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What would be a solution to a highly variable demand product that is impossible to forecast?

Ornella

What if a company is providing a product with a highly variable demand? Shall it just stop producing it? Thanks!

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Sidi replied on 03/16/2018
McKinsey Engagement Manager & BCG Consultant | Interviewer at both firms | Privately helped 30+ candidates secure MBB offers!

Just a quick thought: the decision whether to produce or abort this product would be contingent on two notions:

1. The capacity to flexibly react to demand fluctuations (i.e., close to zero set-up cost for production capacity)

2. The possible speed of production (i.e., can an observed demand peak be almost instantly catered for?).

If these two basic conditions are met, and if the profitability of the product is attractive, then keeping this product in the portfolio might make good sense.

Hope this helps!

B replied on 03/16/2018
NOT AVAILABLE

Hey,

It depends on the specifics of product and demand: the best case scenario you just produce when you get an order and you completely eliminate such risk (an alternative way is to have semi finished goods and to just personalize them depending on demand - it can work in some cases).

If nothing else works the company should evaluate/build scenarios around what will happen and try to decide based on it - even under very unpredictable demand, it might worth to keep producing and selling the good.

btw, if you do such analysis always take into consideration the salvage value of the products

Best

Bruno

Francesco replied on 03/17/2018
Ex BCG | MBB Specialist | #1 Expert for coaching sessions (1300+) and recommendation rate (100%)

Hi Ornella,

it all depends by the objective of the company; for example

  1. if the goal is to maximize revenues (eg – new startup venture-founded) --> No reason to stop production, unless there is an alternative opportunity allowing higher revenues with equivalent investment
  2. if the goal is to maximize profits --> It would depend by the impact of fixed costs of the company and potential capacity constraints

If you can add which was the objective in the case it could help to clarify the best approach.

Best,

Francesco

Vlad replied on 03/16/2018
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

Hi,

I will analyze it the following way:

1) Diagnostics:

  • Demand: what is the current demand and variability? Is it seasonality / variability during the day / etc.
  • Supply: How is the supply currently addressing the demand?
  • Fixed costs: Fixed costs structure and utilization in peaks / off peaks

2) Analyzing the solutions:

  • Demand: Can we smooth the demand by better demand planning / increasing the demand in off-peak (e.g lower the prices, additional promotions, etc).
  • Supply: Can we lower the supply costs by smoothing the production (Typical drivers: add WIP, Add parallel production process with different shifts, normalize output rate of each step, etc)
  • Fixed costs: can we increase utilization in Off-peaks (e.g. produce new products produce private label, licensing other products, etc)

Best