Effectively Balancing Demand and Supply Forecasting in a Rebounding Economy

By Harpal Singh, Co-Founder and CEO
Supply Chain Consultants

I talked recently with some folks in the semiconductor industry. Like other businesses, their volume is coming back, and for some product lines it is coming back with a vengeance. Surely there must be a way to avoid the feast or famine cycles of the economy!

Reaction to increased sales is typically slow after a prolonged downturn. Companies are reluctant to increase resources because it is never clear if the increased level of sales will be sustained. In fact US businesses currently have a higher level of cash and liquid assets than in any of the last 60 years.

Having been through these cycles more than once, we have catalogued a few of the favorite responses here together with some comments on how well they work.


Reaction 1: When in doubt hire a consultant.

Hiring a consultant is a convenient way to appear to address the issue without doing anything about it. Recommendations from the consultant generally take the form of:

a. Build more inventories to buffer sales.
b. Put in a planning process to increase communication and the ability to react.

The problem of course is that if you don't have enough resources to meet the orders, you certainly don't have the capacity to build inventory. Besides, if you have product on hand, would you stash it in the warehouse for future sales, or would you prefer to ship it and get cash in the door? A planning process would certainly have helped, but trying to put one in now is like closing the barn door after the horse has left.


Reaction 2: Do nothing

This is the normal reaction similar to the one people have when they have a toothache. You hope that it too will pass. Increased demand coupled with low capacity invariably leads to expediting. Individuals in the organization who shout the loudest get priority when the normal systems break down. As tempers get frayed, some orders get filled quickly, others get delayed indefinitely, some customers go away, manufacturing reliability drops because of frequent changes to the schedule, and the toothache becomes an abscess.


Reaction 3: Prioritize, communicate, and start digging yourself out of the hole.

A sudden mismatch in supply and demand is not just a manufacturing problem, or a sales problem, but a supply chain problem.

First, put in a team with the authority and credibility to deal with the mismatch. All expediting needs to go through this team, and the team should be responsible for implementing a consistent product allocation policy and for communicating with customers. To be effective, the team has to have credible representation from sales, manufacturing, and the supply chain.

Second, develop a plan for increasing capacity. Frequently, short term capacity increases are expensive. In situations like the present, the business has to make the decision on how much it is willing to spend to preserve and protect the customer base. Longer term projects to ramp up capacity may be more cost effective, but they will not help if the customers have gone away by the time you get capacity up. The first goal, of course, should be to preserve whatever capacity you have by not degrading it with frequent schedule changes and disruptions.

Third, communicate with customers. A common reaction in an upturn is for companies to put in a bunch of orders to "reserve" product just in case. You need to determine which demand is real, and which demand can be delayed. Remember that at the end of the day, you cannot deliver more than what you can make. It is much better to plan the shortfalls and manage them, rather than to let them happen by default. At least when you plan them, you have the opportunity to try to minimize the business damage of delayed orders.

A sudden increase in sales is both a blessing and a curse. Our experience is that it is much more important to acknowledge the mismatch in demand and supply and try to deal with it now, than to spend time and effort arguing about whether or not the sales will be sustained.



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