Price promotions and safety stock: an antagonistic and a synergistic relationship

This study investigates the interplay between price promotions and the level of safety stocks. We propose a framework where both price promotions and improved service levels, operationalized through higher safety stocks, can affect sales. We treat the annual number of promotions as a decision variable and the cycle service level as a strategic parameter. For annual planning purposes, we identify the market conditions where the relationship between the number of promotions and safety stocks is antagonistic and synergistic. We show that higher safety stocks, leading to improved service levels and sales, can “replace” price promotions. This antagonistic relationship is observed in markets with high pre-promotion sales, less reactive to price promotions, and more responsive to product availability. The synergistic relationship implies that these two sales-stimulating tools can simultaneously be used to increase sales. It appears in “anemic” and underdeveloped markets, where the combined contribution of a higher number of price promotions and safety stocks “fuels” the increase in sales, and makes the promotional and operational efforts financially viable to support. We also show that higher values of the ordering cost, inventory holding cost, and lead time, negatively affect the optimal annual number of price promotions adopted by the firm.