Taming the Inevitable Business Cycles
Why is it that when business is good we think that it won’t turn down and when it is slow we think it won’t pick up again? Let’s face it, business cycles are here to stay, and we would do well to anticipate them and run our businesses to make the best of the up cycles and to cope with the down cycles. While these thoughts are primarily aimed at others with manufacturing businesses, the primary issue is pretty generic. None of us have infinite capacity, so how do we most effectively flex our capacity or influence the demand so that they are relatively closely matched?
There are many ways to adjust capacity and if the business cycle is deep enough, we need to employ all of them. If there is a lot of capacity available then using a one shift operation may meet the demand requirements, although it may not provide good utilization of the plant equipment. Adding another shift or two increases both the sales output as well as plant utilization. The maximum output and utilization can be gained by setting up a 24 hour a day, 7 day per week operation. Using overtime is the best governor for adjusting capacity because it can be increased or decreased on a daily basis if necessary. Another methodology for not over capacitizing is to develop strategic partners or suppliers that can help shave peak demand spikes or even permanent demand increases that are not strategic to the business. The best arrangement, although somewhat rare, is to work collaboratively with a customer to share the investment required to increase capacity to meet market opportunities.
It may be harder to adjust demand and it is certainly more challenging to control since many times factors that are external to the business must be influenced. The primary strategy should be to differentiate a business’s product or service. Acme Industries’ response to this objective has been to develop its Beyond Precision Value Promise. If successfully developed and implemented, such a strategy can help earn new customers or new projects with current customers. A continuing challenge for many businesses can be diversifying its customer base, but doing so can help level load demand with business cycles that differ with different customers and industries.
An important capability for a business to employ is to not only adjust capacity and demand as described above, but to also match them closely in real time by order planning and scheduling as well as inventory management. Excellent performance by a company entails giving its customers what they want within reasonable lead times, while managing its capacity and demand without negatively impacting its customers.