills
Time Zone, Risk, Security needs, etc
 For
each location know:
HW availability and operating costs
Skill availability anc costs
Time Zone, Risk level, Security level, etc
 Some
linkages between applications
 Hosting
proposal includes proposed locations for each application and
total cost
IT application Hosting
Spare-Parts Planning
Challenges:
Develop
model and solver to minimize inventory and transportation costs, and satisfy stringent
time-based service criterion
Replace hierarchical model with one that emphasizes rapid delivery
Solver must execute within 1 day (on a full national problem instance) to work within a 1-week
planning cycle
Cost of fulfillment depends on inventory costs and service technician costs
Profit is made by amortizing these costs across multiple customers with similar requirements
Partial list of factors to consider
Contract
duration relative to delivery period
Varibility
of demand
mix, location, timing
Predictability
of demand
how long is the "prediction" interval relative to the "deployment"
interval
can prediction be improved
Resource
flexibility
Resource uniformity
Switching costs for redeployment of resources
QOS
Measurement intervals
Issues and Opportunities
Disconnect
between sales and fulfillment
inconsistent cost assumptions
inconsistent resource availability assumptions
inconsistent assumptions on resource allocation
Role
of demand forecast in pricing a contract
Must each contract "stand alone" as profitable
what
is services analogy of "available to promise"
"capable tp promise"
"available/profitable to sell"