One way of determining if the supply chain is capable of meeting customer demand is to determine if the supply chain is balanced with customer requirements. A scale with customer requirements balanced on one side and supply chain capability on the other depicts the picture of the balance required. Information serves as the fulcrum balancing both sides. Changes in customer demand and marketing activities have the potential to upset the balance. If marketing practices shift the balance too strongly one way, such as through a promotion that strains demand, the supply chain becomes unbalanced with customers' needs. This out-of-balance condition adds cost as the supply chain scrambles to meet demand.
Most product supply systems are woefully unbalanced with customer requirements. Each node in the product supply system must be individually capable of producing and delivering to customer demand each day. The entire supply chain is only as capable as the weakest link in the system. When the supply system is incapable of delivering within customer expected replenishment time, excess costs are generated in the form of inventory and overhead to support work-in-process and finished product inventories.
CUSTOMER DEMAND AFFECTS BALANCE
As Hal Mather states, most company managers would like marketing to provide them with a stable, predictable, growing at a pace they can handle, demand pattern . Unfortunately, what they get is a demand situation that is "erratic, unpredictable, and declining." As Mather notes, "many sales and marketing programs actually cause volatile demand.
They take an underlying customer demand, which is relatively stable for many products, and introduce peaks and valleys." Companies react by implementing programs to improve the flexibility of the factory, adding inventory cushions, and increasing capacity to meet peak demand. Mather suggests companies need to analyze their promotion programs to determine which ones are really adding value and which ones are losing money. This evaluation must include the effect across the entire supply chain.
Customer demand is often volatile as a result of two market factors:
1.changes in customers' buying habits
2.changes caused by company actions or policies, or actions taken by competitors.
The first change in demand is difficult for a company to control, as consumers change their preference. The second change in demand is caused by internal company actions including the marketing activities designed to stimulate customer demand. When customer demand exceeds supply chain capability, the supply chain strains to meet demand and incurs excess costs.
Table 1 describes the characteristics of strained supply chains versus those of a capable supply chain .
AN UNBALANCED SUPPLY CHAIN'S IMPACT ON PROFITABILITY
When the balance between supply chain capability and customer demand is upset and the supply chain cannot meet demand with normal processes, the company incurs costs above the standard cost for the product. These costs may be driven by
•expedited production and transportation
•excess inventory of the incorrect product
•additional changeovers at the manufacturer and suppliers
•nonstandard processing at all locations
•unavailable capacity under normal work schedules.
Companies must balance the supply chain by improving its capability of meeting demand. A capable supply chain will avoid these excess costs.
In addition to added costs when the supply chain is out of balance, the potential for added revenue may also be lost. Opportunities exist for customers to substitute competitor's products when the supply chain is unable to deliver to customer request. Most companies are not aware of the impact of marketing programs on the supply chain and have no means of analyzing the added cost. Models must be developed that can identify the added cost of both the marketing activity and the supply chain impact before the decision is made to go to market.
To Be Continued
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