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SCM
Aggregate PlanningManipulating Demand
Prof. Metin Çakanyıldırım used various resources to prepare this
document for teaching/training. To use this in your own
course/training, please obtain permission from Prof.
Çakanyıldırım.
If you find any inaccuracies, please contact [email protected]
for corrections.Updated in Spring 2020
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SCMMatching Demand and Supply
Supply = Demand Supply < Demand => Lost revenue
opportunity Supply > Demand => Inventory Manage Supply –
Productions Management Manage Demand – Marketing
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SCMManaging Predictable Variability with Supply
Manage capacity» Time flexibility from workforce (OT and
otherwise)» Seasonal workforce, agriculture workers»
Subcontracting» Counter cyclical products: complementary
products
Similar products with negatively correlated demands– Snow
blowers and Lawn Mowers– AC pumps and Heater pumps
» Flexible capacities/processes: Dedicated vs. flexible
a,b,c,d
Similar capabilities One super facility
a
bc
d a
bc
d
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SCMManaging Predictable Variability with Inventory
Component commonality– Remember fast food restaurant menus–
Component commonality increase the benefit of postponement.
» More on this later
Build seasonal inventory of predictable products in preseason–
Nothing can be learnt by procrastinating
Keep inventory of predictable products in the downstream supply
chain and keep the others (spare parts) at the upstream
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SCM
Managing Predictable Variability with PricingRevisit Red Tomato
Tools
Manage demand with pricing– Original pricing: Cost = $422,275,
Revenue = $640,000, Profit=$217,725
Demand increases from discounting– Market growth– Stealing
market share from competitors– Forward buying
» stealing your own market share from the future
Discount of $1 in a period increases that period’s demand by 10%
(market and market share growth) and moves 20% of next two months
demand forward
Can you gather this information –price sensitivity of the
demand- easily? Does your company have this information?
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SCMA Forward Buyer’s Success Story Yesterday was an ordinary
shopping day with an extraordinary experience. At my neighborhood
store, I was walking
to the cleaning-supplies aisle to buy a tile-cleaner. Then I saw
a mountain of toilet paper at the end-of the aisle. They were all
on sale, a great deal that I could not afford to miss.
Yes, I wanted the entire mountain: 12 packages, each with 32
rolls. Why not! I easily loaded 12 packages into 4-carts but
struggled to push my 4-cart load, a recently acquired treasure.
Yup, as a man eagerly pushing a white mountain to the check-out
lane, I got strange looks. Lucky I was, I did not run into one of
my sarcastic neighbors.
A tired-looking woman with two kids, I say early 30-ish,
gathered courage to ask whether there was a toilet paper clearance.
I said -- what I should, but no more – that there was, conveniently
forgetting to say I practically ended the clearance with my
mountain-purchase. The cashier also joked about my soft mountain. I
said my children were feeling sick so we needed more than usual
amount. I am sure they will feel sick before we can finish the
mountain anyway.
The most difficult of all is stacking 12 packages of toilet
paper into my car. I squished 4 packages to fit in the trunk; 6
went to the back seat. I was going to put 2 in the front but they
did not fit. So I opened packages and simply poured 64 rolls on the
passenger seat, into the glove box, under the seats, under my own
feet, some over the dashboard. I got in the car, pushed the rolls
to make space for my body and closed the door. Rolls were pushing
up against the windows/doors and me. I was floating in the soft
medium of toilet paper.
At that time it occurred to me that the store might be
videotaping the parking lot. If they had recorded me and posted it
on a website, I would have been certainly getting offers for the
next comedy blockbuster. No producer is knocking on my door, no
worries for Adam Sandler. The store might have kept the video for
itself, a ridiculous customer’s misery is not a good selling point.
Perhaps my video is featured on the security guards’ coffee break
to increase the morale.
Arriving home, I drove to the indoor garage and quickly unloaded
my trophy. I realized that I forgot to buy the tile cleaner in my
excitement. Anyway it perhaps was not on sale. Otherwise, I would
have found it easily.
I have toilet paper stacked inside the oven, on top of the book
shelves, under my bed and practically in every available unused,
invisible corner of the house. Yes the operation, albeit tiring and
ridiculing, was over. For at least a year, I will have the delight
of using my soft and cheaply acquired toilet paper. As a poor man
with no great accomplishments, I feel great knowing that I shall be
the king of the toilet and have my moments of glory every day for
just a few cents.
Ohh that is pricelesssss!
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SCM
Month Demand ForecastJanuary 1,600February 3,000
March 3,200April 3,800May 2,200June 2,200Total 16,000
Instance name: Original, from 40
See Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔
Original with price of $40
Original, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔
Record as
Revenue = 16 K∗ 40 = $640 K
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SCM
Discounting during off-peak ⇒ Revenue ↑ & Profit ↑
Month Demand ForecastJanuary 3,000 = 1,600 ∗ (1.1) + (3,000 +
3,200) ∗ (0.2)
February 2,400 = 3,000 ∗ 0.8March 2,560 = 3,200 ∗ 0.8April
3,800May 2,200June 2,200Total 16,160
Instance name: Off-Peak discount, Small market growth, from 40
to 39
See Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟐𝟐,𝟗𝟗𝟐𝟐𝟗𝟗Profit = 𝟒𝟒𝟒𝟒𝟔𝟔,𝟔𝟔𝟒𝟒𝟗𝟗
Off-Peak (January) Discount from $40 to $39
Original, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔
Off-peak, Small, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟐𝟐,𝟗𝟗𝟐𝟐𝟗𝟗Profit = 𝟒𝟒𝟒𝟒𝟔𝟔,𝟔𝟔𝟒𝟒𝟗𝟗
More demand ⇒More stable demand ⇒
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SCMPeak (April) Discount from $40 to $39
Discounting during peak ⇒ Revenue ↑ but Profit ↓
Month Demand ForecastJanuary 1,600
February 3,000March 3,200April 5,060 = 3,800 ∗ 1.1 + (2,200 +
2,200) ∗ 0.2May 1,760 = 2,200 ∗ 0.8June 1,760 = 2,200 ∗ 0.8Total
16,380
Instance name: Peak discount, Small market growth, from 40 to
39
See Revenue = 𝟔𝟔𝟗𝟗𝟗𝟗,𝟒𝟒𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟗𝟗𝟔𝟔𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟔𝟔,𝟒𝟒𝟒𝟒𝟔𝟔
Original, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔
Off-peak, Small, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟐𝟐,𝟗𝟗𝟐𝟐𝟗𝟗Profit = 𝟒𝟒𝟒𝟒𝟔𝟔,𝟔𝟔𝟒𝟒𝟗𝟗
More demand ⇒Less stable demand ⇒
Peak, Small, from 40Revenue = 𝟔𝟔𝟗𝟗𝟗𝟗,𝟒𝟒𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟗𝟗𝟔𝟔𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟔𝟔,𝟒𝟒𝟒𝟒𝟔𝟔
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SCMDemand Management
Pricing and Aggregate Planning must be done jointly Factors
affecting discount timing and their new values
– Consumption: 100% increase in consumption instead of 10%
increase– Forward buy, still 20% of the next two months– Product
Margin: Impact of higher margin. What if discount from $31 to $30
instead
of from $40 to $39.)
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SCM
Discounting during off-peak ⇒ Revenue ↑ & Profit ↑
Month Demand ForecastJanuary 4,440 = 1,600 ∗ (2) + (3,000 +
3,200) ∗ (0.2)
February 2,400 = 3,000 ∗ 0.8March 2,560 = 3,200 ∗ 0.8April
3,800May 2,200June 2,200Total 17,600
Instance name: Off-Peak discount, Large market growth, from 40
to 39
See Revenue = 𝟐𝟐𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟗𝟗𝟐𝟐,𝟒𝟒𝟐𝟐𝟒𝟒Profit = 𝟒𝟒𝟔𝟔𝟔𝟔,𝟐𝟐𝟒𝟒𝟒𝟒
Consumption Increase 100%Off-Peak (January) Discount from $40 to
$39
Original, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔
More demand ⇒More stable demand ⇒
Off-peak, Large, from 40Revenue = 𝟐𝟐𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟗𝟗𝟐𝟐,𝟒𝟒𝟐𝟐𝟒𝟒Profit = 𝟒𝟒𝟔𝟔𝟔𝟔,𝟐𝟐𝟒𝟒𝟒𝟒
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SCM
Discounting during peak ⇒ Largest Revenue & Profit
Instance name: Peak discount, Large market growth, from 40 to
39
See Revenue = 𝟐𝟐𝟗𝟗𝟒𝟒,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟗𝟗𝟒𝟒𝟔𝟔,𝟒𝟒𝟔𝟔𝟔𝟔Profit = 𝟒𝟒𝟗𝟗𝟗𝟗,𝟒𝟒𝟔𝟔𝟔𝟔
Consumption Increase 100%Peak (April) Discount from $40 to
$39
Original, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔
More demand ⇒More demand ⇒
Off-peak, Large, from 40Revenue = 𝟐𝟐𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟗𝟗𝟐𝟐,𝟒𝟒𝟐𝟐𝟒𝟒Profit = 𝟒𝟒𝟔𝟔𝟔𝟔,𝟐𝟐𝟒𝟒𝟒𝟒
Month Demand ForecastJanuary 1,600
February 3,000March 3,200April 8,480 = 3,800 ∗ 2 + (2,200 +
2,200) ∗ 0.2May 1,760 = 2,200 ∗ 0.8June 1,760 = 2,200 ∗ 0.8Total
19,800
Peak, Large, from 40Revenue = 𝟐𝟐𝟗𝟗𝟒𝟒,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟗𝟗𝟒𝟒𝟔𝟔,𝟒𝟒𝟔𝟔𝟔𝟔Profit = 𝟒𝟒𝟗𝟗𝟗𝟗,𝟒𝟒𝟔𝟔𝟔𝟔
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SCM
Month Demand ForecastJanuary 1,600
February 3,000March 3,200April 3,800May 2,200June 2,200Total
16,000
Instance name: Original, from 31 to 30
See Revenue = 𝟔𝟔𝟗𝟗𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟐𝟐𝟒𝟒,𝟐𝟐𝟒𝟒𝟔𝟔
Reduced Margin: Original from $31 to $30Original
Original, from 31Revenue = 𝟔𝟔𝟗𝟗𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟐𝟐𝟒𝟒,𝟐𝟐𝟒𝟒𝟔𝟔
Record as
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SCM
Discounting during off-peak ⇒ Revenue ↑ & Profit ↑
Month Demand Forecastsame as in Off-Peak, Large
January 4,440February 2,400
March 2,560April 3,800May 2,200June 2,200Total 17,600
Instance name: Off-Peak discount, Large market growth, from 31
to 30
See Revenue = 𝟗𝟗𝟔𝟔𝟗𝟗,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟗𝟗𝟐𝟐,𝟒𝟒𝟐𝟐𝟒𝟒Profit = 𝟒𝟒𝟒𝟒,𝟒𝟒𝟒𝟒𝟒𝟒
Off-Peak (January) Discount from $31 to $30Consumption Increase
100%
More demand ⇒More demand ⇒
Off-peak, Large, from 31Revenue = 𝟗𝟗𝟔𝟔𝟗𝟗,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟗𝟗𝟐𝟐,𝟒𝟒𝟐𝟐𝟒𝟒Profit = 𝟒𝟒𝟒𝟒,𝟒𝟒𝟒𝟒𝟒𝟒
Original, from 31Revenue = 𝟔𝟔𝟗𝟗𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟐𝟐𝟒𝟒,𝟐𝟐𝟒𝟒𝟔𝟔
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SCM
Discounting during peak ⇒ Revenue ↑ but Profit ↓
Instance name: Peak discount, Large market growth, from 31 to
30
See Revenue = 𝟔𝟔𝟐𝟐𝟒𝟒,𝟒𝟒𝟔𝟔𝟔𝟔
Cost = 𝟗𝟗𝟒𝟒𝟔𝟔,𝟒𝟒𝟔𝟔𝟔𝟔Profit = 𝟐𝟐𝟐𝟐,𝟔𝟔𝟔𝟔𝟔𝟔
More demand ⇒More demand ⇒
Month Demand Forecastsame as in Peak, Large
January 1,600February 3,000
March 3,200April 8,480May 1,760June 1,760Total 19,800
Peak, Large, from 31Revenue = 𝟔𝟔𝟐𝟐𝟒𝟒,𝟒𝟒𝟔𝟔𝟔𝟔
Cost = 𝟗𝟗𝟒𝟒𝟔𝟔,𝟒𝟒𝟔𝟔𝟔𝟔Profit = 𝟐𝟐𝟐𝟐,𝟔𝟔𝟔𝟔𝟔𝟔
Peak (April) Discount from $31 to $30Consumption Increase
100%
Original, from 31Revenue = 𝟔𝟔𝟗𝟗𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟐𝟐𝟒𝟒,𝟐𝟐𝟒𝟒𝟔𝟔
Off-peak, Large, from 31Revenue = 𝟗𝟗𝟔𝟔𝟗𝟗,𝟔𝟔𝟔𝟔𝟔𝟔
Cost = 𝟔𝟔𝟗𝟗𝟐𝟐,𝟒𝟒𝟐𝟐𝟒𝟒Profit = 𝟒𝟒𝟒𝟒,𝟒𝟒𝟒𝟒𝟒𝟒
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SCM
What dominates?Demand Growth, Demand Stability, Margin Size
Silver Medal:Original, from 40
Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔
Gold Medal:Off-peak, Small, from 40
Profit = 𝟒𝟒𝟒𝟒𝟔𝟔,𝟔𝟔𝟒𝟒𝟗𝟗Bronze Medal:
Peak, Small, from 40Profit = 𝟒𝟒𝟐𝟐𝟔𝟔,𝟒𝟒𝟒𝟒𝟔𝟔
Demand stability > Demand growth when consumption by 10%
& large margin
Bronze Medal:Original, from 40
Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔
Silver Medal:Off-peak, Large, from 40
Profit = 𝟒𝟒𝟔𝟔𝟔𝟔,𝟐𝟐𝟒𝟒𝟒𝟒
Gold Medal:Peak, Large, from 40
Profit = 𝟒𝟒𝟗𝟗𝟗𝟗,𝟒𝟒𝟔𝟔𝟔𝟔
Demand growth > Demand stability when consumption by 100%
& large margin
Discount ⇒ Demand growth; Off-peak discount ⇒ Demand
stability
Silver Medal:Peak, Large, from 31
Profit = 𝟐𝟐𝟐𝟐,𝟔𝟔𝟔𝟔𝟔𝟔
Bronze Medal:Original, from 31
Profit = 𝟐𝟐𝟒𝟒,𝟐𝟐𝟒𝟒𝟔𝟔
Gold Medal:Off-peak, Large, from 31
Profit = 𝟒𝟒𝟒𝟒,𝟒𝟒𝟒𝟒𝟒𝟒
Demand stability > Demand growth when consumption by 100%
& small margin
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SCMPerformance Under Different Scenarios
Use rows in blue to explain Xmas discounts. Limited forward buy
wrt consumption.The product, with more (market growth/forward buy)
ratio, is discounted during peak.
Price Discount price
Promotion period
Consump-tion ↑
Forward buy ↑
Profit in $K
Average inventory
40 40 NA NA NA 217 85340 39 Off-Peak 10% 20% 224 48240 39 Peak
10% 20% 216 91240 39 Off-peak 100% 20% 246 13940 39 Peak 100% 20%
255 145031 30 NA NA NA 73 85331 30 Off-Peak 100% 20% 88 13931 30
Peak 100% 20% 77 1450
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SCMDiscount Timing by Forward Buy Amount
Silver Medal:Original, from 40
Gold Medal:Off-peak, Small, from 40 Bronze Medal:
Peak, Small, from 40
Forward buy large wrt consumption growth of 10%
Bronze Medal:Original, from 40
Silver Medal:Off-peak, Large, from 40
Gold Medal:Peak, Large, from 40
Forward buy small wrt consumption growth of 100%
Discount ⇒ Forward Buy; Off-Peak discount ⇒ Demand stability
Small Forward Buy ⇒ Discount During Peak
What gift should you buy on the special days (peak demand) when
retailers supposedly give discounts?
Think of flowers on Valentine’s day. How about diamonds?Compare
forward buy for flowers and that for diamonds.Empirical data
available?
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SCM
Empirical Data: Who spends / How much on Valentine’s day
The average consumer spends $122.98 on 2008 Valentine’s Day,
similar to $119.67 of 2007. Total US spending on Valentine’s Day is
$17.02 B by 18+.
Spending – by gender
» Men again dishes out the most in 2008, spending an average of
$163.37 on gifts and cards, compared to an average of $84.72 spent
by women.
– by age » Adults: 25-34 spend $160.37.» Young adults: 18-24
spend $145.59.» Upper Middle age: 45-54 spend $117.91. » Lower
Middle age: 35-44 spend $116.35.» Elderly: 55-64 spend $110.97.
Gifts» 56.8% of all consumers give a greeting card. » 48.2% plan
a special night out. » 48.0% buy candy.» 35.9% buy flowers.» 12.3%
give a gift card.» 11.8% buy clothing. » ??.?% buy diamonds
– Source: National Retail Federation www.nrf.com
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SCMWhat does an MBA buy for a gift?
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SCMSummary
Optimality of peak vs. off-peak discounting depends on– Forward
buy vs. Market growth
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SCMFactors Affecting Promotion Timing
Factor Favored timing High forward buying Low demand period High
stealing share High demand period High growth of market High demand
period High margin High demand period Low margin Low demand period
High holding cost Low demand period Low capacity volume
flexibility
Low demand period
Factor
Favored timing
High forward buying
Low demand period
High stealing share
High demand period
High growth of market
High demand period
High margin
High demand period
Low margin
Low demand period
High holding cost
Low demand period
Low capacity volume flexibility
Low demand period
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SCMPerformance Under Different Scenarios
Regular Price
Promotion Price
Promotion Period
% increase in demand
% forward buy
Profit Average Inventory
$40 $40 NA NA NA $217,725 895 $40 $39 January 10% 20% $221,485
523 $40 $39 April 10% 20% $211,283 938 $40 $39 January 100% 20%
$242,810 208 $40 $39 April 100% 20% $247,320 1,492 $31 $31 NA NA NA
$73,725 895 $31 $30 January 100% 20% $84,410 208 $31 $30 April 100%
20% $69,120 1,492
Regular Price
Promotion Price
Promotion Period
% increase in demand
% forward buy
Profit
Average Inventory
$40
$40
NA
NA
NA
$217,725
895
$40
$39
January
10%
20%
$221,485
523
$40
$39
April
10%
20%
$211,283
938
$40
$39
January
100%
20%
$242,810
208
$40
$39
April
100%
20%
$247,320
1,492
$31
$31
NA
NA
NA
$73,725
895
$31
$30
January
100%
20%
$84,410
208
$31
$30
April
100%
20%
$69,120
1,492
Aggregate Planning�Manipulating DemandMatching Demand and
SupplyManaging Predictable Variability with SupplyManaging
Predictable Variability with InventoryManaging Predictable
Variability with Pricing�Revisit Red Tomato ToolsA Forward Buyer’s
Success StorySlide Number 7Slide Number 8Peak (April) Discount from
$40 to $39Demand ManagementSlide Number 11Slide Number 12Slide
Number 13Slide Number 14Slide Number 15��What dominates?�Demand
Growth, Demand Stability, Margin SizePerformance Under Different
Scenarios��Discount Timing by Forward Buy AmountEmpirical Data:
�Who spends / How much on Valentine’s day What does an MBA buy for
a gift?Summary Factors Affecting Promotion TimingPerformance Under
Different Scenarios