Discuss the impact of promotion on demand within a supply chain

What will be an ideal response?

Answer: Companies want to explore if and when to potentially offer a promotion. Four key factors influence the timing of a trade promotion:
• Impact of the promotion on demand
• Product margins
• Cost of holding inventory
• Cost of changing capacity

Companies should identify whether each factor favors offering a promotion during the high- or low-demand periods. They start by considering the impact of promotion on demand. When a promotion is offered during a period, that period's demand will go up. This increase in demand results from a combination of the following three factors:
1. Market growth: An increase in consumption of the product, either from new or existing customers.
2. Stealing share: Customers substituting the firm's product for a competitor's product.
3. Forward buying: Customers move up future purchases to the present.
The first two factors increase the overall demand, whereas the third simply shifts future demand to the present. It is important to know the relative impact from the three factors as a result of a promotion before making the decision regarding the optimal timing of the promotion. In general, as the fraction of increased demand coming from forward buying grows, offering the promotion during the peak demand period becomes less attractive. Offering a promotion during a peak period that has significant forward buying creates even more variable demand than before the promotion. Product that was once demanded in the slow period is now demanded in the peak period, making this demand pattern even more costly to serve.
Average inventory increases if a promotion is run during the peak period and decreases if the promotion is run during the off-peak period. Promoting during a peak demand month may decrease overall profitability if a significant fraction of the demand increase results from a forward buy. As forward buying becomes a smaller fraction of the demand increase from a promotion, it is more profitable to promote during the peak period. As the product margin declines, promoting during the peak demand period becomes less profitable.

Other factors such as holding cost and the cost of changing capacity also affect the optimal timing of promotions. When faced with seasonal demand, a firm should use a combination of pricing (to manage demand) and production and inventory (to manage supply) to improve profitability. The precise use of each lever varies with the situation. This makes it crucial that enterprises in a supply chain coordinate both their forecasting and planning efforts. Only then are profits maximized.