What should a marketer do to overcome the negative of derived demand?

Business marketer must understand that the demand for their products and services is
derived demand; that is demand for their products and services is derived from the demand
for their customers product and services( whose demand may also be derived).
The derived demand can wide swings as we move up on the chain from the end customer
known as volatility. Such fluctuations across the supply chain is also termed as Bull whip
effect. For example A company that sells fast food and uses salt as one of the entering
goods.
Time Period Demand for
salt
%
Machines
needed to
handle
demand
Worn out
Machines
Machines
available
New
purchases
1 100 50 50
2 95 47 10 40 7
3 105 52 7 40 12
4 100 50 12 40 10

Here the demand fluctuation in end consumer is reflected in the demand for salt by the fast
food. While the machines to handle are the machine at the salt supplier to the fast food.
Here we see that while the end demand fluctuates by (-5%, 10% and -5%), the demand for
new machines required at the salt supplier is quite large (41% and down 20 % in period 3
and 4). This could severely impact the cost , quality and time as specified by the fast food
chain and assured by the marketing guy to the This phenomenon is cascaded as we move
up the chain. This phenomenon highlights the importance of the paying close attention to
consumer demand forecasts and reports. The marketing and supply chain must be co-
ordinated across the entire chain to mitigate this impact.
The following are the steps that a marketer must undertake to overcome the negative
impact of derived demand.
1) Market Research: Perhaps the most important implication of derived demand is Market
Research. Its not just important to forecast the demand for its product but also close eye on
the customers customers from which the derived demand originates from. Companies that
sell oil field equipment must forecast demand for oil. Companies that manufacture
commercial aircraft must estimate the demand for the air travel. Data based forecast
models which consider underlying casual factors and associated leads and lags, will aid in
anticipating volatile market changes and for planning the operations and marketing
strategies of industrial product companies along with experts opinion.
2) Product /Market Strategies: The industrial supplier must adopt the marketing strategy to
diversify. The relationship between diversity and stability seem to be hold true on an
industry level and individual firm level. The diversification can be achieved by selling the
products to other allied industries that use the component or geographical diversification.
For example oil and gas related turbo machinery diversified by selling in the electrical power
generation market and selling in Eastern bloc countries.
The company can also expand the product lines and expanding product related services (e.g.
maintenance contracts, overhaul and repair, spare parts training etc.) as a means of
dampening volatility.
3) Promotions: It makes good sense that advertising expenditure should be counter cyclic to
sales. However this is the opposite of how companies allocate marketing expenses based on
the projected sales. Though increased promotional budget may help to reduce the volatility
but increasing total demand through advertising is almost impossible.
The sales incentives and commission must be carefully monitored where the sales are
volatile. Great care must care in establishing quotas so that sales dont deviate much in
good or bad business cycles.
4) Pricing: Pricing will be a critical marketing variable in highly volatile industrial market. The
suppliers must adapt an approach of cautious yet flexible pricing system which can
accurately measure and quickly react to competitors prices and changing market
conditions. Demand elasticity plays and important roles in pricing decision.
5) Distribution: Flexible pricing will be critical to profitability in industrial markets. Complex
distribution systems are not conducive to administering frequent price changes. Thus, in
highly volatile markets, direct sales or use of agents paid on commission is recommend.
Also, the high price tag and technical complexity of capital equipment sales will favour a
more direct channel.
6) Demand management is the creation across the supply chain and its markets of a
coordinated flow of demand. First, the traditional function of marketing creates demand for
various products but often does not share these demand-creating plans (such as promotional
programs) with other functions within the company (forecasting, in particular), much less with other
companies in the supply chain.
Second, the role of demand management is often to decrease demand. This may sound
counterintuitive, but demand often exists for company products at a level management cannot
realistically (or profitably) ful-fill. Demand management implies an assessment of the profit
contribution of various products and customers(all with capacity constraints in mindincluding the
capacity of all components in the BOM), emphasizing demand for the profitable ones, and
decreasing demand(by lessening marketing efforts) for the unprofitable
ones.
Supply Chain
Management
Demand Planning
Demand
Management
Marketing/Supply
Chain Relationship
Management
Sales
Forecasting
Management