Supply Chain Management in a Promotional Environment

Supply chain management deals with the effective and efficient coordination of flows of inventory, information and cash to lower the total cost of ownership. The supply chain view always starts with the point of purchase or consumption, e.g., at the retail level and follows orders upstream and product flow downstream from wholesalers, distributors, manufacturers and suppliers. Since 1993, the fast moving consumer goods (FMCG) and the retail industry have formed an alliance to drive out waste out of their supply chains. The initial goal was to reduce the overall supply chain inventory by at least 5 %. This was triggered by the early successes at Procter & Gamble and Wal-Mart in the U.S. in using category management and supply chain collaboration approaches (including information sharing). At the same time, discounters emerged in Germany, i.e., Aldi and Lidl, and challenged big and small stores alike. By 2004, discounters accounted for 37.4 percent of the overall market. Currently, due to a lasting recession, grocery sales are declining and promotion intensity and frequency are steadily increasing across all store formats, including discounters. Retailers that refuse to collaborate with their suppliers but frequently adopt high-low pricing to attract customers to their stores (and lure them away from the every-day-low-pricing (EDLP) stores) are typically suffering from high inventory costs in their supply chains and large forecast error mostly for promotion items (see also chapter by Bolton, Shankar and Montoya in this book).