2020

Unit I. Building a Strategic Framework to Analyze

Supply Chains

MA. MAE GABALES-VILLANUEVA,MBA

FACULTY-JBLFMU-MOLO
7/22/2020
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

Table of Contents

Unit I. Building a Strategic Framework to Analyze Supply Chains .............. 2

1.1. Supply Chain Management in the Hospitality Industry; ..................... 2

1.2. Relevance of Customer Behavior in the Supply Chain Management in
the Hospitality Industry. ..................................................................... 8
1.3 Law of Supply and Demand. ........................................................ 18

1|P age
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

Unit I. Building a Strategic Framework to Analyze

Supply Chains

1.1. Supply Chain Management in the Hospitality Industry;

Learning Objectives: At the end of the topic, students should be able to:

1. Define Supply Chain Management.

2. Describe Supply Chain Management in the
Hospitality industry.
3. List down challenges on the Supply Chain
Management of the Hospitality Industry.
4. Identify the Factors affecting supply chain
management in Hospitality Industry.
5. Enumerate the Benefits of Supply Chain
Management in the Hospitality Industry.

2|P age
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

References: Readings:

https://sbsandco.com/blog/significance-of-supply-
chain-management-in-hospitality-industry

https://www.investopedia.com/terms/s/scm.asp

https://www.supplychaindigital.com/company/how-
procurement-key-vlh-and-hotels-sector

Videos:

https://www.youtube.com/watch?v=OibuRxGSGC0

https://www.youtube.com/watch?v=NUen_lEy4-c

https://study.com/academy/lesson/what-is-supply-
chain-management-definition-importance.html

What is SUPPLY CHAIN Management?

All activities associated with the flow and transformation of goods from the
raw materials stage, through to end users, as well as the associated
information inflows. This includes material and information flows both up and
down supply chain. Therefore supply chain includes a whole horde of
systems such as systems management, operations and assembly,
purchasing, production schedule, order processing, inventory management,
transportation, warehousing, and customer service.

In today‟s changing business environment, there is an increased focus on

delivering value to the customer at the cheapest possible costs. Hence there
has been increased interest in logistics and supply chain management
practices since performance is not only determined by actions and decision,
but also the improvements on return on investment and greater profitability.

3|P age
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

Hotel companies, both big and small, must focus on how to offer products
and services while keeping costs low. In an industry which is labour
intensive many hotels are forced to make bolder and more visible moves in
costs reduction to their operations. It comes as no surprise that much of
these costs cutting efforts have been focused on payroll and other employee
associated costs, like hiring freezes, cuts in employee perks, reduction of
bonuses, and reductions in salaries.

One area of the hotel industry that is usually left out in cost cutting efforts
is its logistics and supply chain operations. Even though logistics and supply
chain is considered an operations management strategy in the hotel and
other service industries, they can use these strategies to help add value to
their properties. The supply chain is an important element within the hotel
and catering industry.

A well-established logistics and supply chain management system can help

the hotel industry give individual hotel companies a sustainable competitive
advantage. The use of the right logistics and supply chain strategies helps
not to only improve the quality and service of the Hotel Company, but drive
down costs. For staff in this industry, it is crucial to build steady
relationships with suppliers and work with a good ordering system in order
to improve the service level towards customers.

The hotel industry can benefit from the comprehensive and integrated
practices of logistics and supply chain management, by delivering a
consistently reliable and high quality service at the best costs.

Challenges in the Supply Chain in the hotel industry

The purchase manager is always under constant pressure to meet the user
departments‟ un- planned needs. As a result the purchase manager always
tries to have huge buffer stocks, lest he should fall short of satisfying the
hotel operating/user departments. But this does not mean that quality
management processes should be totally ignored.

Material Cost: A hotel store deals with huge quantities of the items with
very less price. Bulk of the direct material cost is invested in such items.
Majority of the consumables of the hotel are of perishable nature due to
which one cannot make use of the economies of bulk purchase. This

4|P age
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

increases the Number of transactions and thereby the transaction costs. This
results in increased transaction costs.

Material Ordering Costs: The individual departments normally use

manual indents and purchase requisitions independently. In many properties
the hotels do not have computerized indenting and purchase requisitions.
The consolidation of such indents and requisitions become quite time
consuming. The purchase Department is found to place individual orders for
same products, due to difficulty in consolidation Even for chain properties
where different units are located in the same city, the hotels do not take
advantage of bulk purchasing due to the above reasons.

Inventory Holding Costs: The purchase department, in the fear of not

being able to give the right items to the user departments on time, stock
large quantities of materials. This occupies a large space and there by leads
to increase in costs.

Emergency purchase: The purchases are made on the request to the user
departments on the spur of the moment, and are regularized later by
making the required paper work. Due to lack of planning, emergency
purchases are a matter of routine and not due to exception.

Factors affecting supply chain management in Hotel Industry

It is essential to understand that the premise under which the hospitality

industry operates is much different from other industries. The industries
capital costs are high, operating costs being comparatively lower. The hotel
industry has its unique characteristics, like customer centricity, different
types of management etc.

 Guest or Customers are the utmost important for the hotel industry;
customer satisfaction is of paramount importance to the hotel
industry. In the hospitality industry the customer related activities
such as food and beverage production and service, housekeeping,
Front office management are given utmost importance. The back office
operations such as the accounts, purchases, supplies chain
management, revenue recording etc. take a back seat.

5|P age
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

 Different types of management systems, such as the ownership hotels,

franchisees, hotels which are run on operating contracts by chains etc.
The different managements systems have different implications on the
supply chain management.

In the hotel industry all the efforts are customer oriented as a result lot of
cost reduction which can be attained through improved upstream functions
of supply chain management is lost. Current trends in the industry show that
computerized property management systems are used but mainly for front
office management and reservation systems.

Benefits of Supply Chain Management

 The supplier and the hotel benefit from a well-established system of

supply chain management. The relationship between the supplier and
hotel becomes stronger because of professional management in the
form of development of proper purchasing policies. This could also lead
to concentrating on a few trusted suppliers, rather than have a large
and inefficient supplier base. Newer and more efficient suppliers could
be identified, leading to increased efficiency.
 It leads to significant reduction in costs and also helps continuous
evaluation and improvement in the buying process. It could increase
the product range or perhaps reduce it too, because of intensive
market research undertaken.
 Improved management information to future requirements

SCM – Strategic methods explained

Supplier Identification: Generally supplier base is huge in the hotel

industry, this has its positives, conscious steps should be taken to identify
committed suppliers who are willing to go by the objectives of the
Organisation, and be involved and appreciate and support the changes of the
organizational requirements.

Supplier evaluation and selection: Supplier evaluation is a critical

process, suppliers ability to supply the right goods at the right time with
correct specifications has to be reviewed. Contracts are awarded after
careful negotiations with the supplier.

6|P age
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

Supplier management : After the suppliers fulfils its obligation by

delivering the required goods as per specifications it‟s the responsibility of
the Purchase department to ensure suppliers bills are paid promptly , at
times good suppliers are lost due to the payment delays. Therefore it is very
essential to maintain a strong relationship with the supplier hence supplier
management has to be strengthened.

Supplier development and improvement: It‟s a very crucial step in the

supplier chain management. A careful consideration of this process would
contribute towards efficiency and cost saving.

Conclusion:

Professional supply chain management ensures every supplier is committed

for top quality product and service standards. An efficient supply chain
management helps in significant cost reduction by developing and
implement contracts and agreements with suppliers of hospitality products
and services, securing for the hotels competitive prices be if for food and
beverage, rooms or property operations.

Instructor’s When you hear the words, “flow”, “transformation”, “goods”,

Note “ raw materials “,” end -users”, what came to your mind?
Very good. When these terms became familiar to you,
meaning you have paid full attention to your learning. That‟s
a #Lacsonian! PERSEVERING!

So, how‟s your experience learning in the “new normal?

If you have ideas, questions and interesting thoughts to

share regarding our 1st topic, write it down on your yellow
notebook and feel free to discuss it during our next zoom
meeting 

I would be excited to hear from you.

Galatians 6:9
And let us not grow weary of doing good, for in
due season we will reap, if we do not give up.

7|P age
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

1.2. Relevance of Customer Behaviour in the Supply Chain

Management in the Hospitality Industry.

Learning Objectives: At the end of the topic, students should be able

to:

1.Enumerate the relevance of Customer Behavior

on the Supply Chain Management in the
Hospitality Industry
References: Readings:

https://www.researchgate.net/publication/275592
836_Customer_Involvement_in_Sustainable_Supp
ly_Chain_Management_A_Research_Framework_a
nd_Implications_in_Tourism

https://www.achilles.com/industry-insights/the-
role-of-customers-in-the-supply-

8|P age
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

chain/#:~:text=The%20customer%20is%20a%20
key,cherish%20most'%2C%20Constantine%20G.

https://www.industrystarsolutions.com/blog/2016/
02/supply-chain-to-address-customer-needs/

https://www.inboundlogistics.com/cms/article/how
-evolving-consumer-behavior-impacts-global-
supply-chains/

https://hanhaa.com/changing-consumer-
behaviour/

https://hanhaa.com/parcelive/

Videos:

https://www.youtube.com/watch?v=eYAc4Xcjloo

Customers play an important role in the creation of supply chains.

When you stop to think about how you configure your supply chain and why,
it soon becomes apparent that most roads lead back to the customer:
Buyers will find the most cost effective suppliers in order to offer customers
the best value; they will search for innovate partners to give consumers the
best products and services; and they will endeavour to create a supply chain
that is resilient to disruption and is ethically sound to ensure service quality.
The customer is a key figure in the supply chain and their needs, values and
opinions will affect the supplier decisions buyers make.
In „How the strongest supply chains protect what customers cherish most‟,
Constantine G. Vassiliadis and Glen Goldbach from PwC claimed that the
importance of the customer means that businesses should look to build their
supply chain resilience around them.
With no supply network immune to disruption, the pressure is on
organisations to safeguard their supply chains. Mr Vassiliadis and Mr
Goldbach believe the way to do this successfully is to protect what
customers cherish. This requires businesses to get a clear understanding of

9|P age
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

what consumers value about them and how they differentiate themselves in
the marketplace.
“With your primary customer value proposition front-of-mind, you can
segment the risks that would negatively impact how the supply chain
contributes to that value proposition and build resilience capabilities to
mitigate major risks,” the authors explained.
To build resilience organisations have to identify what threatens their ability
to deliver and what risk mitigation strategies will be the most effective.
All strategies should be built around seven risk enablers, according to Mr
Vassiliadis and Mr Goldbach. These include risk governance, flexibility and
redundancy in product; network and process architecture; alignment
between partners in the supply chain; upstream and downstream supply
chain integration; alignment between internal business functions; complexity
management/rationalisation, and; data, models and analytics.
Among businesses, 60 percent rate alignment between partners in the
supply chain as the most important. This is followed by alignment and
integration between internal business functions with 49 per cent.
Both of these priorities have clear links to satisfying the main concern of
customers: high quality products and services.

Customer Needs Fulfilled with Supply chain

Talented product designers and engineers today do a wonderful job

painstakingly uncovering customer needs by spending countless hours
interviewing potential customers about their biggest pains. Tech
entrepreneurs then successfully develop painkiller products that address
these customers‟ needs. However, there is often a disconnect from the
magic that happens early on in the customer discovery stage and the later
product development process that can lead to customers‟ needs going
unfulfilled.

Once the value of addressing a market problem is confirmed, companies

endeavouring to bring to market disruptive hardware products need to
summarize customer needs early on in the product development process to
determine how best a future state supply chain could address customer
needs. Specifically, companies must understand how competitors‟ supply
chains operate and bring products to market. Understanding competitors‟
supply chains can often unlock value creation opportunities for companies to
address customer needs in new and creative ways. Further innovative

10 | P a g e
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

companies must challenge themselves to look outside their own industries to

understand how other leading companies are bringing to market disruptive
products.

High growth hardware technology companies that successfully incorporate a

disruptive supply chain model early on in the product development process
to fully satisfy customers‟ needs will ultimately launch disruptive products
that capture market share quickly, generate profitable cash flow, and
provide a sustainable competitive advantage. Customer needs can often be
addressed through various supply chain features and benefits that support
the fulfilment of customer needs.

Below is a 5 step process to define and incorporate customer needs into the
supporting supply chain features and benefits early on in the product
development process. Incorporating these supply chain features and benefits
ultimately leads to the commercialization of disruptive products.

1. Interview Potential Customers

First, test your hypothesized target customer needs by interviewing potential

target customers and identifying their supply chain needs. Specific key
needs to understand are quality, price, options, customization, availability,
and lead time. It is important to use non-leading questions during target
customer interviews to attain key industry, non-industry, competitor,
and product and service offerings that are failing, meeting, and exceeding
customer needs. A customer might state that quality is the most important
product feature, but in the next breath state that they will only pay $50,
which results in a specific set of supply chain considerations such as
manufacturing locations, processes, and suppliers that all need to be decided
upon early in the product development process.

2. Benchmark Competitors

Second, conduct research to benchmark industry and non-industry world

class supply chains to attain key product and service offerings that are
failing, meeting, and exceeding customer needs. Exact competitor supply
chain operations are often difficult to benchmark, but the end customer
features and benefits that result from competitors‟ supply chain operations
are easier to benchmark. Companies must benchmark how disruptive

11 | P a g e
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

products are brought to market outside their own industry and the
supporting supply chain operations leveraged to create each feature and
benefit. Competitors that offer a wide range of custom product options with
a short delivery time might in fact have localized flexible manufacturing as
part of their supply chain to facilitate customers‟ needs for custom
products fast.

3. Prioritize Customer Needs & Wants

Third, summarize answers, comments and suggestions with potential

target customers to corroborate and refine hypothesized customer needs. It
is then important to prioritize customer needs based on the number of
mentions of specific needs and those needs that are not offered by your
competitors. These unique potential customer needs not satisfied by your
competitors offer a major opportunity to disrupt the market. In today‟s
hyper competitive consumer electronics sector, we have found that it is
often the product services supported by a robust supply chain, such as
product mix availability, that allows companies to scale quickly by having the
right product at the right time.

4. Outline Your Differentiating Factors

Next, overlay a customer‟s needs with competitive benchmarking to identify

potential future state supply chain differentiating factors based on your
prioritized customer needs. As an example, an online power sports service
parts distributor could implement a haggle free return policy on all service
parts to create a supply chain competitive, and ultimate business model,
advantage that would allow it to compete against brick and motor service
parts stores. Companies that want to create truly disruptive products must
satisfy new white space customer needs in new and different ways in order
to realize a sustainable competitive advantage.

5. Implement, Test & Improve

Lastly, companies that build-in customer needs early on into the product
development process will ensure their products and their supporting supply
chains are truly disruptive. Companies should consistently check in with
customers to survey them to get a pulse on their needs and how competitors
are addressing them. Currently, many customers are demanding a wide

12 | P a g e
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

range of product feature customization not requested only a few years ago.
Companies that identified this request early on are now benefiting from
picking up on this trend several years ago. Those companies that evolve
their supply chain operations to continuously meet customers evolving needs
will continue to thrive and remain relevant in the rapidly evolving business
climate of today.

Implementing the above process for researching, defining, and building-in

solutions for customer needs into your supply chain early on in the product
development process will deliver superior value for your organization

How Evolving Consumer Behavior impacts Global Supply Chains

The impact of evolving consumer shopping behaviors on retailers and

manufacturers is the focus of a new supply chain study by DiCentral, a B2B

13 | P a g e
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

integration services provider, along with the Center for Supply Chain
Research at Lehigh University.

The study, Supply Chain Collaboration in Transformative Vertical Industries:

Implications of Omnichannel and Dropshipping, examines the motivations,
challenges, benefits, and supply chain implications of online shopping and
home delivery from the perspectives of more than 180 C-level executives,
vice presidents, and senior managers in both retail and Consumer Packaged
Goods (CPG) manufacturing.

Study participants share the operational and financial implications associated

with the journey from brick-and-mortar stores to online e-commerce,
particularly with regard to home delivery and order fulfilment models in
which products are shipped directly from the manufacturers and the retailer
no longer carries the physical inventory.

The study also describes the efforts being made to keep up with the pace of
change, the technological investments necessary to accommodate the
change, and the benefits and risks associated with this new online retail
reality.

The study suggests that retailers and manufacturers that have adopted a
high degree of electronic collaboration have benefited most from drop
shipping.

Retailers gain increased visibility into the manufacturers' behaviours which,

in turn, increases the retailers' confidence that products ordered are
acknowledged and shipped within the promised time frames. Barriers to
achieving this goal include a lack of executive involvement and budget
constraints (among other factors), but retailers overwhelmingly point to a
lack of systems integration (EDI, ERP, WMS) as the biggest barrier to drop
ship implementation. Manufacturers' largest barrier was competing priorities
followed by lack of systems integration.

While manufacturers share many of the same goals as retailers, they have
the additional pressure of supporting volume growth and fulfilling orders
quickly and accurately. Despite this, 66% of manufacturer respondents
indicate that drop ship implementation has already led to increased revenue,
particularly those that provided drop ship for no more than 40% of their
total business.

14 | P a g e
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

Both retailers and manufacturers face several key challenges to keeping up

with consumer expectations. Although the research clearly demonstrates
that successful e-commerce and drop ship programs are highly correlated to
the level of collaboration and technology integration between the
manufacturer and retailer, 46% of retailers are reluctant or unable to share
e-commerce sales forecasts with manufacturers.

Changing Consumer Behaviour and the Impact on Logistics

Since The Rise and Wide Adoption of Multi-Channel Sale Approaches E-

Commerce Has Boomed In the UK and Across the Globe. Online sales now
account for 11.9% of global sales and are expected to reach 17.5% of total
sales by 2021. Figures also vary depending on the country as in China 19%
of all retail sales occurred via e-commerce since 2016.

The shift from retail stores to e-commerce has increased the levels of
complexity for those in logistics. Many retailers are outsourcing their logistics
operations to external service providers such as Third-Party Logistics
companies who take charge of all aspects of the supply chain from fulfilment
to delivery. While outsourcing logistics operations has proved to drive lower
costs than in house logistics, putting a third-party in charge of one of the
main business functions has a large impact on customer satisfaction. With
competition rife this is something more important than ever; customers
expect their shipments to arrive with unprecedented speed and to include
free or low-cost shipping. This is creating challenges for those 63% of 3PL
companies for whom the main concern is cutting transportation costs.

Due to fierce competition from major players such as Amazon retailers need
to adapt and make every aspect of the supply chain leaner in order to
provide free next or even same day delivery. In 2015 60% of all online
transactions included free shipping which is only increasing transportation
costs especially in the critical „last mile‟. This rising pinch on margins has
meant that implementing profitable and efficient routing plans has gained
significant importance, with missed deliveries often negating the cost of an
entire transaction. 15% of consumers expect providers to re-schedule
deliveries in the event they were not home and 29% expect items to be
delivered wherever they are. It is estimated that every time a courier fails to
deliver at first attempt, it costs the company £11.

15 | P a g e
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

In traditional retail-store channels the supply chain costs accounted for 4 to

9% of sales while in e-commerce that figure moves to 15 to 18%. The
importance of free and quick delivery options cannot be ignored however
as 50% of shoppers surveyed in study admitted to have abandoned their
shopping carts because the delivery options did not meet their needs.

Real time data has become invaluable to global supply chains

Implementing IoT, big data, and fully integrated supply chain systems has
the potential to combat increased customer expectations. The use of data-
collecting tools can greatly improve the tracking of delivery progress and
create route planning by identifying patterns in delivery times, traffic and
weather patterns. With real time data on a specific shipment, rather than
truck level, consumers can now be alerted when their shipment is, for
example, an hour away leading to fewer missed deliveries. IoT can also
solve issues such as lost shipments, lack of tracking ability or unpredictable
delivery times which make delivery a challenge.

Internet of Things solutions such as ParceLive enable a new wave of network

level visibility and decision making in a world of increased outsourcing and
third-parties. The complexity of many systems, languages and carriers trying
to share information often leads to supply chain failures- while ParceLive
enables a globally uniformed and reliable data set on which to create
workflows. With a growing perfect storm, of rising consumer expectations
and shrinking supply chain margins the focus is now more than ever on
creating a seamless delivery experience. But how to increase efficiency when
the cause of inefficiency is unknown? With missed delivery costs being so

16 | P a g e
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

high how can we go about tackling them if we don‟t know the cause?
ParceLive enables users to build up a complex and wide data set that
provides invaluable supply chain information to users such as traffic patterns
and hot spots for shipment breakages. In addition to wider network visibility
each shipment now has the ability to become a customer service agent,
responding to the consumer in real time on its location and state.

Instructor’s
Note Customers play an important role in the creation of
supply chains. They are the reason why Hospitality
Industry Exists. It is imperative therefore that we value
them.
As #Lacsonians, EQUALITY is our way of life.

Yey! You aced our 2nd Topic!

If you have observations, activities and suggestions to
help you enjoy our lessons, write it down on your
yellow notebook and feel free to discuss it during our
next zoom meeting 
I would be excited to hear from you.

Matthew 7:12
“So whatever you wish that others would do
to you, do also to them, for this is the Law
and the Prophets.

17 | P a g e
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

1.3 Law of Supply and Demand.

Learning Objectives: At the end of the topic, students should be able

to:

1. Describe the Law of Supply and Demand in the

Supply Chain Management.
2. Differentiate Shifts vs. Movements
3. Identify Factors affecting Supply
4. Identify Factors affecting Demand
References: Readings:

https://www.investopedia.com/terms/l/law-of-
supply-demand.asp

Videos:

https://www.youtube.com/watch?v=GqeRnxSuLFI

https://www.youtube.com/watch?v=WZ0I9t9QoZ0

https://www.youtube.com/watch?v=g9aDizJpd_s

18 | P a g e
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

Law of Supply and Demand

What Is the Law of Supply and Demand?

The law of supply and demand is a theory that explains the interaction
between the sellers of a resource and the buyers for that resource. The
theory defines what affect the relationship between the availability of a
particular product and the desire (or demand) for that product has on its
price. Generally, low supply and high demand increase price and vice versa.
Perfect examples of supply and demand in action include PayPal.

Key Takeaways

The law of demand says that at higher prices, buyers will demand less

of an economic good.
 The law of supply says that at higher prices, sellers will supply more of
an economic good.
 These two laws interact to determine the actual market prices and
volume of goods that are traded on a market.
 Several independent factors can affect the shape of market supply and
demand, influencing both the prices and quantities that we observe in
markets.
Understanding the Law of Supply and Demand

The law of supply and demand, one of the most basic economic laws, ties
into almost all economic principles in some way. In practice, supply and
demand pull against each other until the market finds an equilibrium price.
However, multiple factors can affect both supply and demand, causing them
to increase or decrease in various ways. It was extensively studied
by Murray N. Rothbard.

Law of Demand vs. Law of Supply

The law of demand states that, if all other factors remain equal, the higher
the price of a good, the less people will demand that good. In other words,

19 | P a g e
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

the higher the price, the lower the quantity demanded. The amount of a
good that buyers purchase at a higher price is less because as the price of a
good goes up, so does the opportunity cost of buying that good. As a result,
people will naturally avoid buying a product that will force them to forgo the
consumption of something else they value more. The chart below shows that
the curve is a downward slope.

Like the law of demand, the law of supply demonstrates the quantities that
will be sold at a certain price. But unlike the law of demand, the supply
relationship shows an upward slope. This means that the higher the price,
the higher the quantity supplied. Producers supply more at a higher price
because selling a higher quantity at higher price increases revenue.

Unlike the demand relationship, however, the supply relationship is a factor

of time. Time is important to supply because suppliers must, but cannot
always, react quickly to a change in demand or price. So it is important to
try and determine whether a price change that is caused by demand will be
temporary or permanent.

Let's say there's a sudden increase in the demand and price for umbrellas in
an unexpected rainy season; suppliers may simply accommodate demand by
using their production equipment more intensively. If, however, there is a
climate change, and the population will need umbrellas year-round, the
change in demand and price will be expected to be long term; suppliers will
have to change their equipment and production facilities in order to meet the
long-term levels of demand.

Shifts vs. Movement

For economics, the "movements" and "shifts" in relation to the supply and
demand curves represent very different market phenomena.

A movement refers to a change along a curve. On the demand curve, a

movement denotes a change in both price and quantity demanded from one
point to another on the curve. The movement implies that the demand
relationship remains consistent. Therefore, a movement along the demand
curve will occur when the price of the good changes and the quantity
demanded changes in accordance to the original demand relationship. In

20 | P a g e
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

other words, a movement occurs when a change in the quantity demanded

is caused only by a change in price, and vice versa.

Like a movement along the demand curve, a movement along the supply
curve means that the supply relationship remains consistent. Therefore, a
movement along the supply curve will occur when the price of the good
changes and the quantity supplied changes in accordance to the original
supply relationship. In other words, a movement occurs when a change in
quantity supplied is caused only by a change in price, and vice versa.

Meanwhile, a shift in a demand or supply curve occurs when a good's

quantity demanded or supplied changes even though price remains the
same. For instance, if the price for a bottle of beer was $2 and the quantity
of beer demanded increased from Q1 to Q2, then there would be a shift in
the demand for beer. Shifts in the demand curve imply that the original
demand relationship has changed, meaning that quantity demand is affected
by a factor other than price. A shift in the demand relationship would occur
if, for instance, beer suddenly became the only type of alcohol available for
consumption.

Conversely, if the price for a bottle of beer was $2 and the quantity supplied
decreased from Q1 to Q2, then there would be a shift in the supply of beer.
Like a shift in the demand curve, a shift in the supply curve implies that the
original supply curve has changed, meaning that the quantity supplied is
affected by a factor other than price. A shift in the supply curve would occur
if, for instance, a natural disaster caused a mass shortage of hops; beer
manufacturers would be forced to supply less beer for the same price.

How Do Supply and Demand Create an Equilibrium Price?

Also called a market-clearing price, the equilibrium price is the price at which
the producer can sell all the units he wants to produce and the buyer can
buy all the units he wants.

At any given point in time, the supply of a good brought to market is fixed.
In other words the supply curve in this case is a vertical line, while the
demand curve is always downward sloping due to the law of diminishing
marginal utility. Sellers can charge no more than the market will bear based
on consumer demand at that point in time. Over time however, suppliers can

21 | P a g e
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

increase or decrease the quantity they supply to the market based on the
price they expect to be able to charge. So over time the supply curve slopes
upward; the more suppliers expect to be able to charge, the more they will
be willing to produce and bring to market.

With an upward sloping supply curve and a downward sloping demand curve
it is easy to visualize that at some point the two will intersect. At this point,
the market price is sufficient to induce suppliers to bring to market that
same quantity of goods that consumers will be willing to pay for at that
price. Supply and demand are balanced, or in equilibrium. The precise price
and quantity where this occurs depends on the shape and position of the
respective supply and demand curves, each of which can be influenced by a
number of factors.

Factors Affecting Supply

Production capacity, production costs such as labour and materials, and the
number of competitors directly affect how much supply businesses can
create. Ancillary factors such as material availability, weather, and the
reliability of supply chains also can affect supply.

Factors Affecting Demand

The number of available substitutes, consumer preferences, and the shifts in

the price of complementary products affect demand. For example, if the
price of video game consoles drops, the demand for games for that console
may increase as more people buy the console and want games for it.

22 | P a g e
 JOHN B. LACSON FOUNDATION MARITIME UNIVERSITY-MOLO, INC.
BACHELOR OF SCIENCE IN CRUISE SHIP MANAGEMENT (BSCSM)

Kudos! You have completed our 3 topics in Unit 1!

Instructor’s
Note If you have recommendations to make our sessions a lot
more engaging, write it down on your yellow notebook and
feel free to discuss it during our next zoom meeting 

I would be excited to hear from you.

On the 3rd topic, we learned that there is an interaction

between the sellers of a resource and the buyers for that
resource. Same with our CORE VALUE INTEGRITY. If we
practice integrity in all aspects of our lives, especially during
Quizes, we will reap its fruits in the future. Honesty is the
best policy, right?

1 Chronicles 29:17-19
I know, my God, that you test the heart and are pleased with
integrity. All these things I have given willingly and with
honest intent. And now I have seen with joy how willingly
-End of Unitwho
your people 1- are here have given to you

23 | P a g e