How to Optimize Capacity Constraints in a Volatile Market

More than 18 months after the global pandemic drastically changed the way we do business, companies are still feeling the effects of a volatile market. Now, demand is recovering. Not all industries are above pre-pandemic numbers yet, but growth has been evident in several markets – notably consumer spending and housing – and has affected demand across many industries. Unfortunately, supply is trailing behind. Challenges in the labor and transportation markets, which are often out of businesses’ control, are heavily affecting supply.

In many cases, this unprecedented speedy recovery has left companies with increased demand and capacity challenges in the form of production lead times, delivery lead times, and services scheduled far beyond the urgent need. These constraints can impact the ability to make the right decisions for customer relationships and profitability. Additionally, it can be difficult to maintain a competitive advantage, and companies may see profitability erosion as a result. Here are three ways to optimize capacity constraints during market volatility.

First, evaluate your customer portfolio.

• Understand who your most valuable customers are and then direct your resources where they matter most.
• Revamp your customer segmentation and understand your cost to serve.
  • Identify customers with low margins and the reason for those low margins; these customers may be low-volume or infrequent buyers and don’t support long-term partnership goals.
• Be prepared to let go of relationships that may not be serving you to free up capacity for those that do.

Second, make pricing and operational adjustments and execute a plan.

• Group customers into pricing action buckets.
  • Will you cancel orders? Renegotiate existing orders? Change price to time of delivery? Reduce discounts for low-margin customers? Implement or adjust minimum order quantities?
• Identify the ancillary pricing elements you can change quickly.
  • Eliminate or put on hold certain promotions, rebates or program allowances that may not be serving you.
  • Adjust payment terms or freight policies to reflect changing industry dynamics.
  • This guide on 50 common price leaks may help bring to light potential price leaks in your business.
• Prioritize orders based on their profitability.
  • Rather than take a FIFO approach to order fulfillment, focus first on the most valuable orders in terms of customer relationship and profitability.
• Determine a timeline and communication plan.
• Roll-out to your sales team and provide coaching.
• Communicate with customers.
• Put controls in place to ensure that each new order conforms to the policies and terms that address current market conditions.

Third, consider how you might leverage throughput profitability analysis to determine the quickest and most profitable mix going forward.

• Every company is constrained by time and finite resources, whether that is the number of machines, floorspace, trucks, or people to do the work.
• Throughput profitability analysis determines the best way to utilize those finite resources to maximize profitability.
• For example, in this video on throughput profitability, we break down how this analysis can be leveraged for manufacturers, distributors, and service businesses.

While understanding and managing cost structure is an important factor in pricing, it’s not the whole picture. Driving operational effectiveness through managing business constraints in production, delivery, and labor will enable successful profitability management in a volatile market.

We’re seeing no indication this situation is going to change before Q2 of 2022. Taking action now to optimize how your business utilizes its capacity will not only benefit your bottom line in the near term, it will also prepare you to react quickly the next time market dynamics shift.