One of the key elements in supply chain management is forecasted demand. Customer demand is obviously an important, if not the most important, factor in determining production and plans and inventory levels all along the supply chain. If more product is produced than demanded, the company and its suppliers are left with crippling inventories; if less product is produced than demanded, current and future lost sales can be devastating. Thus, it is critical that companies know what customer demand will be as closely as possible. It is also generally assumed that a company cannot control demand; customers determine demand, and companies don’t control their customers. As such, demand is often perceived to be strictly an input to supply chain management. This is not always the case, however, as is demonstrated by the unfortunate experiences of many companies. Following are a few examples of companies that treated demand as an independent factor in their supply chain management decision, to their chagrin.3
1. At mid-year, Volvo found itself with a surplus of green cars in inventory. In order to get rid of this inventory, the sales and marketing group offered discounts and rebates to distributors on green cars. The marketing plan was successful, and the demand for green cars increased. However, supply chain planners, unaware of the marketing plan, perceived that a new customer demand pattern had developed for green cars, so they produced more green cars. As a result, Volvo had a
huge inventory of green cars at the end of the year.
2. When Hewlett-Packard introduced a new PC, demand faltered when Compaq and Packard Bell cut prices. In reaction, supply chain planners at HP cut production back without realizing that sales and marketing had decided to match their competitors’ price cuts. The resulting stock-outs HP experienced resulted in a less than merry Christmas season.
3. Campbell Soup heavily promoted its chicken noodle soup during the winter when demand peaked, which resulted in even greater than normal demand. In order to meet this spike in demand, it had to prepare large amounts of ingredients like chicken in advance and store it. Also, in order to meet the demand, production facilities had to operate in overtime during the winter, which in turn required them to prepare other products in advance and to store them too. The huge inventories and production costs exceeded the revenues from the increased customer demand for chicken noodle soup.
4. Italian pasta maker, Barilla, offered discounts to customers who ordered full truckloads. This created such erratic demand patterns, however, that supply costs overwhelmed the revenue benefits. In each of these brief examples, the company was successfully able to influence customer demand with price discounts and effective marketing, demonstrating that demand is not a completely independent factor. In addition, in each case, an increase in sales did not result in increased revenues because they were overwhelmed by increased supply chain costs. This presents a complex problem in supply chain management. Effective marketing is generally a good thing because it does increase sales; however, it also makes forecasting demand more difficult because it creates erratic demand patterns tied to price changes. So what should companies do? Should they forego price discounts and promotions to render demand more stable in order to create a more consistent supply chain that can be effectively managed? One company we mentioned in this chapter has, in effect, done this. Identify this company and explain how it manages its supply chain. Also, discuss the complexities associated with managing a supply chain in which price changes from promotions and discounts are used and discuss strategies for overcoming these complexities.
