Supply Chain and Operations Management Glossary (V)

Value based pricing: charging each customer an amount close to the customer’s value for the product. This presumes that resale among customers does not occur and that one can determine each customer’s value for the product. One form originally used by Brown Shoe Company, then IBM, and then Xerox, was metering. Brown and IBM charged by hours used. Xerox charged by copies made. See revenue management, discriminatory pricing, and promotion.

Value Engineering: a cost reduction philosophy based on carefully identifying the true purpose of any component in a system and then finding the cheapest yet acceptable way of fulfilling that purpose.

VAN (Value Added Network): A third party provider of network services, such as EDI capability, to buyers and sellers.

VAR (Value Added Reseller): A firm that sells a product bundled with some additional features (e.g., installation) that tend to be customer specific. E.g., a user of the Oracle database may buy the Oracle software from a VAR who installs it on the customer’s computer.

Variables sampling: In quality assurance, sampling in which quality is measured along a continuous interval (e.g., diameter, weight, strength, etc.). In contrast, see attributes sampling.

Variance: 1) A measure of the variability of a set of data (e.g., sales per week). If we have a sample of n observations, xi, for i = 1, 2, … n, and xbar is the mean of the sample, then the sample variance is Σi (xi – bar)2/n. Sometimes an algebraically equivalent, but numerically less accurate formula is suggested: Σi xi 2/n – xbar2. When the variance is small relative to the mean, the latter formula can be very inaccurate. Thus, it should be avoided. Nevertheless, some popular spreadsheet programs use the less accurate version. The sample variance is a biased estimate of the population variance. That is, the variance as n approaches the population size. The sample variance underestimates the population variance because the squared differences are taken with respect to the sample mean, xbar, rather than the (generally unknown) population mean. If the population size is infinite, then an unbiased estimate of the population variance is Σi (xi – xbar)2/(n – 1). A useful result when dealing with the sum of two random variables (e.g., the pooled demand of two similar products) is that: Variance(D1+D2) = Variance(D1) +Variance(D2) + 2*Covariance(D1,D2). 2) In accounting, a variance is the difference between actual and that predicted by standard.

VAT (Value Added Tax): A tax, common in Europe, applied at all levels of the supply chain on the difference between what a producer charges for his product and the cost of all the inputs to the product. In contrast, a sales tax is applied only at the retail point to the full price the seller/retailer charges for product.

Vertical integration: the ownership by a single company of several levels in the supply chain. For example, in the 1920’s Ford owned both steel mills and car factories. See also Coase’s Law.

Vickrey auction: A sealed bid auction in which the higher bid(s) wins, but the winner(s) pay the price of the highest unsuccessful bid. This produces approximately the same result as an open, rising price auction. The desirable feature of a Vickrey auction is that bidders have the incentive to bid their true value for the product. See Vickrey, W. (1961), “Counterspeculation, Auctions, and Competitive Sealed Tenders”, Journal of Finance, vol. 16, no. 1(March), pp.8-37. In contrast, see also: Dutch auction.

VMI (Vendor Managed Inventory): An inventory management policy whereby the supplier decides when to restock product at his customer’s site based on up-to-the minute usage information from the customer. This allows the supplier to take into account his own costs of restocking (e.g., fixed costs of restocking) shared costs when restocking several nearby customers, etc. These agreements typically include a penalty to be paid by the supplier if there is a stockout, and an upper limit on how much inventory can be carried at the customer. The payment arrangement may allow the customer to pay for product only when the customer uses it. The customer must provide the supplier with up-to-date (e.g., daily) information on stock level, and perhaps even forecasts of future usage. See also CPFR, and continuous replenishment.

VPN (Virtual Private Network): An arrangement among two or more organizations whereby a public network, such as the internet, is made to appear as a private, secure communications network to the participating parties.

About the Author: AJ Amjad Khanmohamed

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