A Reverse Spin on Supply Chain

 
 
By Baselinemag  |  Posted 2002-02-04
 
 
 

Big V Supermarkets is taking a lesson from the hotel and airline industries: Use price to determine demand.

PDF Download The chain's secret weapon? Demand-based management (DBM) software.

This is the flip side of supply chain management (SCM), in which companies try to quickly replenish items purchased in stores, through electronic communications with suppliers.

With demand management, the company can begin to predict that movement out of its stores—and better achieve profit, sales and other goals. The software takes into account that such tools as "pricing, promotions and shelf management can influence demands," explains Barchi Peleg, director of research for Stanford University's Global Supply Chain Management Forum. "Combining SCM methodologies with DBM instruments can help companies to truly maximize profits, or other objectives of the enterprise."

Despite having filed for Chapter 11 bankruptcy protection, the privately held Big V is about eight months into its pilot test of DemandTec's Price Center DBM application. The Florida, N.Y.-based 30-store chain has been testing how well it can forecast volume pegged to a particular price of, say, two-liter bottles of Coke.

"You'd get the best price on items—whether that is up or down from the current position—you could achieve your results," says Big V Senior Vice President and CIO Kevin Sterneckert. "You tell it (the system) your intent: to optimize volume or to optimize for profit, and it does so."

If anything, DemandTec's product might be too accurate, Sterneckert jokes. The Price Center program calculated prices for Jell-O so that stores could charge a penny to a nickel more for popular flavors. But the stores overrode that option, preferring—in that case—to price all Jell-O the same, regardless of flavor.

Tools that help companies manage the interplay of price, supply and demand aren't new. Companies in service industries like hotels or airlines—characterized by fixed available capacity (such as number of hotel rooms, or number of seats per flight), have been using them for years, notes Stanford's Peleg. But product-based companies, which typically have significant control of the level of a product available for sale at any point in time, have neglected tools that let them use price to control demand, she says.

But a company-wide rollout at Big V is not imminent. First, Big V must resolve its financial future. Two possible scenarios: a sale of its assets to Wakefern Food Corp. for $150 million, or a purchase outright by onetime suitor Stop & Shop Supermarket Co.