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What should a marketer do to overcome the negative of derived demand?

Business marketer must understand that the demand for their products and services is

derived demand; that is demand for their products and services is derived from the demand

for their customers product and services( whose demand may also be derived).

The derived demand can wide swings as we move up on the chain from the end customer

known as volatility. Such fluctuations across the supply chain is also termed as Bull whip

effect. For example A company that sells fast food and uses salt as one of the entering

goods.

Time Period Demand for

salt

%

Machines

needed to

handle

demand

Worn out

Machines

Machines

available

New

purchases

1 100 50 50

2 95 47 10 40 7

3 105 52 7 40 12

4 100 50 12 40 10

Here the demand fluctuation in end consumer is reflected in the demand for salt by the fast

food. While the machines to handle are the machine at the salt supplier to the fast food.

Here we see that while the end demand fluctuates by (-5%, 10% and -5%), the demand for

new machines required at the salt supplier is quite large (41% and down 20 % in period 3

and 4). This could severely impact the cost , quality and time as specified by the fast food

chain and assured by the marketing guy to the This phenomenon is cascaded as we move

up the chain. This phenomenon highlights the importance of the paying close attention to

consumer demand forecasts and reports. The marketing and supply chain must be co-

ordinated across the entire chain to mitigate this impact.

The following are the steps that a marketer must undertake to overcome the negative

impact of derived demand.

1) Market Research: Perhaps the most important implication of derived demand is Market

Research. Its not just important to forecast the demand for its product but also close eye on

the customers customers from which the derived demand originates from. Companies thatsell oil field equipment must forecast demand for oil. Companies that manufacture

commercial aircraft must estimate the demand for the air travel. Data based forecast

models which consider underlying casual factors and associated leads and lags, will aid in

anticipating volatile market changes and for planning the operations and marketing

strategies of industrial product companies along with experts opinion.

2) Product /Market Strategies: The industrial supplier must adopt the marketing strategy to

diversify. The relationship between diversity and stability seem to be hold true on an

industry level and individual firm level. The diversification can be achieved by selling the

products to other allied industries that use the component or geographical diversification.

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For example oil and gas related turbo machinery diversified by selling in the electrical power

generation market and selling in Eastern bloc countries.

The company can also expand the product lines and expanding product related services (e.g.

maintenance contracts, overhaul and repair, spare parts training etc.) as a means of

dampening volatility.

3) Promotions: It makes good sense that advertising expenditure should be counter cyclic to

sales. However this is the opposite of how companies allocate marketing expenses based on

the projected sales. Though increased promotional budget may help to reduce the volatility

but increasing total demand through advertising is almost impossible.

The sales incentives and commission must be carefully monitored where the sales are

volatile. Great care must care in establishing quotas so that sales dont deviate much in

good or bad business cycles.

4) Pricing: Pricing will be a critical marketing variable in highly volatile industrial market. The

suppliers must adapt an approach of cautious yet flexible pricing system which can

accurately measure and quickly react to competitors prices and changing market

conditions. Demand elasticity plays and important roles in pricing decision.

5) Distribution: Flexible pricing will be critical to profitability in industrial markets. Complex

distribution systems are not conducive to administering frequent price changes. Thus, in

highly volatile markets, direct sales or use of agents paid on commission is recommend.

Also, the high price tag and technical complexity of capital equipment sales will favour a

more direct channel.

6) Demand management is the creation across the supply chain and its markets of a

coordinated flow of demand. First, the traditional function of marketing creates demand for

various products but often does not share these demand-creating plans (such as promotional

programs) with other functions within the company (forecasting, in particular), much less with other

companies in the supply chain.

Second, the role of demand management is often to decrease demand. This may sound

counterintuitive, but demand often exists for company products at a level management cannot

realistically (or profitably) ful-fill. Demand management implies an assessment of the profit

contribution of various products and customers(all with capacity constraints in mindincluding the

capacity of all components in the BOM), emphasizing demand for the profitable ones, and

decreasing demand(by lessening marketing efforts) for the unprofitable

ones.Supply Chain

Management

Demand Planning

Demand

Management

Marketing/Supply

Chain Relationship

Management

Sales

Forecasting

Management