SCM Trend: Linking pricing with supply chain

Pressure on supply chain efficiency and effectiveness increased during the just concluded recession and even after the lean period ended, the pressures remained there, as the customer is becoming more and more demanding everyday. This pressure can be eased a little bit by weighing the cost of improving the supply chain with the discounts that can be offered to the customer in case they are ready to wait for a certain period of time which is above and beyond the stated lead times. The trend has already taken shape in few industries and the best in class players have started using this as a strategy to ease the pressure on supply chain. This not only give customers a welcome cost benefit for their wait time as well as give time to the organization for strengthening the supply chain while not losing sales due to capacity constraints.

To explain the scenario a little bit in detail, let me cite a case study here:

A camera manufacturer/retailer sells its most popular model at $200 and the lead time it promises their online customers to deliver the camera at their home is 7 working days if the destination is within USA. Now, what they do is to implement a two tier pricing for the camera model and provide an option to the customers as below:

• Camera price with 7 day lead time : $200
• Camera price with 21 day lead time : $180

So they offered a 10% discount on their most selling camera model if the customer agrees to delay the shipping by 2 weeks. They found that 28% of their customers opted for the 2 week delay and hence the organization not only could maintain better on-time delivery performance for the one week lead time products but also could ease the pressure on the supply chain. Customers also did not go to the competitors products and also were happy to get some discount on their favorite product. Since, this pricing strategy was for a limited period, it soon ended and by the time, using their demand and forecasting intelligence, the organization made arrangements to improve supply chain capacity.

In above case, though the pricing strategy implemented by the organization was for a limited period but it makes sense to have such a strategy for those of your products where bringing the lead time to the promised or to match competition, costs you more than providing some discount to customers for some delay in lead time. But, beware of setting dangerous precedents as if the competitors start following this (which they will), then you might not be able to go back to original pricing and this can erode your margin for ever. A well thought out strategy is needed in this case to make sure that you get the benefits of this pricing strategy and not lose in the long run.