Question

Why is time important to suppliers to meet demand?

Answer 1

Answer: Thanks to global competition, faster product development, and increasingly flexible manufacturing systems, an unprecedented number and variety of products are competing in markets ranging from apparel and toys to power tools and computers. Despite the benefits to consumers, this phenomenon is making it more difficult for manufacturers and retailers to predict which of their goods will sell and to plan production and orders accordingly.

As a result, inaccurate forecasts are increasing, and along with them the costs of those errors. Manufacturers and retailers alike are ending up with more unwanted goods that must be marked down—perhaps even sold at a loss—even as they lose potential sales because other articles are no longer in stock. In industries with highly volatile demand, like fashion apparel, the costs of such “stockouts” and markdowns can actually exceed the total cost of manufacturing.1

To address the problem of inaccurate forecasts, many managers have turned to one or another popular production-scheduling system. But quick-response programs, just-in-time (JIT) inventory systems, manufacturing resource planning, and the like are simply not up to the task. With a tool like manufacturing resource planning, for example, a manufacturer can rapidly change the production schedule stored in its computer when its original forecast and plan prove incorrect. Creating a new schedule doesn’t help, though, if the supply chain has already been filled based on the old one.

Similarly, quick response and JIT address only part of the overall picture. A manufacturer might hope to be fast enough to produce in direct response to demand, virtually eliminating the need for a forecast. But in many industries, sales of volatile products tend to occur in a concentrated season, which means that a manufacturer would need an unjustifiably large capacity to be able to make goods in response to actual demand. Using quick response or JIT also may not be feasible if a company is dependent on an unresponsive supplier for key components. For example, Dell Computer Corporation developed the capability to assemble personal computers quickly in response to customers’ orders but found that ability constrained by component suppliers’ long lead times.

We think that manufacturers and retailers alike can greatly reduce the cost of forecasting errors by embracing accurate response, a new approach to the entire forecasting, planning, and production process. We believe that companies can improve their forecasts and simultaneously redesign their planning processes to minimize the impact of inaccurate forecasts. Accurate response provides a way to do both. It entails figuring out what forecasters can and cannot predict well, and then making the supply chain fast and flexible so that managers can postpone decisions about their most unpredictable items until they have some market signals, such as early-season sales results, to help correctly match supply with demand.

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Answer 2

There are many factors that affect which and how many goods and services people buy. Demand means the amount, or quantity, of a particular product people are willing to buy at a particular price. The demand for something can change and is influenced by factors such as wages, competition, and reports about products. Demand is connected to supply through price.

Demand influences the price of the good or service. This relationship can be graphed. The quantity demanded of a good, Q, is on the x-axis. The price of the good, P, is on the y-axis. If the price of a good is lower, the demand for it is higher. At a higher price, the demand is lower. This correlation is called the demand relationship. On the graph, Q1 is the amount of the good demanded at price P1, and Q2 is the amount demanded at price P2. A change in a price of the good can be traced on the demand curve to find the quantity.

The demand curve assumes only price changes. A change in any other factor causes a shift of the demand curve. There are many factors that affect the demand for a good. Suppose a type of lettuce is found to be contaminated and removed from stores. The demand for another type of lettuce might increase. This shifts the demand curve to the right. On the other hand, demand for a good can decrease. This shifts the demand curve to the left. The quantity demanded will be lower for each price.

The amount of a good people want to buy changes. This change can be long term or it can be temporary. When a demand curve shifts to the right, suppliers must increase production in response to the demand. The demand curve and how it has shifted helps suppliers determine whether they can meet demand. Suppliers also must try to determine whether the demand is temporary or permanent. Suppose a movie is nominated for several awards. Many people may want to see the movie, increasing demand. This type of demand is likely to be temporary.

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