July 18, 2011
Column | techwatch

From demand signals to demand shaping

An emerging class of software can assess buyer interest and then formulate offers designed to sway purchasing behavior.

By James A. Cooke

Although companies are just starting to use software to decipher demand signals and use the information to adjust inventories in their supply chains, pioneers are looking ahead to the next phase: shaping demand. And that could have major implications for logistics and distribution managers.

Demand, of course, determines inventory and production needs. But only a few companies have started to put aside forecasts and drive replenishment based on actual demand—point-of-sale purchases or orders. Algorithms in sophisticated software take data on those actual "buys" and then recalculate stocking levels at distribution centers, triggering orders from suppliers further up the pipeline.

In the above scenario, companies are merely reacting to consumer demand; they are not prompting the buyer to make a purchase. They are not shaping demand.

But an emerging class of software has the intelligence to assess buyer interest and then formulate offers designed to sway purchasing behavior. Vendors that offer this type of software include Avercast, DemandPoint, and ToolsGroup.

Shaping demand is not an entirely new idea. Companies have engaged in store promotions, purchase incentives, and marketing campaigns for some time now. In fact, one consumer company has been doing this online for a number of years—Amazon.com. When you order a spy novel online from Amazon, the digital merchant will suggest other titles in that genre. By appealing to your tastes in literature, the online store tries to get you to make additional purchases.

While Amazon has done "online demand shaping" in the consumer space, traditional business providers are now starting to eye this practice as well. At the Council of Supply Chain Management Professionals' European conference this past June, Stephen Garbett described how his company, RS Components, was taking steps to do demand shaping online. Based in the United Kingdom, RS is one of the world's largest distributors of electronics and industrial products and components. "We want to understand what the customer is looking for and then manage the customer expectations," said Garbett.

For instance, if a customer was looking for a specific product that RS Components didn't have in stock, he or she could be prompted to buy a related item. Or RS Components could use online promotions to encourage a buyer to take a certain product today at a special price. Or as stocks of a particular product began to run low, the online site could even raise the price on the remaining items.

Although demand shaping would be used to boost revenue and profits, it could also be used to boost supply chain efficiency. For example, a company could offer specials—say, free shipping for orders placed during the morning—in order to better manage its own work flow. If a company had an underutilized warehouse workforce in the morning, it could use special offers to drum up more orders to keep its staff busy.

For distribution managers, this ability to orchestrate demand could be a game changer. It would enable them to marshal their own resources to better utilize warehouse and transportation capacity, leading to higher efficiency and lower costs while still meeting customers' expectations. Demand shaping could become another tool for distribution managers looking for cutting-edge ways to optimize their operations.

About the Author

James A. Cooke
James Cooke is a principal analyst with Nucleus Research in Boston, covering supply chain planning software. He was previously the editor of CSCMP’s Supply Chain Quarterly and a staff writer for DC Velocity.

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