What is demand shaping?
Demand shaping is an operational supply chain management (SCM) strategy where a company uses tactics such as price incentives, cost modifications and product substitutions to entice customers to purchase specific items. Demand shaping is designed to help the company influence demand for a certain product to match its planned supply.
For example, a company with a surplus of a certain product will increase marketing efforts for that product to make it more alluring to customers. Companies can also use demand shaping techniques to meet product development projections.
What are the benefits of demand shaping?
Demand shaping can provide a range of benefits to the enterprise:
- Greater profitability. As demand forecasting improves, production and inventory fall in line with actual customer demand, saving both time and money.
- Less risk in supply chain. As production and customer demand synchronize, the chances of upset in either diminish, leading to fewer supply chain delays and happier customers.
- Greater cash flow. When demand planning is more accurate, there's less need to reduce profit by shedding excess inventory through discounted sales and spending time to fulfill orders more rapidly than usual. Profitability increases.
- Greater productivity. When production and inventory more closely match customer demand, less time and money are spent coping with imbalances, boosting productivity through improved efficiency.
- Improved transaction oversight. When production, inventory and customer demand are aligned, the reduction in disruptions and narrowing of delivery and fulfillment times makes it easier to monitor supplier transactions and costs as well as measure growth and decline.
- Greater visibility in supply chain. Increased supply chain visibility leads to efficiency gains from improved supply chain management through a less reactive planning process.
Types of demand shaping strategies
Some of the key tactics common to demand shaping strategy include the following:
- New product launches to boost demand. The success of a new product launch can be critically dependent on the optimization of the product's introduction. That optimization can include everything from marketing strategy to packaging to distribution as well as an understanding of customer feedback.
- Price optimization. Manipulating a product's price is perhaps the easiest way to shape demand. Lowering the price tends to increase demand, while increasing it tends to lower demand.
- Sales promotions and deals. Promotions and deals are part of price optimization and can increase customer demand.
- Dynamic pricing. Also called real-time pricing, dynamic pricing sets flexible prices for a product or service to allow a company to adjust quickly in response to market demands. Statistics garnered through demand planning, such as statistical forecasts, are also beneficial to a demand-shaping strategy.
- Increase or decrease sales incentives. The incentives offered to sales personnel and distributors are an indirect way of achieving the same demand shaping that price optimization achieves. Increasing or decreasing sales incentives causes salespeople and distributors to increase or decrease their efforts, impacting demand.
- Throttling distribution. Increasing or decreasing product distribution can shape demand.
Demand shaping is different than demand management, which controls and tracks a company's purchasing operations. Demand management is focused on supplier relationships instead of customer relations. It is used to determine external spending rather than individual product pricing.
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