If a company runs a promotion in the off-peak season, answer the following with

Question

If a company runs a promotion in the off-peak season, answer the following with a short explanation: a) What is the impact on the bullwhip effect if forward buying is significant? b) What is the impact on supply chain cost if significant fraction of the increase in demand results from forward buying? c) What is the impact on the supply chain's cost and revenue if significant fraction of the increase in demand results from taking business away from competitors? d) Would you in general recommend off-peak promotion when the product has high margin or when it has low margin?

Explanation / Answer

a) Forward buying is the anticipated buying by retailers or distributors expecting a future price increase or shortage of supply. This results in sudden spike in demand from retailers leading to the inability to match the supply resulting in the manufacturer increasing the supply. When the demand suddenly decreases, excess inventory is build up at each stage thus increasing the bull-whip effect.

b) Supply chain costs increase due to forward buying as firms order in excess leading to increase in supply and if not supplied, it will lead to stockout costs and loss of consumers.

c) In case the demand results from taking business away from competitors, the overall supply chain costs reduce and the revenue increases as there won't be any stockouts and the increased demand is results in increased sales. Costs reduce with increased ordering resulting in lowering holding costs.

d) Off-peak promotion is recommended when the product has low margin as the products need to be sold in larger amounts to get profits on quantity. Also, promoting high margin products in off-peak promotion results in loss due to the promotional discounts offered on these products.

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