The influence of promotional activity on supply chain stability: a fast moving consumer goods (FMCG) perspective.

Abstract

Today, most sales are stimulated at the point of purchase, so sales promotions are becoming a crucial element of any marketing campaign. The consequence of these promotions is the creation of unpredictable demand. The resultant instability has been termed the “Bullwhip Effect” (BWE). The BWE has a negative effect on business performance as it creates information distortions that cause excessive inventory holdings, higher overall costs, poor customer service and lost sales. An important strategy to achieve a smooth flowing supply chain is to mitigate or preferably eliminate the BWE. The aim of this research was to monitor the stock levels of a high value product flowing through the supply chain to determine whether marketing activities, such as promotions, contribute to increased instability in the chain. The study followed a case study approach and analysed the business activities of consumer packaged goods company (CPGC) “X” promoting their product “X”, an item of high value, with retailer “X”. The promotion was monitored in three phases. The phases included pre-promotion planning, execution of the promotion and post promotion analysis. The researcher employed both qualitative and quantitative research methods. The research established that the ROI on the promotion was greater than the target and that the retailer made an additional profit. However, when the assessment of ROI included more of the supply chain, there was a negative operating profit due to excess upstream inventory. The study confirmed that promotional activities contribute to the BWE and that this effect may be more pronounced with products of higher value. The phenomenon worsened as the distance of supply chain nodes from the real demand increased. This caused a major shift in ordering patterns and an altered total inventory pipe fill in the chain. The recommendations arising from this study are that the CPGC and retailer should implement a true scorecard and a joint business plan for those brands that have products of high value. Subsequently, a vendor managed inventory (VMI) system should be implemented. This will remove the retailer’s need to forecast and may prevent unstable ordering and delays due to cost avoidance. Shrinkage will be reduced as the CPGC would directly own, control and supply stock in the retailer’s DCs.