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Balancing Marketing and Supply Chain Activities

Author(s): Robert J. Vokurka and Rhonda R. LummusReviewed work(s):Source: Journal of Marketing Theory and Practice, Vol. 6, No. 4, Supply Chain ManagementSponsored by SYNCRA Software, Inc (Fall, 1998), pp. 41-50Published by: M.E. Sharpe, Inc.Stable URL: http://www.jstor.org/stable/40469935.

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2/11

BALANCINGMARKETING

AND

SUPPLY

CHAIN ACTIVITIES

RobertJ.Vokurka

TexasA&M

University

Rhonda

R. Lummus

Central

Missouri

tate

University

A

relationship

xists

between

he

upply

hain nd

marketing

ctivities. or most

upply

hains balance

exists etween

customer

equirements

nd

upply

hain

apabilities.

hen

marketing

ctivities

trainhe

upply

hain's

bility

o

meet

emand,

additional

osts re ncurred. ll associated osts hould e considered

n

supply

hain

planning,

nd

marketing

nitiatives

should

eevaluated

ncluding

he

ecognition

f hese osts cross he

upply

hain.

Questions

elated o he

iming

f

marketing

activities eed o consider

he

mpact

n the

upply

hain nd the

verall

rofitability

f he nitiative.

INTRODUCTION

Managing

he

upply

hainhas

become

n

important

ssue

for he1990s.Customers ave

multiple

ources

rom hich

tochoose o atisfyemand;ocating roducthroughouthe

distributionhannel

ormaximum

ustomer

ccessibility

t

a minimum

ost ecomes rucial.

ompanies

ave ooked

t

solving

the

distribution

roblem

hrough

maintaining

inventory

t various locations

throughout

he chain.

However,

he

dynamic

ature

f the

marketplace

makes

holding

nventory risky

nd

potentially

nprofitable

business.

ustomers'

uying

abits re

onstantly

hanging,

and

ompetitors

re

ontinually

dding

nd

deleting roducts

which

makes

t

difficultohave he

ight

nventory.

t's hard

to

provide

low

cost

product

henfunds re tied

up

in

inventory.

The shiftn emphasisto the supply hain is due to a

realizationhat

maximizingerformance

fone

department

orfunction

ay

ead

o ess han

ptimal erformance

or he

whole

ompany

nd

beyond.

Purchasing

may

be able

to

negotiate

lower he

price

n a

component

nd receive

favorable

urchase rice

ariance

difference

etweenctual

and

budgeted

r

standard

ost),

ut he ost o

produce

he

finished

roduct

ay

o

up

due o

nefficienciesnthe

plant.

Companies

must ook cross

he

ntire

upply

hain o

gauge

the

mpact

fdecisionsn

any

ne area.

Many

ompanies

re

streamlining

ll

operations

nd

minimizing

he time-to-

customer or heir

roducts

o meet

ompetitive

orces.

The definition f the supply hain is evolving s more

attention as been

placed

on

the entire

supply

and

distributionetwork.

review f

contemporary

efinitions

(Lummus

nd

Alber

1997;

Monczka and

Morgan

1997;

Quinn

1997)

nclude

many

ommon

lements.

sing

hese

previous

efinitions,

supply

hain can

be defined s the

network

f functions

nd

processes,

both

internal nd

external

o an

organization,

hat

are associated with

procuring,

oving,

nd

transforming

asic raw

materialsn

to

product

r ervice or n

end-user. n

ntegral

art

f he

supply

hain stheflow f nformationetween nd

among

all members

f he istributionetwork. he

management

f

the

upply

hain s then

he

ntegration

nd

coordination

f

all these activities including suppliers, carrier,

manufacturers,istributors,

hird-party roviders,

nd

informationarriers.

A

relationship

xists etween

upply

hain

performance

nd

marketing

nitiatives.ritical

o

managing

he

upply

hain

is

managing

he

inkbetween

ach

step

within

he chain o

synchronize

he ntire

upply

hain. ormost

upply

hains,

a balance xists etween ustomer

equirements

nd

supply

Special

ssue 41


3/11

chain

apabilities.

hen

marketing

ctivities

train

he

supply

hain's

bility

o meet ormal

emand,

osts re

incurred.

degree

f

supply

hain

lexibility

ay

etter

absorb

ariationsn demand

atterns

nd

minimizeost

fluctuations,

ut

ddition

osts

may

e ncurredo

gain

his

flexibility.

Some

lanning odels,

uch

s sales

perationslanning

(SOP)

an

ntegrativeanagementrocess

o

trategically

align

emand

nd

production),

inite

apacity

cheduling

(FCS) (a scheduling

ystem

hat

ncorporates

ustomer

priorities

nd

manufacturing

oad

leveling),

emand

planning

nd

cheduling

DPS) (a

process

f

oordinating

demand

orecastsnd

roductioncheduling),upply

hain

planning

SCP)

integratingequirements

ith thers

n he

supply

hain,

sually

uppliers),

nd

enterprise

esource

planning

ERP) an

integrative

ystem

sed o

dentify

nd

plan

enterprise-wide

esourcesneeded to

accept,

manufacture,

nddeliverustom*

rders)

re nuse

oday.

However,

hey

re often

imitedo internalse

in an

organizationr re ocusednproductolumesnlyndnot

on he otalost

mpact

f

marketing

nitiatives.

This rticleescribes

he ink

etween

arketing

ctivities

and

the

upply

hain.The

concept

f a

supply

hain

n

balance

with ustomer

equirements

s discussed.

he

importance

f

onsidering

ll

associated

upply

hain osts

when

valuating

he

projectedrofitability

f

marketing

initiatives

s

developed.inally,

mproving

upply

hain

flexibility

o

better

eet

hanges

n

customer

emand

s

described.

upply

hain

output

hould

e balanced

o

customeremand.

ne

goal

of

managing

he

upply

hain

should

e to

minimize

dded

upply

hain osts

hat esult

fromhangesndemandue omarketingctivities.

MARKETING'S

INK

TO

THE

SUPPLY CHAIN

Most

ompany

anagers

ould

ike

marketing

o

provide

them

ith

stable,

redictable,

rowing

t

pace

hey

an

handle,

emand

attern

Mather

995).

Unfortunately,

hat

they et

s

a demandituationhats

"erratic,

npredictable

and

declining."

sMather

1995)

notes,

many

ales

nd

marketing

rograms

ctually

ause olatile

emand.

hey

take

n

underlying

ustomer

emand,

hichs

relatively

stable

or

many

roducts

nd

ntroduce

eaks

nd

valleys."

Companies

eact

ymplementing

rograms

o

mprove

he

flexibilityfthefactory,ddingnventoryushions,nd

increasingapacity

omeet

eak

emand.

Mather

uggests

companies

eed o

analyze

heir

romotionrograms

o

determine

hichnes re

eally

dding

alue

nd

whichnes

are

osing

money.

his

valuation

ustncludehe

ffect

across

he ntire

upply

hain.

Consumer

emand as

changed

ignificantly

ver

he

ast

decade.

irst f

ll,

here

re

imply

ore arieties

equested

by

consumers.

or

example,

he

numberf

products

n

supermarkets

as risen

romhirteen

housand

n

1981

o

twenty-one

housand

n 1987

Bockerstette

nd hell

993).

These

market

hiftsave

reatedxcellentevalue

treams.

However,

his consumer

indfall

as

also been

some

manufacturers'

ownfall.

he raditional

upply

hain nd

manufacturing

ractices

ere

not

originally

esigned

o

deliver

uch

ariety

nd

omplexity.

In

addition,

ustomer

emands often olatiles a resultf

twoother

actors:

hanges

n customers'

uying

abits,

including

easonality,

nd

changes

aused

by company

actionsr

policies,

r ctionsaken

y

ompetitors.

he irst

change

n

demand

s difficultor

company

o

control,

s

consumers

hange

heir

references

he econd

hange

n

demand

s caused

y

nternal

ompany

ctions

ncluding

marketing

ctivities

esigned

o timulateemand.

These

marketing

ctivities an be divided

nto three

categories:

ass

marketing,

rade

romotion,

nd onsumer

promotion.arketingsesthese hree ools o increase

awareness

f

products

nd

to

stimulateemand

or he

products.

xamples

f

he

many arketingrograms

hatan

affect

emand

nd he

upply

hain

nclude:

adio,

elevision

or

rint

edia

dvertising;

ccount

evelopedrograms

i.e.,

programs

eveloped

ointly

ith he ext

tage

ustomer

n

the

distribution

hain);

consumer

romotions

uch as

coupons

nd

amples,long

with

many

thers.

The

ncreasedemand

rom

arketing

ctivitiesan

have

significant

mpact

n the

upply

hain. The ncreasen

demand

reates disturbancet a

particular

ode

n the

supply

hain

Hada

i

1996).

For

nstance,

trade

eal

increases emandfrom he distributorack to the

manufacturinglant

The

disturbance

ay

ave ittleffect

on he

ntire

upply

hainf he ode as he

bility

o bsorb

the isturbance

hroughafetynventory.

hen he ncrease

in demand

xceeds vailable

nventory,

hedisturbance

s

passed

pstream

o otherinks

n

the

upply

hain. The

disturbance

s

specially

ignificant

t wo xtremeituations:

Whenhe

emand

ncreaseue

o he

romotion

ctivity

strains

he

upply

hain's

apability

o

produce

t the

new evel. The

emporary

ncreasendemand

ay

e

met

hroughuilding

nventory

n

slack

eriods

r

by

activitiesuch s overtime

roduction.

When

redictions

f he

mpact

f he

romotionctivity

are inaccurate.

For

instance,

retail

dvertising

program

s

expected

o

ncreaseemand

y

%

for hree

weeks,

nd nstead 10% ncreases realized.This

unplanned

emand

xceedshe

orecast,

nd he

upply

chain

must eactn he

hort-termo

provideroduct.

42

Journal

f

Marketing

HEORYAND

PRACTICE


4/11

An

example

f the

mpact

f

marketing

nitiatives

n the

supply

hain an be seen n

Figurei.

This

figure

aken rom

historical

alesof

one

product

t

one

ompany

llustrateshe

changes

n

production

tthe

manufacturinglant

evel

based

on

marketing

ctivity.

he horizontalxis

represents

eeks

and

thevalicai axis cases of

product.

ach of he

peaks

n

cases

producedrepresent

n

advertising ampaign

or

promotionctivityonductedymarketing. s

the

figure

indicates,

he ncrease

n

demand

s

significant

t the

plant

level.

Changes

n case demand re as

high

as

five

imes

normal

n one

week.

However,

uring

hose

same time

periods,

oint-of-salehipments

o

consumers

aried

nly

slightly.

rade

promotions

riggered

hemiddle ink

n the

supply

hain o

buy

dditional

roduct

nd store

tfor uture

consumereeds.

Meanwhile,

eeting

he ncreased

emand

in he

eakperiods

trains

he

upply

hain's

apabilities

nd

results

n added ost

for he

ompany.

Note

hat here

re

also

fluctuationsn the

nventory

evel.

Inventories

re

typically igher

han

production

evels

in

order o absorb hevariabilityndemand nd tocover he

lead

ime ssociated

ith

nitiating

ew

production

rders

n

response

o customer emand.

BALANCE MODEL

One

way

of

viewing

he

impact

f this scenario on

the

company

s

to think bout he

upply

hain s

normally

n

balancewith ustomer

equirements.igure

describes

his

balancing

ct.

Promotions

rother

marketing

ctivitiesave

the

potential

o

upset

his

balance.

If

marketing ractices

shifthebalance

oo

trongly

ne

way,

.g.,

with

promotion

that

trains

emand,

he

upply

hainbecomes

unbalanced

with ustomers

eeds. Thisout-of-balanceonditiondds

cost

s the

upply

hain crambles o meetdemand.

Figure

3 describes

n unbalanced

upply

hain

straining

o

meet

customer

equirements.

Traditional

upply

hain

design

or

what

was once

narrowly

referred

o as

manufacturing-onlyesign)

ooked ikethe

following:

Rigid roduction

ystems

esigned

o

produce

nly

few

products

Long supply

ycle

imes

Large

batch

izes

Capacity

ased

on annualvolumes

Volume-driven

echnology

Numerous

uppliers

or he ame

parts.

The

explosion

of

marketing

ctivity

nd

intensity

f

consumer emand

has thrown

many

companies9 upply

chains

nto

tailspin.

heir

ystems

ere

not

designed

o

meet he

equirements

ow

placed

upon

hem.

As a result f

these

changes

n customer

equirements

nd

inadequate

systems

o

manage

hem,

he

followingymptoms

xist:

FIGUREI

DEMAND DISTORTION

120.000

-

IOOOOO-

CASES IN INVENTORY

^^k

A

8O.OOO

-

^^^^^^ ^^^^^^^^^^^L ^^^^^^^^^L ^^^^^^^^^

^^V

CASES

SHIPED^^^^^^^^^^^^^^^^^^H

TOTAL

^^^^H

Special

ssue

43


5/11

FIGURE

2

BALANCED SUPPLY

CHAIN

|

CUSTOMER

SUPPLY

REQUIREMENTS

CHAIN

CAPABILITY

Market

Demand,

^^^^^^k

Suppliers,

Manufacturers,

New

Products,

^^^^^^^^^^

Transportation,

Promotions

jiHHI^^flHkt.

Distributors

FIGURE

3

STRAINED SUPPLY CHAIN

Increased Demand

Increased Costs

Overtime

Due to

Marketing rograms

Expediting

^^^^^^^^^^^^^^

Premium

Freight

^^^^^^^^^^_

Increased

inventory

CUSTOMER

^^^

Costs of

Producir*

t

REQUIREMENTS

^T

^^^ .

Costs

as^ptimallocStion

of

Producir*

t

^^^^^^

SUPPLY

CHAIN

Decreasingmargins

Poor ervice erformance

Increased verheadosts

Poor

roduction

rocess eliabilityquality

nd

delivery

implications)

Increased owntime

ue

to

changeovers

High

inventory

evels of

raw

materials nd finished

product.

Table

1 describes

he

characteristicsf a strained

upply

chain versus those of a capable supply chain. The

synchronization

nd

ntegration

f he

upply

hain

members

are reflected

n thebalanced

upply

hain

description.

he

strained

upply

hain s much

more

isjointed

nd he

mpact

of

fluctuations

auses

disruptionshroughout

he chain as

members

ry

o

adjust

o the

demands

f

their

mmediate

customers.

44

Journal

fMarketing

HEORY AND

PRACTICE


6/11

TABLE 1

SUPPLY CHAIN CHARACTERISTICS

Strained

upply

Chain

Capable Supply

Chain

Produce

o forecast

Push)

Make todemand

Pull)

Highly

ariable emand

rofile

Producemost

roducts aily

reduced

un

ycles)

Low

overall

eliability

Reliable

ystems

No formal

upplier artnerships

Daily

upplier

ntegration

Few

customer

artnerships

Flow

replenishment

f

customer

nventory

Frequent

chedule

hanges

Synchronized

upply

nddemand

Differentchedules or

lants

nd

uppliers

Same schedulescross

upplyystem

Functional

iloswithin

upply

hain

Supply

hain

rocesses y

product

ines

Most

upply

hains re

woefully

nbalanced ith ustomer

requirements

Bockerstette

nd hell

1993).

Each

ink nthe

product

upply

ystem

must be

individually apable

of

producing

nd

delivering

hat

ustomersrder

ach

day.

Theentire

upply

hain s

only

s

capable

s theweakest ink

in the

system.

Where he

supply ystem

s

incapable

of

delivering

ithinustomer

xpected eplenishment

ime,

he

supply

hain arries xcess osts n he orm f

nventory

nd

overhead

o

support

ork-in-process

nd

finished

roducts

inventories.

arketing

rogramsmay

ncrease he out-of-

balance onditionnd should e evaluated artly asedon

their

upply

hain

mpact.

CURRENT

MARKETING

PROGRAM

EVALUATIONS

Traditionally,

ost

ompanies

valuate

roposed

marketing

programs

ased

n

marketing'srojections

f

ales

volumes,

the cost of

running

he

advertisements

r

promotion,

nd

standard

budgeted) upply

hain osts. When ales cover

the

marketing

ost and allow

for a

targeted

evel of

profitability,

he

rogram

s

approved.

Abraham

nd Lodish

1990

challenged

hewisdom f

basing

decisions n

gross

sales uggestingnsteadhefocus hould e on incremental

sales.

Theyproposed

that

managers

hould ook

for

balance between

dvertising

nd

promotion

ased on

marginal-productivity

nalysis.

As

Abraham nd

Lodish

(1990)

state:

"The dea

s to start

ith

zero

budget

nd allocate

money ncrementally

o various

dvertising

nd

promotion ptions.

The

goal

is

to

identify

he

option

hat

marginally

ontributes

ost

o

he

ong-

term

rofitability

f he

roduct.

llocationshould

continue

n

this ncrementalasis until ll

options

that

provide

suitable

eturn n the

ncremental

investmentre found."

Their

esearch howed

nly

16% of trade

romotions

ere

profitable,

ased

n ncremental

ales.

Increased

dvertising

led to more

ales

only

bout

alf he ime. n

addition,

hen

advertising

id

boost

ales,

the extra

profit

ften id

not

cover he xtramedia osts.Promotionsnparticularave

misleading

ffect

n

manufacturers

hipments

ue

oforward

buying.

etailers

ill

ake

n

thousands

f xtra ases

during

the

promotion,

hennot

buy

far everal

weekswhile

hey

deplete

heir

nventory.

WhatAbraham

nd Lodish's

research

id

not

consider n

their valuation f he

profitability

f he

marketingctivity

is the

dded cost

ncurred

y

the

upply

hain

to meet he

surge

n demand. Those costs are not

isolatedto

the

promotion

r

dvertisingctivity,

ut

re

hidden

n

plant

nd

purchasingudgets

ndermaterial

ariance, vertime,

crap,

rework,

remiumreight,

ndother

lassifications.

igure

graphicallyllustratesow hese osts ncreasen relationo

changes

n

demand

for

one SKU at one

company.

As

demand ncreases ue

to

promotion

ctivities,

he

supply

chain

costswhich re

not

ncluded n

standard osts lso

increase.The bottomine

mpact

f he

promotion

ased

n

incrementalales s not valuated

eforehe

rogram

egins.

The

true

ontribution

o

profit

f

he

program

hould nclude

both

he

marketing

ctivity

osts

nd

all

supply

hain

osts

directly

ttributed

o the

promotion.

Special

ssue

45


7/11

lOOO

800

1

600

1 1

400

Z^***^

-

I I TTP^^

- -

^

~~

200

-^

^^-^^-

-

Q

|

| | |

123456789

Montn

| |

Demand

Non-Standard

Supply

Chain

Costs

FIGURE

4

RELATIONSHIP

BETWEEN DEMAND AND

NON-STANDARD

COSTS

A

study

y

Hardie

1997)

discussed he aseof

ecreasing

he

use

of

marketingrograms.

heir

videncehowed hat

rice

promotions

ave been

taking

n

increasing roportion

f

marketingudgets

or onsumer

oods

manufacturersnd

that hese

romotions

re

onditioning

onsumerso ode for

bargains hichmaybeeroding randoyalty. hey ited

numberf ost

avings

hatwould esult

rom de-escalation

of

pricing romotions. smoothing

fthe sales

pattern

would

mean Iowa*

inventories,

mproved

production

coordination,

educed

vertime,

nd more fficient

ogistics

(Hardie

1997).

However,

he

competitive

eactions o

changing

he

use of

pricing

promotions

must also be

considered.

The

performance

easures

urrently

n

place

to evaluate

marketing

ctivities re

traditional

inancial ools.

For

example:

Increasedmarkethare

Return n nvestment

Net

profit

ontribution

Profit

argin

These

performance

easures

analyze

the

cost of the

marketingctivity,

roject

ales

volume,

nclude ost of

production

nd distributiont

standard

budgeted)

ost,

nd

project

he

profit

ontributionor he

product.

New models

are

required

which stimate

he ncremental

ales

from he

marketing

ctivity,

nclude he

marketing

osts f

running

the

romotion

r dvertisementnd he

dded osts ncurred

by

die

supply

hain

s

it extendsts

capabilities

o

meet he

increasen demand.

MAKING TOTAL

COST DECISIONS

Companies

eed o ssess he

rue ost f

undertaking

ertain

marketing rograms

y

identifying

he

incrementalales

from ie

program

nd both he

marketing

nd

supply

hain

costs f he

rogram.

ne

approach

o

gathering

nformation

is to

mplement

n

activity-based

ostingABC)

modelwhich

identifies he

cost of all

activities ssociatedwith the

marketingroject.

However,

BC is a difficultnd

costly

process

o

mplement

Krumwiede 998).

An

activity-based

management

ool s needed

which ids

n

the valuation f

marketing

ecisions asedonestimatesf

ncremental

ales,

marketingosts ndthe ost fvarious upplyhain.

The

model should

apture

he

planned

ncremental

ales

volume,

he

rojected

arketingxpenditures,

nd

projected

added

costs from

he

supply

hain

not

included n the

product's

tandard ost. The

model

should

be

capable

of

answering

What

f

questions

uring

he

promotion

r

advertisinglanning rocess.

For

nstance,

hat f

weekly

sales estimates

rom

he

promotion

ary

rom heforecast.

46 Journal

f

Marketing

HEORY AND

PRACTICE


8/11

Or,

what f

differentethodsf

meeting

emand re

used

by

the

supply

hain,

uch as

building nventory

n

advance

versus

working

vertime?

The

final

esult

houldbe the

expected

et alueof he

marketing

nitiative

onsidering

ll

planned

osts

equired

o meet he ncrease

n

demand.

In

addition,

hemodel hould e

capable

f

valuating

he

program

fterts

ompletion

omeasure he rue

rofitability

of

he

promotion.

The

total

cost

impact

an

be

described

y

the

following

formulas:

Net

Value of he

Marketing

nitiative Total ncome Standardncome

(1)

where

Total ncome

=

Standardncome

(Added

Sales

-

Added

Costs)

(2)

Standardncome

=

(Standard

ales Volume

Price) (Standard

ales Volume

x

(Standard

ost) (3)

Added ales

=

(Added

ales Volume

Selling

Price)

(4)

AddedCost

=

(Added

Sales

Volume Standard

ost)

+

Supply

hain AddedCost

+

Marketing

osts

(5)

An

example

would e as follows:

Standard olume nd Costs

Marketing

romotion

Standard ales Volume

20,000

units Added ales

Volume

5,000

units

Selling

rice

$60/unit

Sales Price

$50/unit

Standardost= $30/unit Standard ost= $30/unit

Added

upply

hain

Cost

=

$25,000

Marketing

osts

=

$50,000

Standard

ncome

=

(Standard

ales Volume

Price) (Standard

ales Volumex

(Standard ost)

=

(20,000

x

$60)

-

(20,000

x

$30)

=

$600,000

With

Marketing

nitiative

Added

ales

=

(5,000

x

$50)

=

$250,000

AddedCost

=

(5,000

x

$30)

+

$25,000

+

$50,000

=

$225,000

Value

of he

Marketing

nitiative

=

$250,000 $225,000

=

$15,000

Total ncome

=

$600,000

$

1

,000

=

$6

1

,000

In this

ypothetical

xample,

he

ncremental

ncome

ttributedo

the

marketing

nitiative

s

only

3

per

unit

$15,000/3,000

units),onsiderably

ess han

he tandard

ncome f

30

per

unit

$600,000/20,000

nits).

his s due o

lower

rice er

unit,

direct

marketing

osts ssociatedwith he

nitiative,

nd

added

upply

hain

osts.

The

supply

hain

imitations

hich aused added

cost

to

meet

he emand

rojections

hould lso

be dentified.able

2

lists

ome

possible

upply

hain imiters

hich

ypically

drive osts.This ist s not

ll-inclusive,

ut

s

representative

of

typical

irm's

upply

hain's dded osts.

Evaluating

ie

cause

for he dded

costs

will

expose

he

imiting

actor

n

the

upply

hain's

erformance.yrecognizing

he

imiting

factor

rconstraintn

the

upply

hain,

fforts

ay

e

made

toremove rreduce he

imiting

actornd make

he

upply

chain

apable

f

meeting hanges

n

demand.

The

basis for

reating

new model

ies

in

the

balance

concept

escribed

arlier.

The

supply

hain s balanced

y

customereeds.

When

marketing

ctivities

ip

he

balance,

or customer eeds

xceed

upply

hain

apabilities,

dded

costs

re ncurred. he

model

hould nclude osts

long

he

supply

hain

that

may

be incurred

y

other

nodes

other

companies),

but are

not added

direct costs

to the

manufacturer.

ompanies

must

ecognize

hat

ther

osts

incurred

long

he

upply

hain

may

ot

et harged

o

hem,

but

get

passed

along

n

higher

rices

o the consumer nd

reduce he verall ffectivenessf

he

upply

hain.

Companies

hould ook t

ffectivelyxecuting

he

marketing

activities

y

valuating

he

rue

rofitability

fthe

ctivity,

i.e.,

by ncluding

ll the ost

mpacts

cross

he

upply

hain.

Activities

hat

disrupt

he

supply

hain

balance add costs

which eedtobe considerednthe valuation.The

supply

chain

limitations

hich

cause the

added cost should be

targeted

or limination r

improvement

hichwill

again

balance he

upply

hain

apabilities

ith onsumer emand.

Special

ssue 47


9/11

SUPPLY CHAIN

FLEXIBILITY

In

additiono

modeling

he otal osts

f a

marketing

program,

ffortshouldlso

be

ongoing

obuildhe

upply

chain

apabilities

obetter

ynchronize

upply

ith emand.

Flexibility

an e

developed

o

mitigate

ost

luctuationsue

to

particular arketingrograms.

more lexible

upply

chainscapable

f etta*

atching

he

roduction

ateo he

demand

ate or he

eriod

nderonsideration.

As outlined

y

Alber nd Walker

1997) increasing

he

flexibility,

r better

ynchronizing

he

supply

hain,

s

difficult

ecause

very

rea of thebusiness

s

affected,

including

emand

management,hroughput,

un

cycles,

batch

izes,

lanning

nd

control,

nd nformation

low.

Linksmust e establishedetweenemand

reation

sales

and

marketing)

nd the

supply

manufacturing

nd

distribution)

nd must nclude he

timely

xchange

f

information.

hroughput

volume

f

roduction),

un

ycles

(how

ften

product

s

manufactured),

nd atchizes

must

becapable fmeetinghedemandequirementstevery

stage

f he

upply

hain. he

lanning

nd

ontrol

ystems

must e

apable

f

eacting

odemand

hangesy

nteracting

withll elements

f he

upply

etwork.

key

o

ncreasing

the

lexibility

nd

ynchronization

f

he

upply

hain

s the

timely

nd

visible

low f

identical

nformation

o all

members

f

he

upply

hain.

A more

lexible

upply

hain

will

e

n better

osition

o

absorb

he

emand

luctuations

ue o

marketing

rograms.

However,

he

osts

f

trategicallymproving

upply

hain

flexibility

ust

lsobe

planned

nd

mplemented.

MANAGERIAL

MPLICATIONS

Current

ethods

sed

to

promote

nd advertiseave

a

significant

mpact

n the

upply

hain's

bility

o

deliver

product

without

ncurring

xcess costs.

Marketing

promotions

ay

rive

pikes

n

demandhat

he

upply

hain

cannot

eet

nder

ormalonditions.

xamples

f dded

costshat

may

e

ncurred

hen emand

t

the

lant

evel

varies

ignificantly

rom

eriod-to-period

eredescribed

earlier.

Thisresearch

ocuses

n

evaluating

he ffectf

peaks

n demand

n the

upply

hain

nd

dentifying

he

costs hichre ddeds theupplyhain trainsomeethe

changes

n level

fdemand.

Models

must e

developed

which

ill nclude

dded

upply

hain osts

n

he valuation

of

romotion

ctivity

rofitability.

TABLE

2

SUPPLY CHAIN

LIMITATIONS

WHICH

DRIVE COST

Request

o

he

upplier

re n

ess

han tandard

eadtime

Lack f

torageapacity

t he

upplier

Lowestost ransportationodesunavailable

Handlingequirementshange

ue o

design

hanges

Manufacturing

lant

owntime

due

ounavailable

aterial)

Lack

f

torageapacity

t

he

manufacturer

Unavailable

apacity

overtime

r

nonstandard

roduction

ethods

sed)

Additional

etups

r

hangeovers

t he

manufacturinglant

Damaged roduct,

bsolete

roduct

Transportation

ode

equiresxpediting

Excess

torageuantitiesequire

dditional

ycle

Lowestost

ransportation

ode an't

rovide

esired

ervice

Unavailable

upplier

roduction

apacity

Additional

etups

r

hangeovers

t he

upplier

Quantities

xceed

upplierapability

a

second

upplierequired)

Unavailable anufacturingapacityanoutsideupplierequired)

Unavailable

anufacturing

apacity

drives roduction

o

higher

ost

plant)

Change

n

productesign

Lack

f

torageapacity

t

he istributor

Request

onstandard

rocessing

t he

istributor

special agging,

ackaging)

48 Journal

f

Marketing

HEORY

ANDPRACTICE


10/11

Companies

an

mprove rofitability

rom etter

managing

the

link between

marketing

nd the

supply

hain.

It

suggests,

here

may

e two ources fbetterontrolledosts

that

ompanies

an

capitalize

n.

The first

otential

ncrease

in

profitability

omesfrom etter

managing

he

marketing

decisions

n

product romotion

nd

advertising.

Models

must e

developed

oexamine he

potential rofitability

f

marketingctivity rior o its implementation,.g. test

marketing.

he second ource f

potential

rofitability

s

a

more

omplete

nowledge

f the associated

upply

hain

costs

esulting

romhe

marketing

nitiative. odels an

help

identify

hat imits he

upply

hainfrom

meeting

emand.

The models

must

look at incremental ales from

he

promotion

r

advertising

ctivity

nd

compare

t to

the

combination

f

both dded

marketing

ost nd added

upply

chain

osts

ncurredo

meet

he ncrease

n

demand.

Both

costs

hould e

considereds

part

f he

decision o run

he

promotion

nd later

included n the

evaluation f

its

profitability.

Manymarketingrojects hich anaffecthe upplyhain.

Companies

must

sk themselveshe

uestion:

ased

on

the

total

cost of the

marketing rogram,

ncluding

both

marketing

nd

upply

hain

osts,

s it

n

the est nterest

f

the

ompany

o

promote

r introduce? second

question

logically

ollows:

What

is

the best time to execute

he

promotion

o have

the

east

affect n

the

upply

hain

nd

improve

he verall

rofitability

f he

promotion?

The

useof

model s a

decision-making

ool

may

lso aid n

decisions n

related

marketing

ssues.

For

nstance,

hat

affect oes

me

promotion

ave

on

other

roducts roduced

at

the ame

plant?

Or,

what

happens

f

the dateson

the

promotion

re lteredlightly,omove he ncrementalales

to other

weeks?

Also,

is the

promotion

running

simultaneously

ith

promotion

un

y

nother

ivision r

segment

f

he

ompany?

s

managers

egin

o

analyze

he

impact

f

marketing

ecisions n theentire

upply

hain,

these

ecisions

ecome

art

f

he

verall

roducttrategy

or

the

ompany.

The

model an

also be useful

n

ncreasing

he

flexibility

f

the

upply

hain omeet

hanges

n

customer

emand. s

the

added

upply

hain

osts re

determined,

t the ame

ime,

the

imiting

actor r

capability

s also identified.hese

capabilityimits,rconstraints,hen ecome argets

or

supply

hain

improvement

rojects.mprovements

n the

supply

hain

process

will

mprove

he

upply

hain's

ability

to deliver

he

product

equired

y

he

marketing

nitiative

t

no additional

ost.

CONCLUSION

Improvementsn upplyhain erformanceavebeen hown

to

improve

ompany

rofitability.

he

Yankee

Group,

Boston-based

onsulting

irm,

oints

o a

study

f

1,000

European

firms,

hat

hows

eading companies

perating

with 6

percent

ower

ogistics

osts han

he

verage.

"With

supply-chain

osts

stimated

t 10

percent

f herevenuesf

most

companies,

hat

ranslates o

a

nearly

four

percent

increase

n

net

profit

argin.

Considering

he

average

net

profit

argin

or he

healthy,

ortune

0-sized

ompany

s

less than

10

percent,

four

ercent

ottom-line

avings

s a

big

boost"

Davis

1995).

Balancing

marketing

ractices

ith

upply

hain

apabilities

will not ccur vernight. rogramsuch s ECR (Efficient

Consumer

esponse)

n the

grocery

ndustry

re

designed

o

incorporate

efficient

promotion

as

part

of their

implementation,

utno one

n the

ndustry

elieves

hat

will

be

easy

to

accomplish.

According

o forma*

Quaker

President

nd

COO

Philip

Marineau,

"Reengineering

or

ECR

does entail

major

financial osts.

For

Quaker

that

means

$110

to

$130

million

in

initial

cost-reduction

measures

and

realignment

f the sales

organization"

(Mathews

1994). According

o

Marineau,

they

were

spending

etween

10

and

$20

million

nnually

n

employee

education

nd

development

o

align

he

ompany

ith

CR

concepts.

Management

f

he

upply

hain

means

managing

ll the

different

rocesses

nd

activitieshat

roduce

alue nthe

hands f

heultimate

onsumer.

Marketing

ctivities re

one

of he

processes

hat hould

dd

value

o the onsumer.

Promotion

olicies

hat reate nstable emand

nd

result

in

surges

f

orders

n the

manufacturinglant

nd ts

suppliers

dd

costs o

the

product

hich re

ultimately

passed

on

to the

onsumer.

Management

f he

marketing

activities

hould

nclude

n

analysis

f heir ost

mpact

across he

ntire

upply

hain.

The resultwill be a

supply

chain

hat oes

not train

o meet emand nd

recognizes

lower osts

long

he

upply

hain nd better

rices

or

he

customer.

Special

ssue 49


11/11

REFERENCES

Abraham,

agid

M

and eonard .

Lodish

1

90), "Getting

heMost

Out f

Advertising

nd

Promotion,11

arvard usiness eview

68

3):

50-60.

Alber,

aren .AndWilliam . Walker

1997),

"Supply

hain

Management:

APractitioner's

pproach,''

0thnternational

onference

roceedings,

Falls

Church,

A: APICS.

Bockerstette,osephA. and RichardL. Shell (1993), Time Based

Manufacturing,

orcross,

A:

Institutef Industrial

ngineers

nd

McGraw-Hill,

nc.

Davis,

Donald

1995),

"State f

a New Art:

Manu&cturersnd

Trading

Partnersearn s

They

Go,"

Manufacturingystems,

3

8):

2-10.

Hadavi,

K.

Cyrus1996).,Tightening

he

upply

hain

Using

Real-Time

Information,"

PICS The

erformance

dvantage,(1):

34-37.

Hardie,

ruce

1997),

"Who

Benefits

rom

rice

Promotions?"

usiness

Strategy

eview,

4):4148.

Krumwiede,

ip

R.

(1998),

"ABC:

Why

t's

Tried

nd

How t

Succeeds,"

Management

ccounting,

9

10):32-38.

Lummus,

honda

.

and

Karen

. Alber

1997),

Supply

hain

Management:

Balancing

he

upply

hain

With ustomer

emand,

alls

Church,

A:

APICS.

Mather, al (1995), "Don't FlextheFactory,tabilize heDemand," E

Solutions,

11):

40-43.

Mathews,

yan

1994),

"HowCriticals Critical

Mass," rogressive

rocer,

73

10):

43-44.

Monczka,

obert

M.

andJim

Morgan

1997),

"What's

Wrong

With

upply

Chain

Management?"

urchasing,

22

l):69-73.

Quina,

rancis .

1997),

What's he uzz?"

LogisticsManagement,

6

2):

43-47.

AUTHORBIOGRAPHY

Robert

.Vokurka

Ph.D.,

exasA&M

University)

s

an

assistant

rofessa-

f

ndustrialistribution

n the

Dwight

ode

College

f

ngineering

tTexasA&M

University.

e

held

ositions

f

lant

Manager

ndDivisionontroller

n

ndustry.

e

has

published

ntheJournal

fOperations

anagement,

nternational

ournal

fForecasting,

roductionnd

nventory

Management

ournal,

s

well s other

ournals

nd

roceedings.

isresearch

nterests

nclude istribution

trategies,upply

chain

management,

nd

manufacturing

lexibility.

AUTHORBIOOGRAPHY

Rhonda

. Lummus

Ph.D.,

University

f

owa)

s an associate

rofess-

f

Operations

anagement

t

Central issouritate

University.

he

pent

S

years

n

ndustry

mplementing

nd

oordinating

RP

ystems

ndJIT

rograms.

hehas

published

articles

n

he ournal

f

Operations

anagement,

nternationalournal

f

ervice

perationsanagement,

roduction

nd

Inventoryanagement

ournalnd nother

ournals

nd

roceedings.

hehas

recentlyompleted

research

rant

unded

y

APICS

n

Supply

hain

Management.

50

Journal

f

Marketing

HEORYAND

PRACTICE

balancing marquering

Documents