Supply Chain Frontiers issue #16. Read all articles in this issue.
In retailing it is almost second nature: stimulate sales of slow-moving items by marking down the price. It is called demand shaping, and companies such as Dell have refined and developed the strategy and are now applying it in many markets. Demand shaping could offer companies new ways to match supply and demand - one reason why the MIT Center for Transportation & Logistics’’ (CTL) recently launched demand management (DM) research program will take a hard look at the strategy.
Dell shapes demand every day, explained Research Director Larry Lapide, who is leading the new DM research effort. “A group of people meet and they look at inventory levels,” he said. If the levels are excessive for certain products they will fire up the company’s web-based marketing program; if there is a supply shortage the managers will do the opposite. “They can do it because they can change the web every day and they have real-time visibility into suppliers and clear demand signals,” Lapide said.
A recent survey of Supply Chain Strategy readers – the monthly newsletter co-produced by CTL – suggests that companies regularly adjust the levers of demand. Conducted this June/July, one of the questions asked was what type of demand shaping is done during the DM planning process. Out of the 160 respondents 38% said that no demand shaping was carried out. Thirty-eight percent said that they apply the strategy on an ad hoc basis through marketing programs and pricing actions. Twenty-seven percent and 22% advance or delay planned marketing programs and new product launches respectively to influence demand. “According to the survey more companies than we expected are using this strategy,” commented Lapide.
And there are many variations on the demand shaping theme. This was evident at the Demand Management: Matching Supply & Demand in Real-Time executive roundtable held this August in Chicago to launch CTL’s demand management research program. At the event Lapide moderated a panel of leading industry experts.
One roundtable participant described how the restaurant chain MacDonald’s writes a custom algorithm that includes 20 to 50 causal factors that influence the demand for each item in its promotional campaigns. As programs roll out demand is carefully monitored and if an item is not moving well the company intensifies its marketing efforts. It puts more marketing horse power behind slow-movers because supply has already been allocated and is sitting in various master warehouses and distribution centers.
Hewlett Packard and Wal-Mart have formed a unique partnership to shape demand on the busiest retail day of the year in the United States: the day after Thanksgiving, commonly known as Black Friday. In collaboration with Wal-Mart a special product is designed by HP - a printer, for example - that is sold only on that day at a special price. The idea is to use the product to lure customers into Wal-Mart stores and hence stimulate demand.
“Really this is about optimally manipulating demand and supply, and there are limitless ways that companies can do it to improve sustained profitability,” said Lapide. He goes further to state, “supply always matches demand in the long run, but most often through losing too many sales opportunities or selling products at distressed prices.” Finding out what methods are used, and how demand shaping can be optimized and applied, is one of the tasks that CTL’s new DM research project team will undertake (see CTL Announces Pioneering DM Research in Updates section of this Frontiers newsletter).
For more information on how to join CTL’s DM research effort contact Larry Lapide.