|M.Sc Student||Roey Feldhaim|
|Subject||Insurance for Service Failures - Utilizing Risk|
Allocation for Revenue Management
|Department||Department of Industrial Engineering and Management||Supervisors||Dr. Yedidsion Liron|
|Dr. Zahavi Gal|
|Full Thesis text|
In global markets with immense competition, companies strive to provide the most reliable service or product for consumers’ satisfaction. However, optimal service can be costly and economically unjustified. In this work, we aim to construct a framework under which an optimal service can be defined and achieved with respect to the total revenue management of the company. Under this framework, we suggest a novel approach connecting quality of service, risk management and the total revenue by incorporating “self-insurance” mechanism.
We show that by adding a self-insurance mechanism, we improve profitability. Furthermore, additional revenues can be earned by reducing the risk of damages for the consumers. Finally, we show that optimal service for maximum profitability does not imply risk-free service. We assume that the company and the customer have opposite motivation while engaging the transaction. Since providing high quality service is costly a company wishes to provide the least quality service that is still satisfactory for the highest price that the customer is willing to pay. At the same time, the customer strives to receive the most reliable service while paying the least price offered for the service. These opposing motivations suggest that an optimal price and quality can be achieved to best satisfy company and customer goals.
Our initial task employing the model is to define a space of events that consumer may consider as dissatisfactory and, in case of default, may suffer losses; e.g., company flight delays, product malfunction, recalls etc. We suggest the company to issue an insurance contract compensating for their own service failure. We claim that by doing so the company has an immediate inclination to improve the quality of service in order to avoid future payments in case of default. Assuming that the insured events are the ones causing the most dissatisfaction amongst customers, this mechanism enables and finances the improvements of the most disturbing, painful and loss generating events to the customers. Moreover, the insurance premium will reveal the willingness to pay to remove the threats for a specific service failure, and rank the importance of different events.
In order to take this approach, a company needs to reorganize its revenue management procedure. Initially, the company offers a product that is unprotected for failure for a price that maximizes its revenue under the customers’ willingness to pay distribution. Using the new mechanism, we suggest the company to offer insurance as a supplement to the original unprotected service. This procedure will segment the consumers into three different groups: those who are unwilling to pay for the unprotected service; those who are willing to pay for the unprotected service without insuring their losses from service failure; and those that are willing to purchase the service as well as the insurance. This partition inherently enables the company to generate more revenue from the sales of the service and at the same time finance self-improvement.
We implement our self-financing insurance mechanism on a real study case of flight delays and produce convincing numerical conclusions