Supply vs Demand: A Foundational Truth

This is such a simple concept but it’s amazing how much we get into verbal contests with Sales over it. The situation is we have six of our product on hand and the customer calls and wants ten of them. Ten of us, from all departments in the company, will sit around the table in the daily production meeting and argue whether this is right or wrong. Manufacturing and Materials will moan about the customer not knowing what they want or why couldn’t they forecast it. Sales will bark about needing to take care of the customer or why can’t Manufacturing make what we sell and quit arguing. Every other department in the meeting will take either one these positions depending on whether or not they view demand as predictable or not. The bottom line though is the customer wants ten, we have six, and we’re four short. We either find a way to make it or the customer will go elsewhere for it.


You have to balance supply and demand


The bigger issue though is neither side of this argument is taking the time to understand the impact this common situation has on each other let alone the impact on the company as a whole. From a manufacturing perspective, what they’re worried about is the disruption an order can have on the whole factory. Typically the above situation occurs because the order is needed in less than normal lead time. Dropping the order in at less than lead time will always send a disruptive ripple through the rest of the business and if there are not enough extra resources or raw materials to get the new order done, then like standing in line, someone at the end of the line will get bumped out and not get served. This costs money and customers will be unhappy. From a Sales perspective, they are concerned about the customer taking their business elsewhere because the customer is not satisfied.

What reinforces the above is Manufacturing is measured on low costs and efficient performance and Sales is measured on generating sales and taking care of the customer. At first blush, these two measurements are in conflict with each other unless we do the following. Find out the cost of change, reducing lead time, and proactively manage demand.


It really is a ridiculous fight

Finding out the cost of change accomplishes two things. First, by finding out what it costs us to change an order, we may find out we’re better off telling the customer no. If it costs us $250 to change an order (we must also include the cost of the ripple effect) and we’re only making $75 on the order, it doesn’t make sense to make the change. It may get argued “but doing this is a one time thing”. It never is. Once this door is opened everyone will expect it left open. The second thing identifying the cost of change does is it opens up the possibility of us approaching the customer and seeing if they will take a bit of a discount to not change the order. If it costs us $250 to change an order, and the item being dropped in is one that always changes, then maybe we offer the customer a $50 discount to not change. If they change, we add on the $50. This is the proverbial win-win situation. We save $200, the customer save $50, and schedules and needs are met.

Reducing lead time increases flexibility for the manufacturing floor as well as the customer. If we can eliminate five days from a fifteen day lead time item, manufacturing gets to respond 33% quicker as well as the customer gets to wait 5 days longer before they have to make a commitment to an order. The longer the customer gets to wait before they have to commit, the more certain the demand is and the less chance of a change needing to occur. Again, the proverbial win-win situation.


Reduce leadtime

Proactively managing the customers demand means you aren’t waiting to react to demand. You get to set the tone for meeting demand. By seeing what’s coming, you get to slot demand where it fits best for you as a manufacturer as well as still take care of the customer. In addition, you now have your hooks into the customer. Once you are managing the customers schedule for them, they will never want to go back and do it themselves. They have 60 hours of work to get done in a 40 hour week too. Once more, a win-win situation.

All this takes a leadership that understands the above as well as committed to balancing what’s right for the customer AND their own organization.