4 ways to achieving better balance between supply and demand

(As originally appeared at Telus Business Talk, 6 June 2012)

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By Robert Tousignant, Partner, Advisory, EY

A few weeks ago, the Globe and Mail asked me to advise a small Manitoba-based hemp food manufacturer on managing unexpected spikes in demand. Fluctuating demand and supply are common headaches for food and beverage manufactures of all shapes and sizes — from billion-dollar companies to small enterprises like the hemp food company. Demand variability is largely the effect of the promotionally intensive nature of the go-to-market strategies ubiquitous to this industry.

Similar to behaviour exhibited by end consumers, trade channels and retail chains have become conditioned to purchasing large volumes on discounted pricing schedules. Meanwhile, competitive pressures continue to force manufacturers to run margin-eating promotions at the retail level, again spiking demand.

The traditional manufacturing supply chain is measured on maximizing the use of inventory, and therefore production volume, which restricts the investment companies are able to make in developing spare capacity to meet demand spikes. Stocking up on the finished product is rarely a good option given the perishable nature and limited production capacity of food.

So what strategy or combination of strategies can companies use to better balance supply and demand?

  1. Improved planning and co-ordination: Improved forecasting is key to effective supply chain response. Once you’ve triangulated upon demand — a feat that’s part art and part science — the rest is generally just math.  Complication often arises because different departments in an organization have widely varying ways of defining demand — for example, marketing may define it with brand, sales force with account and finance with business line. Even if the departments can reach a consensus, the inherent meaning of the number may become lost in the translation to supply chain. Also, the math on the supply side can be significantly improved by reducing lead times within the process.
  2. Outsourcing “flex” capacity: Contract manufacturers provide the alternative capacity companies need to meet demand spikes. This is because contract manufacturers can share available capacity among multiple customers, ensuring their facilities maintain optimal utilization. Outsourcing is generally a more expensive option, but in the hyper-competitive world of consumer goods, the margin compression is often a necessary evil to maintain customer satisfaction.
  3. Segmenting the customer base: All customers are not created equal. When demand spikes impose allocating shortfalls, the biggest and/or most profitable customers will get the lion’s share of available supply. The sales channel can also help drive prioritization. For example, the hemp food manufacturer could focus on fulfilling retail customers first, as online buyers are not generally conditioned to expect immediate order delivery.
  4. Maintain safety stock for raw materials and work in progress: If the raw or the semi-finished materials are less susceptible to perishable concerns, the manufacturer can stock up on them (within limits) for a demand spike. Then the focus will become the final conversion and distribution process during a demand spike.

This is by no means an exhaustive list of strategies. Options like everyday low pricing to stabilize demand were not examined. This would only be available to companies with sizable financial and market heft or those offering a unique product base.

Ultimately, selection of the appropriate strategy will be driven by the conditions and constraints of your particular organization. Companies that successfully manage to balance demand and supply can focus the bulk of their efforts on maximizing market share and profits. The rest will continue to be distracted with chasing orders and fire-fighting.

 Robert Tousignant is a partner in EY’s Advisory practice.