In the retail sector, promotions serve as a lever to attract consumers to stores and retain existing customers.
However, for the supply chain, promotional activities primarily bring disruptions.
Fluctuations in sales volumes, cannibalization, and impacts on the distribution flow — promotions artificially alter consumer demand and disrupt the usual forecasting and procurement processes.
What are the real impacts of promotional activities on the supply chain?
And, more importantly, how can they be integrated with a dedicated supply chain solution to mitigate their consequences on the logistics chain?
Inaccurate sales history
Distorted consumer demand for promoted products
The first impact of promotions on the supply chain is on sales history.
Under normal circumstances, forecasters rely on a “standard” demand to establish a forecast. By standard demand, we mean consumer demand adjusted for events that significantly deviate from its trajectory, such as stockouts.
Promotional activity is also one of the factors that distort consumer demand. When the lever is activated, the demand for promoted products surges with impulse purchases. Once the promotion ends, on the contrary, the demand contracts because consumers have stocked up or returned to their usual buying habits.
Promotions cause significant variations in sales compared to regular volumes. Consequently, they “contaminate” sales history. Without correction, there is a risk of overestimating the demand for promoted products, leading to cascading effects on the supply chain, such as excess inventory, additional costs, and reduced profitability.
To adjust the forecasts, it is necessary to calculate the promotional effect to determine what the demand would have been during that period if the promotion had not taken place.
Using a specialized supply chain solution facilitates the correction of sales history. The tool automatically calculates the effect of the promotion on observed sales and then corrects the sales figures for promotions. These corrected sales ensure a much more accurate standard (non-promotional) forecast.
For example, our supply chain solution, Optimix XFR, excludes the weeks affected by promotional activity from the forecast to enhance its reliability.
Phenomenon of cannibalization on substitutable products
In addition to the impact on discounted products, promotional activity also affects so-called substitutable products. This is what we call cannibalization.
For example, let’s say you’re running a promotion on 12-pack natural yogurts of brand A. Naturally, you will increase the sales of this product. However, as a result, the sales of similar products from brand B and C will decrease. The promotion will also have an impact on the entire product category.
From this perspective as well, promotions have an impact on forecasting. It is therefore essential to adjust for the effects of cannibalization on substitutable products, otherwise your forecasts will be distorted.
To achieve a high level of accuracy, you must take into account the cannibalization phenomenon.
A supply chain solution helps you to:
- Identify the products affected by the promotion
- Automatically adjust the sales history of these items
- Consider the impacts on the entire product category, both in terms of adjusting historical data and forecasting
Halo effects on other product categories
Often, products affected by promotional activity can belong to another category of items. Even if they are not directly involved in the promotion, halo effects can be observed.
For example, a promotion on printers will automatically impact the sales of associated consumables. The same observations can be made between barbecues, accessories, charcoal, and so on.
Once again, it is important to take into account this halo effect to ensure the reliability of your forecasts.
With a high-performing supply chain tool based on AI, advanced modeling will allow you to recalculate forecasts for all products affected by price changes of one or more products.
Distribution disrupted by promotion
Impact of promotion on volume forecasting
In retail stores, it is usually the marketing department that plans and manages promotions. However, the impacts on the supply chain are significant enough that category managers and logisticians are rightfully consulted. In terms of the supply chain, the objective is to anticipate the effects of the promotion as accurately as possible by refining the forecast.
The first question that arises concerns the volume of orders to be forecasted to ensure promotional activity.
The impact of the promotion will not be the same from one store to another. Ideally, the impacts are calculated based on past events with similar promotional mechanics. If the promotional history does not present such similarities, cascade mechanisms must be considered.
Impact on Orders and Stocks
Promotions also have an influence on order and stock management.
In the case of promotional activity on a product, the volume of orders is significantly higher than the usual volume. For the distributor, the promotion generates an excess of activity.
Promotions are often associated with dedicated products, cannibalizing regular shelf products. They involve dedicated production processes. Therefore, it is essential to anticipate promotional orders. Retailers commit several weeks in advance to allow the supplier to smooth out the peak of activity. Given the expected volumes, there is a phenomenon of anticipated purchasing.
If promotional purchases are anticipated, it becomes crucial to differentiate between promotional stocks and regular shelf stocks in order to not disrupt the ordering process of the regular product.
At the end of the promotion, often the remaining stocks must be merged with the regular shelf to avoid overstocking.
To manage promotional items, retailers can establish a separate promotional circuit with the use of overflow stock.
In other words, promotions typically involve:
- Dedicated order management,
- Anticipated ordering lead times,
- Separate logistics circuit,
- Dedicated stock reservations,
- Specific forecasting methods
The flexibility of the Optimix XFR solution provides an appropriate response to promotional supply processes.
In general, the promotional process is collaborative. It notably impacts stores, forecasters, and buyers. The flows can be dedicated, stocks and work in progress can be positioned in specific locations, and lead times are not the same. At the end of the promotion, stocks and any work in progress are often shared.
The solution supports all these specificities and streamlines collaboration among the stakeholders involved in the promotion.
Integrating promotions into the forecast
Promotional activity requires extensive adjustment of historical data and more complex forecasting methods. AI simplifies the correction phases. Normal demand is no longer sought. With effective modeling, it is now possible to calculate a forecast in a comprehensive context.
Conventional methods relied on two versions of the forecast:
- A non-promotional forecast based on adjusted sales history
- A promotional forecast based on similar promotional activities’ historical data
However, in reality, promotional and non-promotional stocks are interconnected. Products can transition between the two. In terms of transportation as well, for logistical cost considerations, it may be preferable to break down barriers to achieve savings.
Therefore, depending on the requirements, it is valuable for the solution to merge promotional and non-promotional forecasts to predict the overall logistical impacts and assist the retailer in making informed decisions.
New technologies allow for the consolidation of forecast components based on the configuration. A single version is calculated based on the category’s or product’s context.
With a supply chain solution like Optimix XFR, you can choose either mode of forecasting according to your needs. Additionally, the solution calculates the impacts in terms of stock projections and deliveries across all nodes of the supply chain.
In conclusion, it is clear that promotions have a significant impact on companies’ supply chains. They can generate a sudden increase in demand, which poses major challenges in terms of stock management, production capacity, and logistics.
To maintain the efficiency of the supply chain, it is essential for supply chain managers to collaborate closely with marketing and sales teams to anticipate promotions and plan accordingly.
It should also be noted that promotions should not be considered as an independent strategy. They need to be integrated into a comprehensive approach to supply chain management aligned with the company’s business objectives. Supply chain managers must continue to seek ways to improve operational efficiency, reduce costs, and minimize delays while taking into account the impacts of promotions.
To do so, data analysis plays a crucial role in understanding the impact of promotions on the supply chain. Supply chain managers should invest in advanced analytical tools to collect, track, and analyze data related to promotions in order to gain valuable insights into demand trends, customer preferences, and supplier performance. This in-depth analysis can help make informed decisions to optimize supply chain management and maximize the benefits of promotions.
Would you like to delve deeper into these topics or explore strategies that can optimize your own supply chain?
We invite you to contact us. Our team of passionate and experienced experts in the retail industry is ready to answer all your questions and share their knowledge.