A recent article in Supply Chain Brain on Planning and Managing Demand: A Modern Supply Chain Imperative provided a great example of how you could use scenario-based what-if optimization to slash costs and increase profit at the same time.
Another approach [to maximize the profitability of a given inventory investment] is for operations to look at the sales pipeline and see that a customer is currently in the pipeline and is expected to order 50 widgets. What if sales approached that customer with an offer of $1/widget price reduction on 20 widgets if they made a decision within two weeks? Assuming the customer accepted the offer, how much does it impact revenue and profitability?
[Let’s say that] in the original factory order, total revenue would have been $1,500 (100 at $15/widget). Cost of the factory order is $630 (90 at $7/widget) plus $90 (10 at $9/widget) for a total of $720. Margin is thus 52 percent [because a widget costs $5, a $60 container holds 30 widgets and a partial container cost $4 a widget].
[But] what is the situation if the discount offer is accepted? Total revenue for the order would be $1,500 (100 at $15/widget) plus $280 (20 at $14/widget), or $1,780. Total cost of the order would be $840 (120 at $7/widget). Margin increases to 53 percent. By cutting prices the company ends up making more money. Furthermore, it does not impact total demand (since the customer would have made the purchase anyway), but rather it affected profitability and cost, since the customer saved $20, and the company saved an equal amount.
And this is something you could easily figure out with a good scenario-based what-if decision optimization solution that allowed you to adjust prices to see what offers you could make that would benefit you and your customer(s).