Supply Chain Management

Managing Demand in Supply Chains

Demand Management

• Demand can be shaped or influenced by: (1) Promotion and/or (2) Pricing (or discounts)

• Timing of promotion and pricing changes is important

• Demand increases can result from a combination of three factors: • Market growth (increased sales, increased market size) • Stealing share (increased sales, same market size) • Forward buying (same sales, same market size)

Demand Management

• Pricing and aggregate planning must be done jointly, and split profit among the stages involved.

• Promotion (or discount) timing (peak vs off-peak) is crucial.

Demand Management and Factors Affecting Promotion Timing

Factors affecting promotion timing: • Impact of promotion on demand • Product margin:

- Impact of higher margin • Consumption and forward buying:

- Changing fraction of increase coming from forward buy (e.g., 100% increase in consumption instead of 10% increase)

• Inventory holding cost • Cost of changing capacity

Month Demand Forecast January 1,600 February 3,000 March 3,200 April 3,800 May 2,200 June 2,200

• Working days/month = 20 days • Max overtime/worker/month = 10 hours • Inventory at end of June = 500 units

Example: Develop an Aggregate Plan for the Following Demand

See Excel File Demand-Management-Example.xlsx

Aggregate Planning data

Item Cost Materials $10/unit Inventory holding cost $2/unit/month Marginal cost of a stockout $5/unit/month Hiring and training costs $300/worker Layoff cost $500/worker Labor hours required 4/unit Regular time cost $4/hour Over time cost $6/hour Cost of subcontracting $30/unit Initial Inventory (January) 1000 units Initial workforce (January) 80 emplyees

Optimal Aggregate Plan (No Promotion)

Ht Lt Wt Ot It St Ct Pt Period # Hired # Laid off # Workforce Overtime Inventory Stockout Subcontract Production

0 0 0 80 0 1,000 0 0 1 0 15 65 0 1,983 0 0 2,583 2 0 0 65 0 1,567 0 0 2,583 3 0 0 65 0 950 0 0 2,583 4 0 0 65 0 0 267 0 2,583 5 0 0 65 0 117 0 0 2,583 6 0 0 65 0 500 0 0 2,583

Cost = $422,275, Revenue (at $40/unit) = (16,000)($40) = $640,000

Profit = $217,725 See Excel File Demand-Management-Example.xlsx

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

Month Demand Forecast

Demand Changes

January 3,000 10% increase+20% from Feb+20% from

March February 2,400 – 20% to January March 2,560 – 20% to January April 3,800 May 2,200 June 2,200

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

Peak (April) Discount from $40/unit to $39/unit

Month Demand Forecast

Demand Changes

January 1,600 February 3,000 March 3,200 April 5,060 10% increase+20%

from May+20% from June

May 1,760 – 20% to April June 1,760 – 20% to April

Cost = $438,857, Revenue = $650,140, Profit = $211,283

January Discount: 100% Increase in Consumption, Sale Price = $40 to $39

Month Demand Forecast

Demand Changes

January 4,440 100% increase+20% from Feb+20% from

March February 2,400 – 20% to January March 2,560 – 20% to January April 3,800 May 2,200 June 2,200

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

Peak (April) Discount: 100% Increase in Consumption, Sale Price = $40 to $39

Month Demand Forecast

Demand Changes

January 1,600 February 3,000 March 3,200 April

8,480

100% increase+20% from May+20% from

June May 1,760 – 20% to April June 1,760 – 20% to April

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

Performance Under Different Scenarios

Regular Price

Promotion Price

Promotion Period

Percent increase in demand

Percent forward buy

Profit

$40 $40 NA NA NA $217,725 $40 $39 January 10 % 20 % $221,485 $40 $39 April 10% 20% $211,283 $40 $39 January 100% 20% $242,810 $40 $39 April 100% 20% $247,320 $31 $31 NA NA NA $73,725 $31 $30 January 100% 20% $84,410 $31 $30 April 100% 20% $69,120

Conclusions

1. Average Inventory increases if we promote in the peak period and decreases if we promote in the off-peak season.

2. Promoting during peak periods reduces profit if the significant increase in demand comes from forward buying (compared to growth).

3. If the increase in forward buying is a small percentage compared to the increase in demand (i.e., consumption), then it is more profitable to promote in peak season.

Conclusions …

4. As the product margins decline, promoting during peak periods becomes less profitable.

5. Both pricing (demand management) and aggregate planning (supply management) decide the supply chain profitability.

Factors Influencing Discount Timing

Given that there is an impact of promotion on demand: • Impact of discount on consumption • Impact of discount on forward buy • Product margin

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 flexibility Low demand period