The costs of demand variability can put you out of business.” That blunt assessment, recently offered to us by the director of sales and operations planning at a Fortune 500 company, reflects what managers already know: Peaks in demand can drive high overtime costs, stockouts, and lost sales, while slowdowns leave capacity idle and increase excess inventory. The impact on customer service levels — not to mention the bottom line — can be significant. But how can companies best manage this variability, especially when deciding which potential new customers to target?
Consider a manufacturing company that is expanding its capacity to produce an additional 20 units each month and is pursuing two potential new customers for that increased output. Both prospects have an average demand of 20 units per month, but prospect A’s demand is stable, while prospect B’s is highly variable. Prospect A strikes executives as an ideal customer, because it has stable demand that exactly matches the company’s proposed capacity expansion. But a closer look at the aggregate demand patterns of the manufacturer’s entire customer base reveals that B is superior: It needs more product when other customers in the company’s portfolio need less and thus smooths out overall demand. (See “Looking at Demand Across a Customer Portfolio.”)