Managing Demand in the Supply Chain

Supply chains can influence demand by using pricing and other forms of promotion. For exam­ple, John Deere offers a discount to farmers who are willing to take ownership of a planter during the off-season. The further from the peak that a farmer places an order, the larger the discount offered by Deere. The goal here is to move demand from the peak period to the off-peak period, thus reducing predictable variability. It is thus important to understand how promotions influ­ence demand.

When a promotion is offered during a period, that period’s demand tends to go up. This increase in demand results from a combination of the following three factors:

1. Market growth: An increase in consumption of the product occurs from either new or existing customers. For example, when Toyota offers a price promotion on the Camry, it may attract buyers who were considering the purchase of a lower-end model. Thus, the promotion increases the size of the overall family sedan market as well as increasing Toyota’s sales.

2. Stealing share: Customers substitute the firm’s product for a competitor’s product. When Toyota offers a Camry promotion, buyers who might have purchased a Honda Accord may now purchase a Camry. Thus, the promotion increases Toyota’s sales while keeping the overall size of the family sedan market the same.
3. Forward buying: Customers move up future purchases (as discussed in Chapter 11) to the present. A promotion may attract buyers who would have purchased a Camry a few months down the road. Forward buying does not increase Toyota’s sales in the long run and also leaves the family sedan market the same size.

The first two factors increase the overall demand for Toyota, whereas forward buying simply shifts future demand to the present. It is important to understand the relative impact from the three factors as a result of a promotion before making a decision regarding the optimal timing of the promotion. In general, as the fraction of increased demand coming from forward buying grows, offering the promotion during the peak demand period becomes less attractive. Offering a promotion during a peak period that has significant forward buying creates even more variable demand than before the promotion. Product that was once demanded in the slow period is now demanded in the peak period, making this demand pattern even more costly to serve.

Factors influencing the Timing of a Promotion

Four key factors influence the timing of a promotion:

• Impact of the promotion on demand
• Cost of holding inventory
• Cost of changing the level of capacity
• Product margins

If a promotion primarily results in forward buying (as may be the case for a product like detergent), it is best to use promotions to reduce the seasonal peak by offering a price discount during low-demand periods. Offering a promotion during low-demand periods also makes sense if the manufacturer has a high cost of holding inventory or finds it expensive to change produc­tion levels. It is for this reason that John Deere offers its promotion during low-demand periods before the peak. In contrast, if a promotion results in a significant increase in sales by attracting new buyers, it may be better to offer a price discount during the peak period, when many buyers are in the market for the product. The increased cost of production because of the higher peak demand resulting from a promotion is likely to be offset by the margin obtained from new buy­ers. Table 9-1 summarizes the impact of various factors on the optimal timing of promotions.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.