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
Leaders at a large grocery chain were concerned about the number of spoiled products that were being thrown out each week. They discussed different pricing strategies the stores could employ to sell the products on the shelf before the new stock arrived and solve the inventory issue.
They fed all the data into an AI-driven dynamic pricing engine, and the system recommended a pricing program that focused on profits early in the cycle before lowering prices to reduce inventory later in the cycle. The system relies on machine learning, so it took some time to optimize. But once optimization was achieved, the grocer was routinely reducing spoilage by about 15% because the sales and inventory data was being used to manage the store’s inventory and supply chain.
Similarly, an electronics company was dealing with skyrocketing costs for its retail business. They developed an algorithm that prioritized lower pricing for merchandise that was disrupting the supply chain and inventory management. It took a few months, but the retailer brought its warehouse costs under control. At that point, leaders decided to use price more strategically, particularly when it came to supply chain. They developed a dynamic pricing program to help control the supply chain and their inventory.
More and more businesses are realizing the connection between pricing and inventory — and enjoying significant gains. Is it time for you to consider how an AI-driven pricing strategy could help your supply chain?