Supply & Demand is Backwards

Is Inventory an Asset…or an Albatross?

When I worked for a Nike subsidiary, we would hear the CFO lament about the warehouse in Japan that

"was visible from space”. He was a finance guy focused on one thing: Return on Invested Capital.  What 

ties up the most cash in manufacturing companies? Nike’s latest financials showed $6.7b inventory on the 

balance sheet. 

In my experience, companies love to buy more product. You will always get support from the sales group - “Can’t sell what we don’t have!” Production is all in. That's fine if you need to bulk up on staple product with steady demand. But what percentage of your business does that cover? Are you depending on that to hit the growth targets?

The stuff in the warehouse is not really an asset; it’s a bet on future demand. But these chips often accumulate over time because other games are afoot: The supplier offered a great price based on upping the quantities; Your own factory needed to fill production capacity; One of your biggest customers went belly up; There’s a global pandemic.  The Supply side can almost seem inevitable…like gravity. Call it an asset, but you can bet it’s of the rapidly depreciating kind.

The Demand side, though, is where the game is won or lost. The reason your company might need another warehouse soon is that the same rigor applied to planning, producing, and delivering all that product was not applied to the front end of the process. In other words, don’t blame production or sales for bungling the Supply…..blame product and marketing for whiffing on the Demand. 

Demand drives everything.

The most successful companies in the world have eternal product shortages. They are experts at manufacturing

demand. In today’s world it’s not that difficult to get something made. Look at all the stuff out there….we’re drowning in it.      I recently did a search on Amazon for “carbon road bike forks”; got back 399 results. Take out the word “forks” and you get over 10,000.  If you build it they will come? What if they don’t?

Demand creation takes time, rigor, thought, inspiration, enrollment and energy to produce, all occurring before you 

get to Supply. It needs to be crafted step by step with meticulous pressure testing, rolled out on a timetable that starts 

within the organization, and once ready, given sufficient media investment that insures it reaches the intended audience. 

It is the single most important ingredient in enabling you to achieve your business objectives: it allows you to achieve sufficient quantities to produce it efficiently; it allows you to price it at favorable margins; it gives you the confidence to allocate cash to manufacture it, etc etc. Demand lubricates the entire machine. 

Design creates demand.

The design process, embedded in the demand creation process, is the most critical, and squishiest, aspect of any product marketing enterprise. To work, it must be driven from the top. Steve Jobs spent most of his time on campus with Jony Ive. Elon Musk is a design freak. If the CEO spends his time on design, then you can be sure the company invests tremendous resources there. It’s not just that Apple or Tesla are passionate about it. They view it as the highest leverage corporate investment they can make. Design excellence allows Tesla to require deposits on future vehicles with no guaranteed release date. That’s cash in the bank, and demand information that allows them to be way ahead of competitors. 

In the past I bought Volvo turbo wagons because I experienced a perverse enjoyment dusting German sports sedans in my flying brick. I was definitely an outlier. But with their well earned reputation for safety, quality and Nordic quirkiness, all of us enthusiasts thought if Volvo ever designed beautiful cars they could compete with the big boys.  Dan Neil recently wrote in his Rumble Seat column for the WSJ about Volvo’s newest hybrid coupe: “..the Polestar 1’s value rests in it being a truly, historically beautiful car.”. From 2017-2019 Volvo grew 23% globally, while the industry declined over 30%. Seen any new Volvos in your neighborhood lately?

Toward a  Demand-Driven Organization

How do you build an organization that values and tasks itself to create desire? There's no easy answer, but first you need a leadership team as comfortable with and committed to squishy stuff like design charrettes and A/B message testing as they are with ROI and EBITDA. Many would have these activities relegated to "those creative types in product and marketing".  I would just quote the late great HBS professor Theodore Leavitt who defined Marketing simply as: "the getting and keeping of a customer". You could just as well use that as the definition of business. Take care of that, and everything else falls into place.