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Planning Demand and Supply in a Supply Chain

Manipulating the DemandChapter 9

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Matching Demand and Supply

Supply = Demand Supply < Demand => Lost revenue opportunity Supply > Demand => Inventory Manage Supply – Productions Management Manage Demand – Marketing

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Managing Predictable Variability with SupplyManage capacity

» Time flexibility from workforce (OT and otherwise)» Seasonal workforce, agriculture workers

» Subcontracting

» Counter cyclical products: complementary products Similar products with negatively correlated demands

– Snow blowers and Lawn Mowers

– AC pumps and Heater pumps

» Flexible capacities/processes: Dedicated vs. flexible

a,b,c,d

Similar capabilities One super facility

a

bc

d a

bc

d

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Managing Predictable Variability with Inventory

Component commonality– Remember fast food restaurant menus

– Component commonality increase the benefit of postponement. » More on this later

Build seasonal inventory of predictable products in preseason– Nothing can be learnt by procrastinating

Keep inventory of predictable products in the downstream supply chain

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Managing Predictable Variability with PricingRevisit Red Tomato Tools

Manage demand with pricing– Original pricing:

» Cost = $422,275, Revenue = $640,000, Profit=$217,725

Demand increases from discounting– Market growth– Stealing market share from competitors– Forward buying

» stealing your own market share from the future

Discount of $1 in a period increases that period’s demand by 10% (market and market share growth) and moves 20% of next two months demand forward

Can you gather this information –price sensitivity of the demand- easily? Does your company have this information?

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Off-Peak (January) Discount from $40 to $39

Month Demand Forecast January 3,000=1600(1.1)+0.2(3000+3200) February 2,400=3000(0.8)

March 2,560=3200(0.8) April 3,800 May 2,200 June 2,200

Cost = $421,915, Revenue = $643,400, Profit = $221,485

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Peak (April) Discount from $40 to $39

Month Demand Forecast January 1,600 February 3,000

March 3,200 April 5,060=3800(1.1)+0.2(2200+2200) May 1,760=2200(0.8) June 1,760=2200(0.8)

Cost = $438,857, Revenue = $650,140, Profit = $211,283Discounting during peak increases the revenue but decreases the profit!

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Demand Management

Pricing and Aggregate Planning must be done jointly Factors affecting discount timing and their new values

– Consumption: 100% increase in consumption instead of 10% increase

– Forward buy, still 20% of the next two months

– Product Margin: Impact of higher margin. What if discount from $31 to $30 instead of from $40 to $39.)

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January Discount: 100% increase in consumption, sale price = $40 ($39)

Month Demand Forecast January 4,440=1600(2)+0.2(3000+3200)

February 2,400=0.8(3000) March 2,560=0.8(3200) April 3,800 May 2,200 June 2,200

Off peak discount: Cost = $456,750, Revenue = $699,560Profit=$242,810

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Peak (April) Discount: 100% increase in consumption, sale price = $40 ($39)

Month Demand Forecast January 1,600 February 3,000 March 3,200 April 8,480=3800(2)+(0.2)(2200+2200) May 1,760=(0.8)2200 June 1,760=(0.8)2200

Peak discount: Cost = $536,200, Revenue = $783,520Profit=$247,320

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Performance Under Different ScenariosRegular Price

Promotion Price

Promotion Period

% increase in demand

% forward buy

Profit Average Inventory

$40 $40 NA NA NA $217,725 895 $40 $39 January 10% 20% $221,485 523 $40 $39 April 10% 20% $211,283 938 $40 $39 January 100% 20% $242,810 208 $40 $39 April 100% 20% $247,320 1,492 $31 $31 NA NA NA $73,725 895 $31 $30 January 100% 20% $84,410 208 $31 $30 April 100% 20% $69,120 1,492 Use rows in bold to explain Xmas discounts. The product, with less (forward buying/market growth) ratio, is discounted more.What gift should you buy on the special days (peak demand) when retailers supposedly give discounts?

E.g. Think of flowers on valentine’s day. How about diamonds?For flowers, what is (forward buying/market growth) due to discounting?How about for diamonds?

Need empirical data. What is available?

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Empirical Data: Who spends / How much on Valentine’s day

The average consumer spends $122.98 on 2008 Valentine’s Day, similar to $119.67 of 2007. Total US spending on Valentine’s Day is $17.02 B by 18+.

Spending – by gender

» Men again dishes out the most in 2008, spending an average of $163.37 on gifts and cards, compared to an average of $84.72 spent by women.

– by age » Adults: 25-34 spend $160.37.» Young adults: 18-24 spend $145.59.» Upper Middle age: 45-54 spend $117.91. » Lower Middle age: 35-44 spend $116.35.» Elderly: 55-64 spend $110.97.

Gifts» 56.8% of all consumers give a greeting card. » 48.2% plan a special night out. » 48.0% buy candy.» 35.9% buy flowers.» 12.3% give a gift card.» 11.8% buy clothing. » ??.?% buy diamonds

– Source: National Retail Federation www.nrf.com

Where

is forw

ard buy or m

arket

growth

due to disc

ounting?

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Factors Affecting Promotion Timing

Factor Favored timing High forward buying Low demand period High stealing share High demand period High growth of market High demand period High margin High demand period Low margin Low demand period High holding cost Low demand period Low capacity volume flexibility

Low demand period

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Summary

Optimality of peak vs. off-peak discounting depends on– Forward buy vs. Market growth