Changing the Shape of Supply and Demand
Demand sensing and demand shaping have become important strategies when considering customer collaboration and downstream visibility to improve supply chain efficiency.
Demand sensing refers to forecasting methods that use mathematical techniques and real-time information to create more accurate demand forecasts (a variety of supply chain analytics), while demand shaping is the act of influencing demand to match supply.
Demand shaping is both a strategic and tactical tool. Strategically, it attempts to align customers’ longer-term demand patterns to longer-term resource and capacity constraints. Tactically, it uses price, promotion, and products/services bundling to influence customer demand toward available supply.
One early effort to recognize and understand how shaping demand can help minimize the bullwhip effect caused by downstream demand variability on the upstream supply chain was the collaborative effort by Procter & Gamble and Walmart in the late 1980s that resulted in everyday low pricing.
This and similar efforts led to the development of tactics that influence demand to match supply, such as price incentives, cost modifications, and product substitutions to entice customers to purchase specific items at certain times.
Demand shaping falls into three major categories:
- Pricing. Providing incentives such as discounts, coupons, increased advertising, and even internal sales incentives.
- Counter-seasonal product and service mixing. Fully utilizing resources and allowing for a more stable workforce.
- Back ordering during periods of high demand. This may avoid overtime and help keep capacity more constant.
In most cases, the supply chain management function oversees back ordering processes, but it can influence many other demand shaping options that are primarily controlled more by sales and marketing in a typical organization. One way to make the case for pricing adjustments and incentives occurs during a company’s sales and operations planning process, where the goal is to match demand and supply.
Technology will have an increasing impact on the future of demand shaping. E-commerce businesses such as Amazon have been especially astute by adjusting prices frequently to influence demand through what is known as dynamic pricing. The idea is to use technology—think supply chain analytics—to better understand what customers are looking for and then manage their expectations. Some examples include:
- If customers are looking for a product that isn’t in stock, they could be prompted to buy a related item.
- A seller can use an online promotion to encourage a buyer to take a certain product at a special price for a limited time, today only for example.
- As a particular product begins to run low, a site could raise the price on the remaining inventory.
Companies can also use demand shaping to increase supply chain efficiency by tracking supply inventory and then telling sales and marketing whether to promote or discount related finished goods and by better utilizing warehouse and transportation capacity. For example, they can offer free shipping during a distribution center’s less busy time.
The benefits are clear; it’s time to get your demand in shape.