Forward buying

Raw materials (substrate or feedstock) costs are usually a significant cost element in most biocatalytic processes. Their importance highlights the importance of good buying policy and skills and, when possible, the effective use of forwards buying and futiues markets to obtain cheap raw materials etc. despite variabilities in their... 

Forward buying Existing customers simply change the timing of the purchase to take advantage of the lower prices. 

Forward buying Customers move up future purchases (as discussed in Chapter 11) to the present. A promotion may attract buyers who would have purchased a Camry a few months down the road. Forward buying does not increase Toyota s sales in the long run and also leaves the family sedan market the same size. 

The first two factors increase the overall demand for Toyota, whereas forward buying simply shifts future demand to the present. It is important to understand the relative impact from the three factors as a result of a promotion before making a decision regarding the optimal timing of... 

High forward buying Favors promotion during low-demand periods... 

High retaiier hoiding costs Decreases forward buying by retailer... 

The importance of a collaborative S OP process is further supported by the fact that the optimal action is different if most of the demand increase comes from market growth or stealing market share rather than from forward buying. We now illustrate the scenario in which a discount leads to a large increase in consumption. 

Promoting during a peak-demand month may decrease overall profitability if there is a small increase in consumption and a significant fraction of the demand increase results from a forward buy. In Table 9-3, observe that running a promotion in April decreases profitability when forward buying is 20 percent and the demand increase from increased consumption and substitution is 10 percent. 

Regular Price Promotion Price Promotion Period Percentage of Increase in Demand Percentage of Forward Buy Profit Average Inventory... 

As the consumption increase from discounting grows and forward buying becomes a smaller fraction of the demand increase from a promotion, it is more profitable to promote during the peak period. From Table 9-3, for a sale price of 40, it is optimal to promote in the off-peak month of January, when forward buying is 20 percent and increased consumption is 10 percent. When forward buying is 20 percent and increased consumption is 100 percent, however, it is optimal to promote in the peak month of April. 

Managers can reduce information distortion by devising pricing strategies that encourage retailers to order in smaller lots and reduce forward buying. 

STABILIZING PRICING Managers can dampen the bullwhip effect by eliminating promotions and using everyday low pricing (EDLP). The elimination of promotions removes forward buying by retailers and results in orders that match customer demand. P G, Campbell Soup, and several other manufacturers have implemented EDLP to dampen the bullwhip effect. 

Managers can place limits on the quantity that may be purchased during a promotion to decrease forward buying. This limit should be retailer specific and linked to historical sales by the retailer. Another approach is to tie the promotion dollars paid to the retailer to the amount of sell-through rather than the amount purchased by the retailer. As a result, retailers obtain no benefit from forward buying and purchase more only if they can sell more. Promotions based on sell-through significantly reduce information distortion. 

A forward buy occurs when a retailer purchases in the promotional period for sales in future periods. A forward buy helps reduce the retailer s future cost of goods for product sold after the promotion ends. Although a forward buy is often the retailer s appropriate response to a price promotion, it can decrease supply chain profits because it results in higher demand variability, with a resulting increase in inventory and flow times within the supply chain. 

Our objective in this section is to understand a retailer s optimal response when faced with a trade promotion. We identify the factors affecting the forward buy and quantify the size of a forward buy by the retailer. We also identify factors that influence the amount of the promotion that a retailer passes on to the customer. 

We first illustrate the impact of a trade promotion on forward buying behavior of the retailer. Consider a Cub Foods supermarket selling chicken noodle soup manufactured by the Campbell Soup Company. Customer demand for chicken noodle soup is D cans per year. Campbell charges C per can. Cub Foods incurs a holding cost of h (per dollar of inventory held for a year). Using the EOQ formula (Equation 11.5), Cub Foods normally orders in the following lot sizes ... 

In practice, retailers are often aware of the timing of the next promotion. If the demand until the next anticipated trade promotion is Qj, it is optimal for the retailer to order min Qf, Qi Observe that the quantity ordered as a result of the promotion is larger than the regular order quantity g. The forward buy in this case is given by... 

As a result of this forward buy, DO will not place any order for the next 3.8236 months (without a forward buy, DO would have placed another 31,912/6,325 = 5.05 orders for 6,325 bottles each during this period). Observe that a 5 percent discount causes the lot size to increase by more than 5(X) percent. 

Trade promotions lead to a significant increase in lot size and cycle inventory because of forward buying by the retailer. This generally results in reduced supply chain profits unless the trade promotion reduces demand flnctnations. 

From Examples 11-11 and 11-12, observe that the increase in customer demand resulting from a trade promotion (7.5 percent of demand in Example 11-12) is small relative to the increased purchase by the retailer due to forward buying (500 percent from Example 11-11). The impact of the increase in customer demand may be further dampened by customer behavior. For many products, such as detergent and toothpaste, most of the increase in customer purchases is a forward buy by the customer customers are unlikely to start brushing their teeth more frequently simply because they have purchased a lot of toothpaste. For such products, a trade promotion does not truly iuCTease demand. 

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