Trade promotions offered by manufactures and distributors, for instance, quantity discounts, price reductions, rebates and coupons make buyers undertake forward buying. Forward buying is the purchase of items whose time of utilization is due mostly owing to price fluctuations occasioning attractive prices. Another form of price reduction results when manufacturers offer trade promotion schemes like trade special discounts, payment terms and price terms to their customers.
Customers purchasing behavior does not reflect immediate needs but rather they buy commodities to stock up for future use.
Customers buy more when commodity prices are down and reduce purchases when prices soar. Customers’ buying behaviors doesn’t imply consumption patterns (Wade, 2004, p. 23). A situation called the bull-whip effect results when fluctuations in purchasing quantities are larger than fluctuations of consumption levels. Demand data of supply chains is disfigured by the bull-whip effect.
Failure to forecast distribution stage sales could force firms to use sales or customer orders data to manage inventory, schedule capacity, predict on products and plan production.
The big fluctuations are a hindrance to effective management. Some problems due to this phenomenon include: wrong product estimations, excessive or less capacity, wanting customer service owing to absent products or uncertain production scheduling. Many revisions translating into higher overheads resulting from overtime pay and fast-tracked shipment are incurred.
HP experience similar consequences due to order fluctuations which led to more supplier order exaggerations (Lowson, 2002, p. 56). ‘Demand forecast updating’, whereby prediction is based on past orders from customers, leads to the bull-whip effect. Orders aren’t placed promptly with companies hatching (accumulating) orders through either periodic ordering or push ordering.
Periodic ordering is characterized by peak demand periods and periods of no demand. The fluctuations are more than the demands faced by firms.
Periodic ordering increases variability and heightens the bull-whip effect. Ordering patterns exhibit an upward trend from one order to the next. Companies that do push ordering have ordering behaviors from customers being more unpredictable than consumption rates. The “hockey stick” scenario results. Often orders are erratic and at times they overlap with periodic customers placing orders simultaneously. Demand surge is greater and this amplifies the bull-whip effect. Huge variations in product demand could force firms to lie idle at some times and operate on overtime at peak times.
The need to have huge stocks of supplies also makes firms liable to pay for premium shipping rates. An upsurge in damages resulting from handling abnormally large supplies is experienced (Kitchen & Pelsmacker, 2004 p. 16). Trade promotions can result in losses on a firm’s stock performance. Trade deals could choke distribution lines with forward-buying inventories of products. A case in point is the dropping of Bristol-Myers Squibb share prices from $74 to $67 after a sales offer.
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