{"id":214,"date":"2015-03-12T19:19:04","date_gmt":"2015-03-12T23:19:04","guid":{"rendered":"https:\/\/opentextbc.ca\/principlesofmarketingh5p\/chapter\/9-2-demand-planning-and-inventory-control\/"},"modified":"2023-01-13T12:24:17","modified_gmt":"2023-01-13T17:24:17","slug":"demand-planning-and-inventory-control","status":"publish","type":"chapter","link":"https:\/\/opentextbc.ca\/principlesofmarketingh5p\/chapter\/demand-planning-and-inventory-control\/","title":{"raw":"9.2 Demand Planning and Inventory Control","rendered":"9.2 Demand Planning and Inventory Control"},"content":{"raw":"
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Learning Objectives<\/p>\r\n\r\n<\/header>\r\n

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  1. Explain why demand planning adds value to products.<\/li>\r\n \t
  2. Describe the role inventory control plays when it comes marketing products.<\/li>\r\n \t
  3. List the reasons why firms collaborate with another for the purposes of inventory control and demand planning.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<\/div>\r\n

    Demand Planning<\/h1>\r\n

    Imagine you are a marketing manager who has done everything in your power to help develop and promote a product\u2014and it\u2019s selling well. But now your company is running short of the product because the demand forecasts for it were too low. Recall that this is the scenario Nintendo faced when the Wii first came out. The same thing happened to IBM when it launched the popular ThinkPad laptop in 1992.<\/p>\r\n

    Not only is the product shortage going to adversely affect the profitably of your company, but it\u2019s going to adversely affect you, too. Why? Because you, as a marketing manager, probably earn either a bonus or commission from the products you work to promote, depending on how well they sell. And, of course, you can\u2019t sell what you don\u2019t have.<\/p>\r\n\r\n\r\n[caption id=\"attachment_982\" align=\"aligncenter\" width=\"400\"]\"An Figure 9.6: IBM ThinkPads were hard to find in 1992. But NASA didn\u2019t have any trouble getting one. In 1993, astronauts used it to repair the Hubble Space Telescope, which orbits Earth.[\/caption]\r\n\r\n<\/div>\r\n

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    As you can probably tell, the best marketing decisions and supplier selections aren\u2019t enough if your company\u2019s demand forecasts are wrong. Demand planning is the process of estimating how much of a good or service customers will buy from you. If you\u2019re a producer of a product, this will affect not only the amount of goods and services you have to produce but also the materials you must purchase to make them. It will also affect your production scheduling, or the management of the resources, events, and processes need to create an offering. For example, if demand is heavy, you might need your staff members to work overtime. Closely related to demand forecasting are lead times. A product\u2019s lead time is the amount of time it takes for a customer to receive a good or service once it\u2019s been ordered. Lead times also have to be taken into account when a company is forecasting demand.<\/p>\r\n

    Sourcing decisions<\/em>\u2014deciding which suppliers to use\u2014are generally made periodically. Forecasting decisions<\/em> must be made more frequently\u2014sometimes daily. One way for you to predict the demand for your product is to look at your company\u2019s past sales. This is what most companies do. But they don\u2019t stop there. Why? Because changes in many factors\u2014the availability of materials to produce a product and their prices, global competition, oil prices (which affect shipping costs), the economy, and even the weather\u2014can change the picture.<\/p>\r\n

    For example, when the economy hit the skids in 2008, the demand for many products fell. So if you had based your production, sales, and marketing forecasts on 2007 data alone, chances are your forecasts would have been wildly wrong. Do you remember when peanut butter was recalled in 2009 because of contamination? If your firm were part of the supply chain for peanut butter products, you would have needed to quickly change your forecasts.<\/p>\r\n

    The promotions you run will also affect demand for your products. Consider what happened to KFC when it first came out with its new grilled chicken product. As part of the promotion, KFC gave away coupons for free grilled chicken via Oprah.com. Just twenty-four hours after the coupons were uploaded to the Web site, KFC risked running out of chicken. Many customers were turned away. Others were given \u201crain checks\u201d (certificates) they could use to get free grilled chicken later (Weisenthal, 2009).<\/p>\r\n\r\n\r\n[caption id=\"attachment_983\" align=\"aligncenter\" width=\"300\"]\"Two Figure 9.7: KFC\u2019s new Kentucky Grilled Chicken was finger-lickin\u2019 good\u2014if you could get it. Reportedly, the chain nearly ran out of the birds following a promotion on Oprah.com.[\/caption]\r\n\r\n<\/div>\r\n

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    In addition to looking at the sales histories of their firms, supply chain managers also consult with marketing managers and sales executives when they are generating demand forecasts. Sales and marketing personnel know what promotions are being planned because they work more closely with customers and know what customers\u2019 needs are and if those needs are changing.<\/p>\r\n

    Firms also look to their supply chain partners to help with their demand planning. Collaborative planning, forecasting, and replenishment (CPFR) is a practice whereby supply chain partners share information and coordinate their operations. Walmart has developed a Web-based CPFR system called Retail Link. Retailers can log into Retail Link to see how well their products are selling at various Walmart stores, how soon more products need to be shipped to the company and where, how any promotions being run are affecting the profitability of their products, and so forth. Because different companies often use different information technology systems and software, Web-based tools like Retail Link are becoming a popular way for supply chain partners to interface with one another.<\/p>\r\n

    Not all firms are wild about sharing every piece of information they can with their supply chains partners. Some retailers view their sales information as an asset\u2014something they can sell to information companies like Information Resources, Inc., which provides competitive data to firms that willing to pay for it (Bowersox & Closs, 2000). By contrast, other firms go so far as to involve their suppliers before even producing a product so they can suggest design changes, material choices, and production recommendations.<\/p>\r\nPriced at about $2,500 the Tata Nano is the least expensive car ever produced in the world. To make a safe, reliable car at such a low cost, Tata Motors, an Indian company, sought new, innovative design approaches from its suppliers. The elimination of one of the car\u2019s two windshield wipers was one result of the collaboration that occurred between Tata and its supply chain partners (Wingett, 2008).\r\n

    \r\n\r\nWatch the video: Tata Nano driven (3 minutes)<\/a>\r\n\r\n[embed]https:\/\/www.youtube.com\/embed\/3sZitve3SUw[\/embed]\r\n

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    The trend is clearly toward more shared information, or what businesspeople refer to as supply chain visibility. After all, it makes sense that a supplier will be not only more reliable but also in a better position to add value to your products if it knows what your sales, operations, and marketing plans are\u2014and what your customers want. By sharing more than just basic transaction information, companies can see how well operations are proceeding, how products are flowing through the chain, how well the partners are performing and cooperating with one another, and the extent to which value is being built in to the product.<\/p>\r\n

    Demand-planning software can also be used to create more accurate demand forecasts. Demand-planning software can synthesize a variety of factors to better predict a firm\u2019s demand\u2014for example, the firm\u2019s sales history, point-of-sale data, warehouse, suppliers, and promotion information, and economic and competitive trends. So a company\u2019s demand forecasts are as up-to-date as possible, some of the systems allow sales and marketing personnel to input purchasing information into their mobile devices after consulting with customers.<\/p>\r\n

    Litehouse Foods, a salad dressing manufacturer, was able to improve its forecasts dramatically by using demand-planning software. Originally the company was using a traditional sales database and spreadsheets to do the work. \u201cIt was all pretty much manual calculations. We had no engine to do the heavy lifting for us,\u201d says John Shaw, the company\u2019s Information Technology director. In a short time, the company was able to reduce its inventory by about one-third while still meeting its customers\u2019 needs (Casper, 2008).<\/p>\r\n\r\n<\/div>\r\n

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    Inventory Control<\/h1>\r\n

    Demand forecasting is part of a company\u2019s overall inventory control activities. Inventory control is the process of ensuring your firm has an adequate supply of products and a wide enough assortment of them meet your customers\u2019 needs. One of the goals of inventory management is to avoid stockouts. A stockout occurs when you run out of a product a customer wants to buy. Customers will simply look elsewhere to buy the product\u2014a process the Internet has made easier than ever.<\/p>\r\n

    When the attack on the World Trade Center occurred, many Americans rushed to the store to buy batteries, flashlights, American flags, canned goods, and other products in the event that the emergency signaled a much bigger attack. Target sold out of many items and could not replenish them for several days, partly because its inventory tracking system only counted up what was needed at the end of the day. Walmart, on the other hand, took count of what was needed every five minutes. Before the end of the day, Walmart had purchased enough American flags, for example, to meet demand and in so doing, completely locked up all their vendors\u2019 flags. Meanwhile, Target was out of flags and out of luck\u2014there were no more to be had.<\/p>\r\n

    To help avoid stockouts, most companies keep a certain amount of safety stock on hand. Safety stock is backup inventory that serves as a buffer in case the demand for a product surges or the supply of it drops off for some reason. Maintaining too much inventory, though, ties up money that could be spent other ways\u2014perhaps on marketing promotions. Inventory also has to be insured, and in some cases, taxes must be paid on it. Products in inventory can also become obsolete, deteriorate, spoil, or \u201cshrink.\u201d Shrinkage is a term used to describe a reduction or loss in inventory due to shoplifting, employee theft, paperwork errors, or supplier fraud (Waters, 2009).<\/p>\r\n

    When the economy went into its most recent slide, many firms found themselves between a rock and a hard place in terms of their inventory levels. On the one hand, because sales were low, firms were reluctant to hold much safety stock. Many companies, including Walmart, cut the number of brands they sold in addition to holding a smaller amount of inventory. On the other hand, because they didn\u2019t know when business would pick up, they ran the risk of running out of products. Many firms dealt with the problem by maintaining larger amounts of key products. Companies also watched their supply chain partners struggle to survive. Forty-five percent of firms responding to one survey about the downturn reported providing financial help to their critical supply chain partners\u2014often in the form of credit and revised payment schedules.[footnote]PRTM Management Consultants, \u201cGlobal Supply Chain Trends 2008\u20132010,\u201d http:\/\/www.prtm.com\/uploadedFiles\/Strategic_Viewpoint\/Articles\/Article_Content\/Global_Supply_Chain_Trends_Report_%202008.pdf (accessed September 13, 2021).[\/footnote]<\/p>\r\n\r\n<\/div>\r\n

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    Just-in-Time Inventory Systems<\/h1>\r\n

    To lower the amount of inventory and still maintain they stock they need to satisfy their customers, some organizations use just-in-time inventory systems in both good times and bad. Firms with just-in-time inventory systems keep very little inventory on hand. Instead, they contract with their suppliers to ship them inventory as they need it\u2014and even sometimes manage their inventory for them\u2014a practice called vendor-managed inventory (VMI). Dell is an example of a company that utilizes a just-in-time inventory system that\u2019s vendor managed. Dell carries very few component parts. Instead, its suppliers carry them. They are located in small warehouses near Dell\u2019s assembly plants worldwide and provide Dell with parts \u201cjust-in-time\u201d for them to be assembled (Kumar & Craig, 2007).<\/p>\r\n

    Dell\u2019s inventory and production system allows customers to get their computers built exactly to their specifications, a production process that\u2019s called mass customization. This helps keep Dell\u2019s inventory levels low. Instead of a huge inventory of expensive, already-assembled computers consumers may or may not buy, Dell simply has the parts on hand, which can be configured or reconfigured should consumers\u2019 preferences change. Dell can more easily return the parts to its suppliers if at some point it redesigns its computers to better match what its customers want. And by keeping track of its customers and what they are ordering, Dell has a better idea of what they might order in the future and the types of inventory it should hold. Because mass customization lets buyers \u201chave it their way,\u201d it also adds value to products, for which many customers are willing to pay.<\/p>\r\n\r\n<\/div>\r\n

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    Product Tracking<\/h1>\r\n

    Some companies, including Walmart, are beginning to experiment with new technologies such as electronic product codes in an effort to better manage their inventories. An electronic product code (EPC) is similar to a barcode, only better, because the number on it is truly unique. You have probably watched a checkout person scan a barcode off of a product identical to the one you wanted to buy\u2014perhaps a pack of gum\u2014because the barcode on your product was missing or wouldn\u2019t scan. Electronic product codes make it possible to distinguish between two identical packs of gum. The codes contain information about when the packs of gum were manufactured, where they were shipped from, and where they were going to. Being able to tell the difference between \u201cseemingly\u201d identical products can help companies monitor their expiration dates if they are recalled for quality of safety reasons. EPC technology can also be used to combat \u201cfake\u201d products, or knockoffs, in the marketplace.<\/p>\r\nTo understand how EPC and RFID technology can help marketers, watch this YouTube video.\r\n

    \r\n\r\nWatch the video: The Basic of RFID and EPC (4 minutes)<\/a>\r\n\r\n[embed]https:\/\/www.youtube.com\/embed\/k-w6ZYIo37E[\/embed]\r\n\r\n<\/div>\r\n

    Electronic product codes are stored on radio-frequency identification (RFID) tags. A radio-frequency identification (RFID) tag emits radio signals that can record and track a shipment as it comes in and out of a facility. If you have unlocked your car door remotely, microchipped your dog, or waved a tollway tag at a checkpoint, you have used RFID technology.[footnote]\u201cFAQs,\u201d EPCglobal, http:\/\/www.epcglobalinc.org\/consumer_info\/faq (accessed December 2, 2009).[\/footnote] Because each RFID tag can cost anywhere from $0.50 to $50 each, they are generally used to track larger shipments, such cases and pallets of goods rather than individual items. See Figure 9.8 \"How RFID Tagging Works\" to get an idea of how RFID tags work.<\/p>\r\n\r\n

    \r\n\r\n[caption id=\"\" align=\"aligncenter\" width=\"424\"]\"How Figure 9.8: How RFID Tagging Works[\/caption]\r\n\r\n<\/div>\r\n

    Some consumer groups worry that RFID tags and electronic product codes could be used to track their consumption patterns or for the wrong purposes. But keep in mind that like your car-door remote, the codes and tags are designed to work only within short ranges. (You know that if you try to unlock your car from a mile away using such a device, it won\u2019t work.)<\/p>\r\n

    Proponents of electronic product codes and RFID tags believe they can save both consumers and companies time and money. These people believe consumers benefit because the information embedded in the codes and tags help prevent stockouts and out-of-date products from remaining on store shelves. In addition, the technology doesn\u2019t require cashiers to scan barcodes item by item. Instead an electronic product reader can automatically tally up the entire contents of a shopping cart\u2014much like a wireless network can detect your computer within seconds. As a customer, wouldn\u2019t that add value to your shopping experience?<\/p>\r\nAn interesting chapter about inventory approaches and demand, don't you think?\r\n

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    Key Takeaways<\/h1>\r\n<\/header>\r\n
    \r\n\r\nThe best marketing decisions and supplier selections aren\u2019t enough if your company\u2019s demand forecasts are wrong. Demand forecasting is the process of estimating how much of a good or service a customer will buy from you. If you\u2019re a producer of a product, this will affect not only the amount of goods and services you have to produce but also the materials you must purchase to make them. Demand forecasting is part of a company\u2019s overall inventory control activities. Inventory control is the process of ensuring your firm has an adequate amount of products and a wide enough assortment of them meet your customers\u2019 needs. One of the goals of inventory control is to avoid stockouts without keeping too much of a product on hand. Some companies are beginning to experiment with new technologies such as electronic product codes and RFID tags in an effort to better manage their inventories and meet their customers\u2019 needs.\r\n\r\n<\/div>\r\n<\/div>\r\n
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    Review Questions<\/h1>\r\n<\/header>\r\n
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    1. Why are demand forecasts made more frequently than sourcing decisions?<\/li>\r\n \t
    2. How can just-in-time and vendor-managed inventories add value to products for customers?<\/li>\r\n \t
    3. Why and how do companies track products?<\/li>\r\n \t
    4. Let's see if you can remember the key definitions: [h5p id=\"45\"]<\/li>\r\n<\/ol>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n

      References<\/h2>\r\nBowersox D. J. and David J. Closs, \u201cTen Mega-Trends That Will Revolutionize Supply Chain Logistics,\u201d Journal of Business Logistics<\/em> 21, no. 2 (2000): 11.\r\n\r\nCasper, C., \u201cDemand Planning Comes of Age,\u201d Food Logistics<\/em> 101 (January\/February 2008): 19\u201324.\r\n\r\nKumar S. and Sarah Craig, \u201cDell, Inc.\u2019s Closed Loop Supply Chain for Computer Assembly Plants,\u201d Information Knowledge Systems Management<\/em> 6, no. 3 (2007): 197\u2013214.\r\n\r\nWaters, S., \u201cShrinkage,\u201d About.com, http:\/\/retail.about.com\/od\/glossary\/g\/shrinkage.htm (accessed December 2, 2009).\r\n\r\nWeisenthal, J., \u201cSlammed KFC \u2018Scrambling to Source More Chicken,\u2019\u201d The Business Insider<\/em>, May 6, 2009, http:\/\/www.businessinsider.com\/kfc-2009-5 (accessed December 2, 2009).\r\n\r\nWingett, S., \u201cCapro, Saint-Gobain, Denso Win Big with Tata Nano,\u201d Automotive News Europe<\/em>, March 3, 2008, 16.\r\n

      Media Attributions<\/h3>\r\n