Balancing supply and demand to avoid inventory surprises in 2023

The events of the past three years have created varying narratives about supply chains, infused at times with sensationalism, parody and misdirection. The latter of these three often shift the conversation away from addressing immediate tactical challenges and towards long-term strategy.

While mainstream awareness of supply chains has brought about many opinions on the role it plays, one narrative should rise above the noise: Supply chain serves as a stabilizing rudder that guides the business through turbulence by always training its focus on mission and objective — balancing supply and demand for optimized network performance that fulfills demand.

Preparing for an uncertain path

Heading into 2023, most supply chains have experienced a full economic cycle in less than 3 years. This began with disruptions in 2020, followed by severe shortages, price inflation and reversal of many post-pandemic demand surges. If next to come is a recession, we are being told that it will be different from those previously experienced due to shortages in talent and other critical resources.

While this may be true, we don’t need a custom playbook for each possible scenario. Remember, supply chains have always been challenged to balance between short- and long-term business objectives. While needing to understand the perspectives of financial and commercial stakeholders, we can’t fulfill the supply chain mission by fully adopting them.

Instead, we bring balance through a supply chain lens that aligns the organization around design choices and operating decisions that account for risks and constraints in achieving and sustaining total network performance. Experiences of the past two years have removed any excuse for simplified planning assumptions that ignore risks and constraints.

While this may seem overwhelming, a single operating plan needs only to adjust for the dominant business constraints and risks. For example:

• Constrained supply requires more active demand management tactics such as allocation

• Constrained margin requires complexity reduction and segmentation for better alignment

• Constrained demand requires focus on cash and review of long-term capacity alignment.

Considerations for the year ahead

Concerns about recession risk and questions about 2023 demand should prompt discussion with business and financial stakeholders centering around the following question: “Are you prepared to sacrifice some margin in return for better balance and lower inventory risk?”

To aid the conversation, supply chain leaders should develop and propose three options for consideration:

Weigh the balance of working capital with capacity economics: Higher inventory costs should be countered with reduction of discretionary supply quantities, where constraints allow, to reoptimize this balance. More frequent replenishments will also enhance responsiveness to demand changes.

Flexibility for postponed supply commitments might be worth the cost: Commit to suppliers in advance based on more conservative, high-confidence demand projections. Respond to demand upsides with more responsive secondary supply that has higher cost but lower risk of residual excess inventory.

Offer incentives for firm, planned customer demand: Offer favorable terms (pricing or payment timing) to those customers who can commit to firm orders. Securing demand that can’t be canceled or changed will close the commitment gap relative to the firm, advance commitments required to your suppliers.

While uncertainty looms and varying narratives about supply chain are bound to arise, don’t lose sight of the essential role supply chain plays in times of crisis. These are moments for supply chain leaders to demonstrate the value their organization provides by offering strategies to help the business achieve network balance, while weighing margin and inventory risk.

Paul Lord is a senior director analyst in Gartner’s Supply Chain research organization, creating and coordinating content creation for supply chain cost and inventory optimization. He provides thought leadership and practical insights on inventory excellence and cost optimization through written research, client interactions and event presentations. Lord also covers supply and inventory planning with a focus on orchestration of constrained capacity and material decisions within manufacturing networks across all industries. He can be reached at: [email protected]

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