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The Other Side of the Equation

By Dave Turbide, CFPIM, CIRM, CSCP, CMfgE | September/October 2013 | 23 | 5

We supply chain and operations management professionals tend to think of demand as a given. It’s common to manipulate supply to meet demand—but this does not have to be a one-way process. It’s also possible to shape demand to better fit supply.Shaping demand to meet company goals

We supply chain and operations management professionals tend to think of demand as a given. It is what it is, and the job is to use resources to meet demand in the most efficient and effective way possible. It’s common to manipulate supply to meet demand—but this does not have to be a one-way process. It’s also possible to shape demand to better fit supply.

Demand, as a major input of sales and operations planning (S&OP), is determined by the result of forecasting and demand planning. The demand statement reflects the best estimate of what the market wants and is expected to buy. Traditionally, during S&OP, the supply and demand sides of the business meet to agree on an operating plan that matches supply to demand.

The forecast begins by modeling past demand and projecting it into the future. The base forecast is modified to reflect external factors not reflected in past history, such as the product’s position in its life cycle or demographics and economic trends that could affect future demand. Finally, subjective adjustments can be made based on personal experience, market intelligence, knowledge of the competition’s expected activities, and the like.

However, what if the forecast is brought into the S&OP process and it’s discovered that demand can't be met efficiently? Perhaps the desired profit margins are unattainable because of an unfavorable product or customer mix. Maybe the forecast demand doesn’t completely consume capacity or there is insufficient capacity to satisfy all demand.

Adjusting expectations
The standard response to these situations is to manipulate supply, but consider manipulating demand for an even better fit. Incentives such as coupons, discounts, sales commissions, and bonuses; advertising; manipulating the structure and function of sales and distribution channels—these factors all can be adjusted to promote the specific kind of demand you want or discourage the kind you don’t. The key is to identify the products, markets, customers, channels, or segments to increase or decrease and tailor marketing and sales efforts accordingly.

S&OP results in a plan that both sides of supply and demand can reference in measuring success. A projected finished goods inventory position is one measure of success. If inventory levels at a particular time are higher than expected, it could be because of too much supply or because sales performed under expectations. If inventory is less, fill rates lower, or back orders higher than expected, then either sales outperformed or production failed to achieve its plan. Determine which is the case, and take corrective measures.

Supply usually does an admirable job of adapting to demand, but this is not necessarily the best way to run the company and generate profit. S&OP is a process of agreement, and both sides of the equation must be willing to adapt to the needs of the other for the good of the enterprise.

Dave Turbide, CFPIM, CIRM, CSCP, CMfgE, is a New Hampshire-based independent consultant, freelance writer, and president of the APICS Granite State chapter. He may be contacted at dave@daveturbide.com.

 

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