What is derived demand and what implications does it have for logistics systems?
What will be an ideal response?
Derived demand is created as managers conceptualize forecasts and guess at future demand; it only exists on paper. Derived demand is a major management issue and one that every logistician must understand.
When derived demand is introduced into logistics systems, the system capacity must expand to meet the imaginary needs of this demand, driving up costs and distorting the tradeoffs between inventory, transportation, warehousing, and infrastructure. The goal of the logistician then is to remove as much derived demand as possible so as to plan for the integration of the logistical system. One way to reduce derived demand is to share actual demand data, rather than forecasts, with everyone in the supply chain. Walmart has gone to the point of sharing cash register point-of-sale data with suppliers to ensure that they are receiving accurate demand. In addition, managers can be proactive by using statistical process control charts and other tools to make sure that inventory systems are not out of control. In short, managers must be aware of the importance of managing demand.
A second way that derived demand can be reduced is through reducing reliance on promotions and sales. Promotions and sales are effective marketing strategies that artificially raise demand, but the artificial spikes in demand that result ripple through the logistics systems. Logistics systems work best when demand is stable and predictable; promotions and sales create instability. Part of Walmart's logistics strategy has been to promote everyday low prices rather than sales. This strategy provides the system with the steady, stable demand needed to put consistent logistics systems in place.
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