5 Ways to Balance Supply and Demand in an Organization
Finding the balance between supply and demand remains a universal pain point for many businesses, as it can be challenging to estimate emerging trends and gain visibility into the supply chain.
However, forecasting software enables companies to balance supply and demand by collecting valuable sales data over an extended period of time to define customers, product preferences, profits, and inventory needs.
Common Challenges of Balancing Supply and Demand
Balancing supply and demand is not a simple task. It requires insight into company finances and capacity, as well as broad market trends. While challenges may vary depending on the sales channel, obstacles that many businesses encounter include-
While brick-and-mortar stores can easily define their loyal customers, as they must be located near the target demographic, online retailers often find it challenging to identify their client base.
Consumers can purchase an item online from anywhere and remain relatively anonymous, making it challenging to develop buyer personas.
Customer demand is finicky and tends to fluctuate often, making it challenging to anticipate. And the repercussions of demand change can vary significantly, posing risks to companies that are unable to forecast sales. While a shift in demand could mean increased sales for one product, it could be the fall of another.
Collecting Historical Data
Collecting historical data is difficult for any business that is just starting or launching a new product line. Companies in this situation are forced to research market trends and collect sales information from similar products.
As accurate sales forecasts rely on extensive historical data, many businesses are unable to perfect their predictive models until they collect more transactional information.
Although balancing supply and demand is typically difficult due to the challenges of gauging customer demand, some businesses also have issues on the supply side.
Companies often face risks that are out of their control, such as long lead times and supply chain disruptions upstream. On the other hand, some organizations have difficulty properly managing their inventory, calculating healthy levels, and maintaining safety stock.
5 Ways to Balance Supply and Demand
While the balance between supply and demand looks different for every business, companies should first-
Understand Customer Demand
Businesses need to understand what customers want, where they want it, and at what time. In order to define this, managers must learn their shoppers' preferences, behaviors, budgets, and environmental factors that impact these patterns.
For example, if a retailer notices frequent turnover for cost-efficient goods but dead stock forming from expensive items, managers should adjust their inventory orders accordingly. However, inventory managers should corroborate this with past sales data to ensure it isn't a short-lived trend.
Understanding customer demand is even more challenging for large retail chains that have multiple locations scattered around various areas. In this case, each store must individually collect sales data to define their average customer demand.
Invest in Demand and Supply Planning
In addition to historical data, businesses need supply and demand planners who have a thorough knowledge of product lines, categories, and factors that impact consumption rates. Raw data needs intervention of some sort to define trends, anomalies, and variables.
Supply and demand plans can also outline factors that quantitative data cannot cover, such as cultural impact, habit formation, competitors' effect on demand. Managers must know which forecasting methods work best for their company and will improve decision-making.
Utilize Forecasting Software
Forecasting software is essential for any financial goal, whether to meet a monthly sales target or drive expansion. An accurate forecast enables businesses to ready their entire supply chain in advance to ensure they can meet upcoming demand.
For example, if a forecast predicts that sales for a specific item will skyrocket within the next few months, retailers can slowly increase their inventory orders rather than frantically trying to boost stock levels. This way, suppliers aren't overwhelmed at the last minute, and stores will not have to supplement inflated storage expenses.
To get a holistic forecast, management should consult their sales, marketing, and finance teams to ensure all internal operations are optimized for future events.
Integrate the Pareto Analysis
The Pareto analysis, also known as the 80/20 rule, is a statistical technique that groups inventory based on their demand and profit contribution.
According to this method, stock can be categorized into three groups-
- Group A - Inventory that makes up 75% of sales
- Group B - Inventory that makes up 15% of sales
- Group C - Inventory that makes up 5% of sales
By grouping stock using the Pareto analysis, businesses can-
- Identify the most important products
- Calculate healthy safety stock levels
- Reduce excess stock
- Ensure the availability of Group A items
Optimize Replenishment Frequency
By keeping minimal inventory levels on-hand, companies can preserve their bottom line. However, it is not as easy as it sounds, as there are numerous variables at play, including-
- Lead times
- Forecast accuracy
- Supply chain disruptions
- Environmental factors
To begin, companies need to determine the accuracy of their lead times. Inaccurate lead times can negatively affect replenishment frequency.
Once this has a reliable history, managers should finetune their forecasting methods and logistics management. This ensures that businesses at the top of the supply chain also have the capacity to optimize the replenishment frequency.