Demand Shaping: The “Bid Model” tool
Updated: Nov 17, 2022
In this article, I explain an effective technique for shaping demand. This technique can be applied in environments where prices are bid for each job or project. We have found that most organizations have some of this type of demand for most of their S&OP families. I originally published this article in May 2012 under the title; The "Bid Model": A Demand Shaping Tool. Enjoy!
I don’t believe demand planning is a passive part of the S&OP process. Back in the good old days, we called it forecasting and then built our plan based on the forecast. Over the years, we tried all kinds of different forecasting methods: intrinsic, extrinsic, multiple statistical models, expert opinion and ‘gut feel’. The developers of forecasting tools made millions of complex statistical models. Some of us in Operations even felt we knew better, so we took it upon ourselves to adjust the forecast. We all accepted that the forecast, by definition, was wrong and that’s life. Well, we live and learn.
Today, it’s called the Demand Plan, not a forecast, and the difference is not subtle. A demand plan is executed and a forecast is watched. In today’s S&OP process, Sales needs to do more than develop the Demand Plan - they need to execute it. They need to be able to increase or decrease it. Essentially, they need to ‘shape’ it.
Lead-time and pricing are two common demand shaping tools. Lead-time variation usually results from poor demand management. If demand comes in over plan, the backlog increases, increasing the lead-time to customers. Customers who don`t like the extended lead-times take their business elsewhere, thus reducing (or shaping) the demand. Extending lead-times reduces demand but at what cost? In most cases, pricing is a better tool and hence, we get the “Bid Model”.
The “Bid Model” is an effective demand shaping technique that works if you have pricing flexibility. This is the case on “one off” jobs or projects that must be costed and bid. Also, large orders often get special discounts. The same may be true from large customers. In all of these cases, pricing is a variable and it can be used for demand shaping with the objective of maximizing margin while meeting the Demand Plan.
The “Bid Model” uses the relationship between price and the probability of winning the order to calculate a series of probable margins. Everything being equal, the optimal bid would generate the highest probable margin, but more on that later. Let’s look at how to build the model step-by-step.
The "Bid Model": Step by Step
1. Clearly define the scope and cost for the bid. Typically, this is done by an estimating group and at this stage the cost may or may not be shared with Sales. In this example, the cost has been estimated at $60.
2. Develop the price/win probability relationship. This should be done by Sales. Give them a list of price points and have them fill in the win probabilities. The following table shows the values used in the example: