Demand Risk: Companies' Worst Nightmare

June 29, 2015 · READ

Picture this: Business is booming, products are flying off shelves and into the hands of consumers, and getting rave reviews across the board from customers. Manufacturers can hardly keep stores stocked with their goods. It sounds like a dream scenario to many companies. But the fact of the matter is that these dreams can quickly turn into nightmares if demand cannot be managed effectively. That’s why understanding demand risk is important for companies to avoid seeing their dreams become nightmares.  

The coffee craving

No enterprise wants to leave sales on the table because they cannot satisfy demand. Yet at the same time, the rush to meet demand can be a dangerous proposition. Unsatisfied demand can lead companies to make unwise, spur-of-the-moment decisions – they may try to increase productivity (and jeopardize the safety of workers), hire more employees (leading to more expenses), sign agreements with third-party suppliers (resulting in delays in manufacturing and more expenses) or enter new countries in an effort to decrease costs. There is also the risk that a company’s output simply does not scale well, yet it invests money in trying to increase supply which results in inefficient use of resources.

The coffee industry is currently facing supply issues. In the West, coffee has been a staple of people’s everyday diets for a long time now. However, consumers in China and India have recently taken to caffeinated beverages as well. Additionally, more businesses are adding coffee to their offerings – Subway and Taco Bell, for example, both started selling breakfast in recent years.

However, producers have been unable to keep up with demand for a multitude of reasons. First and foremost, coffee can be difficult to produce since it can only be grown in tropical regions and at high elevations. As Risk Management Magazine noted, four countries are responsible for the production of two-thirds of the world’s coffee. Additionally, droughts in Brazil and fungus in Central America have made keeping up with demand even more difficult.

There is no denying the coffee business is booming, with major chains such as Starbucks reporting $12.7 billion in sales annually. However, businesses that rely on coffee need to keep demand risk management in mind as they look to quench consumers’ thirst for caffeinated beverages. The coffee industry’s next step will be an important one as participants look to shore up production, and several players are taking a unique approach. Some are embracing smaller producers to help them grow into greater contributors, others are looking to develop new coffee varieties with resistance to blight and fungus that should improve the resiliency of crops.

Strengthening the supply chain to avoid demand risk

At the end of the day, managing demand risk ultimately comes down to how firms utilize their supply chains. By being proactive with their supplier relationships, they may be better able to ensure scarcity or other demand issues do not negatively affect their bottom lines.


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