Some businesses use LTOs as a strategic marketing tool. Others use limitecd- time price discounts to liquidate end-of-season products. Many use price discounts
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to “flush the pipeline” to look fil on end-of-quarter reports, which is, af a minimum, comroversial. Retailers in the CPG industry frequently use LTOs in the form of advertising staple goods to consumers at very attractive prices. The retailers’
motivation is to attract consumers to their stores.
Although LTOs are popular, there are many questions about how the use of LTOs benefits a supply chain as a whole. For example, in the case of limited-time price discounts at grocery stores, the objective for the retailers is to generate traffic to their stores, expecting that consumers will buy discounted-priced producis and others atreqular prices. Consumers willlouy more of the discounted-price products, but do they increase consumption of these products? What are the benefits for the manufacturer and its supplierse Consumers advancing purchases but not consuming more will not benefit the supply chain in the long run.
The effect of promotions, particularly price discounts, on consumption and their effect on brand loyalty, repurchase intention and category growth received considerabie attention from researchers in Marketing. Some agree that the promotion’s effect on consumption stems from higher household inventory levels, which leads to consumers having fewer stockouts at home and, thus, increased usage [4]. In those product categories in which price promotions foster usage, they can be used to make the category grow [5]. The effeci of advertised price cuts on the acceleration of purchases might have a disparate effect among types of consumers; the effect is sironger on users that usually consume more than others [46]. Also, tt has been found that price promotions have an immediate effect on brand purchase, out their effect on future brand preference is weaker [7], suggesting that price cuts might not have a sustainable beneficial effect. Similarly, price promotions might affect short-term category demand, but rarely exhibit a lasting effect on category growth [8].
The study of the effect of price promotions on consumer behavior is beyond the scope of this research. However, this form of LTO might have major implications
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on the normal supply chain dynamics. That is, end-customers sensitive to discounts will change their purchasing oshavior, affecting the shape of the end-customers’
demand. if this change in the demand is considered for planning and plans are noi shared throughout the supply chain, management? at each tier will react to the next-tier’s demand, which willresult in the amplification of demand. That is, the end-customers’ demand will be amplified as the demand signal is transmitied uostream in the supply chain [9].
Similarly, the use of price promotions to “flush the pipeline” stems from an undesirable management behavior: io make a firm look better on periodic financial reports. From a SCM perspective, the besi-case scenario Is for this behavior fo stop.
Fostering nexi-ter demand disrupts the supply chain dynamics by disturbing the normal flow of products. This practice usually results in having excessive inventory of the products that end-customers do not want and having stockouts of the oroducis that end-customer do want. However, soeculative purchases might generate short-term benefits to a firm willing to buy products at a discount or with rebaies, and sell the products at the regular price which is referred to as price gaming. Frequenily, the practice of pushing inventory forward to “flush the pipeline”
is reinforced by incentives to sale represeniatives that are based on revenues rather than account profitability. This kind of practice hinders the overall supply chain efficiency [10]. Ideally, financial markets would stop rewarding firms’ performance solely on periodic reports that represent a set of infrequent snapshots of an ongoing
process.
This amplification of demand effect frequently results in having the wrong quantities of products at the wrong places at ihe wrong Time. Therefore, the implementation of price promotions, and any LTO in general, should not be considered as an issue affecting a single firm in isolation, out should be coordinated across the key supply chain members since benefits for one firm might vanish when consiciered in the supply chain holistically.
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This research focused on LTOs used as a strategic marketing tool: these LTOs can be a central element for the long-term success of a firm and the supply chain as a whole. Nevertheless, it is expected that managers dealing with any type of LTO or short-lived products will find value in the implementation of dynamic fime- based postponement.
THE CHALLENGE OF MANAGING LTOs
Managing LTOs effectively is challenging. Orders have to be placed in advance of the highest selling period, which is usually short relative to the time needed to make products flow through the supply chain. For example, an apparel retailer has an average replenishment cycie time from order receipt to delivery of three to four months [11] for a selling season that might be two months long.
Moreover, many products become obsolete in a short period or lose value very quickly, For example, some consumer electronics, which may be managed as LTOs, might become obsolete in a few weeks [12]. In some industries, prices are marked down as the end of the season gets closer and, ultimately, products are diverted to secondary channels. li has been estimated that markdowns are generally 40% to 50% in apparel products and 15% to 25% in CPG items [13].
Pianning for a LTO is difficult. Achieving the target customer service level throughout the offer is likely to be very costly given that the level of uncertainty of demand usually is extremely high before the LTO is launched. This is particularly true when LTOs are designed to capture the customers’ attention by offering specially designed products which usually are original. Thus, if is uncerfain how customers will respond to the LTO.
Product availability is a critical element of a LTO. No generalizations can be made about end-customers reactions to stockouts because these reactions depend on situational factors [14], stockouts might render the marketing efforts inefficient [15]. Consumers at a grocery store face average stockout levels of 10%
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to 30% on regular items [16] and of 20% on advertised items [17]. The nigh stockout levels facing the end-customer that grocery retailers are experiencing might cost several million dollars a year to manufacturers and retailers [18].
The challenges associated with managing LTOs effectively and efficiently represent a fertile ground for researchers studying ways fo integrate activities across members of the supply chain.