Managing Demand

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 later.
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.