One of the biggest challenges facing supply chain managers is ensuring that there is enough supply in the pipeline to meet demand, without carrying too much additional stock. In a perfect system, cycle stock would meet 100% of the demand, and no other inventory would be needed — except safety stock, which provides a buffer for uncertainty on both sides of the supply-demand the equation.
To a large degree, artificial intelligence (AI) has improved supply chain management. AI systems use predictive analytics, rather than gut feelings, to manage and reorder stock based on lead times, historical data and seasonal demand. Using predictive demand distribution tools, these AI systems balance supply and demand, resulting in cost efficiencies in terms of warehousing and inventory withholding costs.
Surprisingly, there is little discussion in the market about an AI tool that can help manage supply chains. The role of price — and specifically, dynamic pricing — in supply chains is poorly understood, but it can be used to optimize inventory.
Dynamic pricing engines find the optimal price based on predetermined requirements. A shoe retailer might want to consider external factors, such as the competitive environment or an upcoming citywide marathon, in addition to internal factors, such as customer history or inventory levels to determine price. The AI-driven pricing engine accounts for a number of factors and recommends the price point most likely to close the sale while meeting the retailer’s requirements.
It is important to note that dynamic pricing does not necessarily mean price increases. Like demand, dynamic pricing is bidirectional. The dynamic pricing engine may determine, for any number of reasons, that it is advantageous for a retailer to lower prices to close the sale. At the same time, demand varies based on the needs of consumers. As demand changes, prices should change, as well. Products in high demand but limited supply benefit from higher prices. Obviously, this situation is good for retailers that can earn extra profits. These price increases also are healthy for the supply chain because they can slow demand growth so that networks can still function effectively while managing and warehousing fewer items.
Conversely, if supply is high, retailers can move products through the supply chain by lowering prices. Profits won’t be as high for each item, but retailers can make money from the sales volume and ultimately realize significant savings by removing merchandise from the supply chain. By connecting the retailer’s category manager to the supply chain, both parties benefit.
Proper pricing in action
In the dynamic world of supply chain management, balancing the competing pressures of supply and demand is a constant challenge. While traditional methods have long focused on optimizing inventory, the integration of powerful tools, such as AI-driven dynamic pricing, offers a new frontier for efficiency.
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Editor's note: This article has been updated to reflect current trends and topics in supply chain. The original publish day was February 2021.
