Sometimes companies are in, what seems to be a wonderful situation – the demand is big, so big it seems there is not enough capacity to handle all of it. Unfortunately, when this stage is reached it commonly comes along with increasing difficulties to supply the customers demands reliably. This is to be expected. What is also to be expected, is the way companies try to handle the situation.
Assuming, that the companies facing this situation have faith the demand peak is not temporary, it stands to reason they will now (obviously late) decide to increase their capacities. Clearly, installing new capacity takes time (whether internal – new equipment and additional manpower, or external – subcontractors). And during this time the supply difficulties continue. Of course, if companies believe that the peak in demand is temporary, they will not add capacity and the situation will continue until the demand drops. (one thing is sure though, this is a prophecy that will without a doubt will fulfill itself – the poor supply performance guarantee that the demand will drop).
In the interim period – the period between now and the point where the capacity is again larger than demand, the companies will continue to struggle with supply. Unavoidably, customers will become more and more unhappy with the situation. The more times their supply is not delivered as promised the less happy they become and more and more they express their dissatisfaction.
Naturally, customers express their dissatisfaction to their point of contact within the supplying company, which normally is the sales people. Sales people are extremely concerned with the risk of losing orders and more so the risk of losing customers. This results with what turns to be a daily, multiple routine. Customers call to ask about their deliveries -> Sales people check and realize it is going to be delivered late -> Sales people place pressure on operations people to expedite the late order -> Operations people try to accommodate and jump the queue for the late order -> Other orders are getting delayed -> Other customers become angry with the delay -> These other customers approach their sales person -> the sales person approaches operations and cycle starts again. When anyone in this cycle feels stuck, there is always the escalation process – sales people approach the sales manager, that in turn will approach the operations manager, that in turn will order the planning department to jump the queue for the specific order. But this happens in the same frequency, resulting with the same chaotic results which will lead to the last resort – approaching the CEO for his decision. As if, anyone in this process including the CEO had the capability to make such a decision.
This vicious cycle, ensure performance continues to deteriorate and no one within the system, not sales, not operations planning people, not the sales manager, not the operations manager and clearly not the CEO can make a reasonable choice here. The system is noisy – it has more demand than its capacity, and what all of these people are doing, out of excellent intention, is introducing more and more noise into the system by constantly shifting priorities. These shifts in priorities keep changing the operations queues moving some orders to the head of the queue and others to its tail, they mandate frequent change-overs, they mess raw materials consumption and make the planning totally irrelevant. And what is worse, it results with exactly the opposite effects to the desired ones, lead times elongate, which increase delays and further damages the supply reliability and ultimately increase the customer dissatisfaction.
The situation starts because companies do not have faith in their ability to grow and sustain growth. Should they had this confidence, they would have installed sufficient capacities to start with and avoid the situation. This confidence is crucial, and companies need to develop a competitive advantage that provides this confidence (you can refer to other posts of mine here on how to create such competitive advantages). However, as long as this confidence does not exist, and companies remain reluctant in investing prematurely in capacity, or if nevertheless a temporary peak in demand is experienced, companies need to realize that when everyone in the company gets involved with deliveries and puts pressure on the supply organization, each one for the orders that are currently important for them, the result is increased noise into a noisy system and further deterioration of the service levels.
There are a few better ways to handle the situation. Starting with accepting the fact that demand is grater than capacity. This means that for a given period the company will not be able to satisfy all of the demand. Yes, not satisfy at all. It is not that some orders are going to be delivered later, some orders are never going to be delivered (if you have a capacity of 1000 units per period of time and the demand for the same period of time is 1200 you will not deliver 200 units, at all. This is because of the fact that the gap is not fluctuating, but rather fixed. For every period there is an excess demand of 200 units above the capacity). Most companies are having extreme difficulties in accepting this fact. As long as you will allow orders to flow in with demand that exceeds your capacity, there will be a quantity you will never deliver however, which products exactly you are not going to deliver are going to be a random result. And that is sad, as a random result means you may be losing sales on your best products and/or best customers. There is no other choice – you must decide which products you will stop selling during this period. There are many ways to execute such a decision, which is absolutely crucial to your business performance.
The second part of the equation is to stop introducing ever growing noise into the supply system. Some decisions needs to be taken and effectively communicate with the appropriate stakeholders. Decisions about supply time – you will probably need to elongate your supply time and notify all of your customers on the temporary elongation in supply times, you will need to decide on priority rules – just set them, make sure everyone within your system understands them and that they are being followed, and you will need to make sure that exceptions to these rules are rare. Minimizing the entry noise into the system will enable it to perform in the most effective way in a turbulent period.
