Balancing Supply and demand
The major challenge in planning is finding the balance between supply and demand. An imbalance between the two will have a serious impact on the efficient and profitable running of the business.
Too much supply (above and beyond the planned and targeted level set for valid business reasons) will result in:
- Building excess inventory which will then have to be stored in a facility that one way or another must be paid for (even if it is internal storage there is an opportunity cost and also the costs associated with heat, light etc). Longer term there is a risk obsolescence in the future especially if the stock has an expiry date. And that excess inventory represents a sunk cost of material and resources that has to be paid for but for which you will not be paid for some time.
- Another result of too much supply could be discount pricing. A basic law of supply and demand is that in times of excess supply prices will fall. However your overheads won’t. So the business will make less profit. Also if you give a reduced price to a customer today that sets a new expectation with the customer. They may demand that price ongoing.
- The obvious solution to excess supply is to cut capacity. That may mean closing lines or even the whole factory for a period. It may also involve cutting staff numbers. This is often the default position but must be managed carefully. Equipment may be quite complex to shut down or start up. And the trained staff you have let go may find other jobs and not be available when you need to re-hire them.
Too little supply is a situation where where you cannot fulfill orders (demand may have come in higher than expected, or you have had a breakdown in your process, or a supplier has let you down) and will result in:
- A shortage in supply will result in dissatisfied customers. They may be forced to give some or even all of the business to your competitors. You must manage the relationship with your customers very carefully in a case like this.
- Supply shortages almost always result in increased costs as you try to get out ot the situation. These costs include elements such as overtime, expedited shipments (both to your customer and from your suppliers), and paying a premium for access to limited resources.
- In some industries a dominant customer may insert a clause in their contract to stipulate that their supplier will pay a fine for missed deliveries. One major supermarket chain I have dealt with will fine their suppliers the full cost of lost sales if they are not supplied when they want it.
So it is critical that your planning function properly manages supply and demand. But to do that they must also have accurate information on supply and demand. Many problems that will be the root cause of a supply-demand imbalance will be down to lack of information.
If you want help in balancing supply and demand in your company and in managing the key information flows that make this possible then contact us.