Resource Allocation and Contract Pricing

1. Resource Allocation and Contract Pricing Brenda Dietrich

2. 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

3. 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

4. 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

5. 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.

6. 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?

7. 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

8. 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 • Evaluate many scenarios of demand to determine peak and likely resource requirements • Rapidly solve large optimization models representing allocation of resources against demand scenarios • Benefits: Accurate cost models for pricing of contracts, and fast evaluation of opportunities. • expected cost, confidence intervals, identification of risks • Issues: Cost of new contract depends on current contract base

9. 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.

10. Business Continuity & Recovery Services • The system is modeled as a queueing system with 4 arrival streams • hurricanes, earthquakes, floods, power outages. • 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 # 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

11. 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. • solvable with queueing model • Extensions • multiple skill classes • geographies - location • insert delay into schedulingt

12. 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

13. IT application Hosting

14. 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

15. 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

16. 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"