Answer: Supply chains can influence demand by using pricing and other forms of promotion. Marketing and sales often make the promotion and pricing decisions, and they typically make them with the objective of maximizing revenue. However, changing the demand pattern can change the cost the company incurs to meet that demand. Thus, pricing decisions based only on revenue considerations often result in a decrease in overall profitability. The same is true when thinking of the supply chain. The retailer sets the price and runs promotions to generate

demand. This is regularly done without taking into account the impact on the rest of the supply chain. Therefore, the combination of pricing and aggregate planning (both demand and supply management) can be used to maximize supply chain profitability.

When performing aggregate planning, the goal of all firms in the supply chain should be to maximize supply chain profits because this outcome leaves them more to divide with each other. For profit maximization to take place, companies need to devise a way to collaborate and, just as important, determine a way to split the supply chain profits. Determining how these profits will be allocated to different members of the supply chain is a key to successful collaboration. Difficulty: Moderate

5.

Discuss the impact of promotion on demand within a supply chain.

Answer: Companies want to explore if and when to potentially offer a promotion. Four key factors influence the timing of a trade promotion:

? Impact of the promotion on demand ? Product margins

? Cost of holding inventory ? Cost of changing capacity

Companies should identify whether each factor favors offering a promotion

during the high- or low-demand periods. They start by considering the impact of promotion on demand. When a promotion is offered during a period, that period’s demand will 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, either from new or existing customers.

2. Stealing share: Customers substituting the firm’s product for a competitor’s product.

3. Forward buying: Customers move up future purchases to the present.

The first two factors increase the overall demand, whereas the third simply shifts future demand to the present. It is important to know the relative impact from the three factors as a result of a promotion before making the 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. Average inventory increases if a promotion is run during the peak period and decreases if the promotion is run during the off-peak period.

Promoting during a peak demand month may decrease overall profitability if a significant fraction of the demand increase results from a forward buy. As forward buying becomes a smaller fraction of the demand increase from a promotion, it is

more profitable to promote during the peak period. As the product margin declines, promoting during the peak demand period becomes less profitable. Other factors such as holding cost and the cost of changing capacity also affect the optimal timing of promotions. When faced with seasonal demand, a firm should use a combination of pricing (to manage demand) and production and inventory (to manage supply) to improve profitability. The precise use of each lever varies with the situation. This makes it crucial that enterprises in a supply chain coordinate both their forecasting and planning efforts. Only then are profits maximized.

Difficulty: Moderate

6.

Discuss key issues when managing predictable variability of demand within a supply chain.

Answer: 1. Coordinate planning across enterprises in the supply chain. For a supply chain to successfully manage predictable variability, the entire chain must work toward the one goal of maximizing profitability. Everyone in a supply chain may agree with this in principle, but in reality, it is very difficult to get an entire supply chain to agree on how to maximize profitability. Within a company, marketing often has incentives based on revenue, whereas operations has incentives based on cost. Within the supply chain, different enterprises are judged by their own profitability, not necessarily by the overall supply chain’s profitability. It is clear that without working to get companies to work together, the supply chain will return suboptimal profits. Therefore, firms in the supply chain need to collaborate through the formation of joint teams. Incentives of the members of the supply chain must be aligned. High-level support within the organization, including support from the chief executive officer, will also be needed because this coordination often requires groups to act counter to their traditional operating procedures. Although this collaboration is difficult, the payoffs are significant.

2. Take predictable variability into account when making strategic decisions. Predictable variability has a tremendous impact on the operations of a company. A firm must always take this impact into account when making strategic decisions. However, predictable variability is not always taken into account when strategic plans are made, such as what type of products to offer, whether or not to build new facilities, and what sort of pricing structure a company should have. The level of profitability is greatly affected by predictable variability and, therefore, the success or failure of strategic decisions can be determined by it.

3. Preempt, do not just react to, predictable variability. Companies often have a tendency to focus on how they can effectively react to predictable variability. This role often falls on operations, which tries to manage supply to best deal with predictable variability. The management of supply as well as demand provides the best response to predictable variability. Actions like pricing and promotion that manage demand are preemptive and often in the domain of marketing. It is important for marketing and operations to coordinate their efforts and plan for predictable variability together well before the peak demand is observed. This coordination allows a firm to preempt predictable variability and come up with a response that maximizes profits.