1.2 Nature of Industrial Demand

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1.2 Nature of Industrial Demand

Ultimately the supply of virtually all "industrial" products and services is dependent upon consumer demand. This can be illustrated by a simple diagrammatic example, as shown on the next page.

We say, therefore, that Industrial Demand is DERIVED DEMAND. That is, it is derived from Consumer demand. So it follows that demand for a company's products will be affected by the demand for some ultimate consumer product or service - no matter how far removed the company might be from the consumer market.

As we move further back in the "chain" from the consumer, the number of companies in a particular industry reduces. For example, there are relatively few steel manufacturers, yet steel is bought and processed by many companies until there are thousands of companies producing consumer goods that incorporate steel in some way. Similarly, there are relatively few oil extracting companies, but many companies further down the "chain" that produce goods derived from oil products.

The effects of all this are significant to companies that manufacture or supply industrial goods or services:

(a) The company needs to be aware of what is happening in its customers' markets (and those of its customers' customers) even though the company does not have direct access to these markets

(b) Price manipulation, and other gimmicks, are not likely to have much effect on the total demand for industrial products. If there is little consumer demand, there will be a low level of industrial demand that cannot readily be stimulated by price - cutting. Also, because there are relatively few suppliers in the industrial markets, any attempt at a "price war" is likely to attract price retaliation. The net effect will then be to reduce profits all round.

(c) Following on from (a) above, sales forecasts must be largely based on customers' assessments of demand, rather than wholly upon the suppliers' assessments. In practice, forecasts are usually based upon a "mix" of intelligence - from within the suppliers' company, from the customers and from the customers' customers etc.

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