Order Management System (OMS)

Balancing Supply and Demand: Definition and Benefit

Ngoc Lee
Balancing Supply and Demand: Definition and Benefit
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Despite the fact that this issue has been extensively researched, many businesses still struggle with balancing supply and demand because it results in either lost profits or having too much inventory on hand. Sadly, understocking or overstocking is frequently seen as a binary decision that must be taken, but balancing supply and demand offers a solution. 

Since it can be difficult to predict upcoming trends and obtain visibility into the supply chain, finding the perfect balancing supply and demand continues to be a problem for many firms. 

Let’s take a look at what balancing supply and demand means along with demand planning strategies to increase customer happiness and business profitability.

What does Supply and Demand Balancing mean?

The practice of making things available to customers at the proper location and time is known as supply and demand balancing. This balance is reached once the throughput of your supply (Time/Unit manufacturing and transportation) matches the rates of sales (Time/Sale units) for a specific item. It's more difficult to create supply and demand balance than it would appear, despite the fact that it can be written in a straightforward equation:

Time/Sale units = Time/Unit manufacturing and transportation

Supply and Demand Balancing definition
Supply and Demand Balancing definition

A company's optimal combination of customer happiness, lean management, and profitability is provided by supply and demand balancing. Businesses frequently struggle to close the gap between customer requirements and business capacity as a result of shorter product life cycles and quicker lead times. Companies using a crude supply-demand balancing strategy have inefficiencies in their operations. They lack the essential, connected parts that create true value. They won't simply fall short of their sales targets; losses are also anticipated. 

👉 Read More: Dependent Demand Item And Independent Demand Item 

Stockouts or an overabundance of inventory may result from an imbalance between supply and demand. While the latter may result in significant markdowns, the former will result in greater expenses for accelerated delivery. Lack of integration may also contribute to poor performance and subpar delivering services downstream as well as higher manufacturing costs upstream in the supply chain. Permanent client loss is the result of frequent stockouts or subpar service. The following are what difficulties that a business may face when finding the balancing supply and demand:

Difficulties that retailers face in balancing supply and demand

There is little doubt that physical retail sites have a special set of difficulties. But the eCommerce platforms are the place where the challenges to supply and demand balance are most obvious.

Difficult to determine customer

The online shopper is not as well defined as the brick-and-mortar one, where demand is tied to a particular consumer or place. Shopping online hides the identity and address of customers, making it challenging to pinpoint how your items are seen in the marketplace where the actual sales are occurring.

Changing demand

Demand frequently varies greatly in the realm of eCommerce due to changes in how products are managed and advertised. Another problem is product hoarding where consumers buy a product in huge numbers in order to limit supply and regulate cost. 

Balancing Supply and Demand
Balancing Supply and Demand

Insufficient historical data

The lack of historical statistics to aid in forecasting, particularly for new products, is among the biggest obstacles to supply-demand balance for businesses in any sector.

Unreliable predictions

The ability to anticipate demand is hindered by the lack of past data. The forecasting that is now provided frequently fails to accurately capture the effects of previous historical events, including promotions, new openings, and delistings.

Supply problems

Although most of the obstacles to a demand and supply balance come from the demand aspect of the market, the supply aspect of the company still faces difficulties. They are extended lead times, interruptions in the supply chain, as well as the problem of determining minimum stocking volumes and safety stockpiles.

Explaining Supply and Demand

Key business-affecting elements include supply and demand. A retailer will be better able to spot shifts in consumption if they have a working grasp of economic theory. The terms supply and demand have very clear meanings. The quantity of an item or service that a provider is able or willing to offer at a specific price is known as the supply. Demand is the quantity of an item that a customer is able or willing to buy at a specific price. Acknowledging supply and demand will help businesses anticipate how customers will respond to pricing changes. 

For instance, it is assumed that consumer demand for a product would decline as the price rises. Additionally, the idea of supply and demand helps businesses decide how much to charge for their products. The equilibrium price of the market is the best price for a product. When buyers desire the same amount of a product as providers are able to supply, this happens. To get the most out of your item, supply and demand must be balanced. 

👉 Read More: Direct Product Profitability (DPP): Definition and Calculation 

What are the 4 Fundamental Laws of Supply and Demand?

In an appropriate environment, controlling supply and demand will be as easy as predicting demand and purchasing (or making) products in response. Because the world is flawed,eCommerce retailers maintain supply and demand equilibrium by keeping in mind the following four laws:

Law of supply and demand
Law of supply and demand
  • The First Law of Supply and Demand states that higher prices and smaller quantities result when supply is constant but demand rises.
  • The Second Law of Supply and Demand states that price and quantity will fall if demand declines while supply stays constant.
  • The Third Law of Supply and Demand: If supply grows while demand stays constant, the result is a decrease in price and an increase in quantity.
  • The Fourth Law of Supply and Demand: Higher prices and smaller quantities result if supply declines while demand is constant.

How Do You Control Demand and Supply?

Now that you are aware of the rules of supply and demand, you may use them to assist in addressing the following four fundamental inquiries about supply and demand planning:

  • Which products will be required?
  • What quantities of each item will be required?
  • When will the goods be wanted?
  • Where must the goods be located once they are required?

You can define inventory rules, distribute available goods and resources, account for supply and demand, minimize stockouts & overstocking, and more by responding to these questions.

How To Determine The Balance Between Supply and Demand

Finding the ideal supply-demand balance for your business is crucial to the success of your business plan, but it also has a big impact on the many aspects of your company as a whole.

Recognize consumer demand

Understanding demand, or what customers desire and where they want it, is the first step. To do this, businesses must understand what consumers can afford, the items they choose and why, as well as the cultural and environmental elements that affect customer behavior. 

Recognize consumer demand
Recognize consumer demand

For example, if customers in your shop or region demand premium goods, there is just no need to overstock brands that are poorly made or packed in containers with unclear labeling. Order to regularly scan sales patterns, seasonality, and market validity, necessitates the use of historical data. 

We can anticipate future demand using this sales information and statistical modeling. Companies must examine previous sales data and adjust predictions on a regular basis relying on the industry. The providers must use the same strategy and examine the demand originating from every retailer, outlet, and customer group. 

Overall, these acts make it possible to see the wants and dislikes of customers considerably more clearly. Knowing this gives us the groundwork to begin supplying what is required to satisfy the demand.

Focus on your supply-demand planners

Historical statistics by themselves cannot provide a comprehensive insight into demand. You require competent supply-demand planners who are familiar with commodity categories, mindful of outside influences that could impact consumption, and informed with demand managing and forecasting techniques. 

Supply-demand planners
 Supply-demand planners

Not all details can be accessed in the database. When creating forecasts, making plans for supply, and determining inventory levels, planners should take into account a variety of factors, including the effects of a competitor's in-store promo, cultural influences on how consumers grow their shopping behavior, the history of foreigners in the local area and so on. 

Demand management refers to a specialized field with various strategies, approaches, and nuances that are exclusive to the position, hence training and education are essential. Planners must grasp which projecting methods to apply to specific data sets, how to combine predictions with demand-affecting factors, and when need to make qualitative adjustments to projections. 

Getting informed about a certain product category gives planners a competitive edge since it enables us to anticipate the effects of promotions as well as rival actions. 

Additionally, it makes it easier to communicate with sales staff, on whom we rely for data on customers and projections.

Forecasts support the supply plan

Do you believe that your firm should be focusing on long-term profitability growth or merely hitting monthly sales goals? Let the sales staff prepare and accept the projection if the only objective is to end the month with objectives met. The majority of vendors and distributors operate in this way. The sales team's effort to any company is quite significant, but they lack the knowledge to provide projections that accurately reflect demands. 

Planners who are data-focused must strike a balance between the unavoidable tendency of salesmen to overestimate their capacity to meet sales targets. We require information from our coworkers in marketing and sales, supply chain, finance, and maybe customer service when creating predictions, and the best way to work together is via a sales or operations planning strategy.

This forum enables us to agree on predicted totals as a whole. Here, supply chain management is crucial.

Forecasts support the supply plan
Forecasts support the supply plan

Let's use Tesco as an illustration, the largest retail chain located in the UK. When Tesco gave its supply chain managers charge of order replenishment, it significantly boosted product availability as well as decreased inventory. This strategy made it possible for the Supply Chain and category management departments to more effectively manage shelves, promotions, and new product launches.

Combine Pareto analysis into your targeted level of stock

Pareto analysis, commonly referred to as the rule of 80/20, is a statistical technique for making decisions that identify which 20% of resources result in 80% of the expected outcome. In the planning demand, we seek to pinpoint the 20% of items that account for 80% of profitability.

Pareto analysis
Pareto analysis

When it comes to controlling inventories, planners should be their closest friends. In order to provide yet another example, let's look at Transmed Overseas, a complete distributor throughout the Middle East and Africa, which had a single DOS (standing for "days of stock") aim for each brand. 

Massive variations in levels of stock were being caused by this, which also led to excessive stock and outdated products in addition to out-of-stock (OOS) situations. 

We initially ranked the SKUs of each brand's products according to performance using Pareto analysis. Then, we divided the SKUs into two classes: class A, which represented 75% of sales, and class B, which represented 15% of sales. The SKUs that made up the last category, C, accounted for barely 5% of sales. Using this method, we were able to identify our most crucial items and categorize each one's safety levels of stock. 

By employing Pareto analysis, we were able to increase customer care by 3% while simultaneously reducing surplus stock by 15 to 20 percent and ensuring the availability of class A SKUs. Even while Pareto analysis is useful, you also need to take lead time, contractual obligations, forecasting models, as well as other things into account.

Improve restocking and order frequency

Lower inventory is a benefit if we manage the frequency of inventory replenishment properly. Writing about it is simple, but doing it is challenging! Although there are numerous elements, such as extended lead times, seasonality, forecast accuracy, containerization, promotions, and PIPO (Phase in Phase out) procedures, that impact the appropriate order frequency, it is still possible. 

Your initial step should be to confirm the accuracy of your lead times. Any attempt to increase order frequency without a high degree of lead time precision is a wild guess that runs the risk of failure and expense. In order to track the OTIF (On Time, In Full) performance of each order from each vendor, the supply chain team needs to work diligently. 

👉 Read More: Fixed Order Quantity: Model and Formula 

The team should examine forecast accuracy at the SKU level and forecast misses, which is one of the unseen inventory expenses experienced by businesses, once there is a credible history of lead time with accuracy performance. The trust in product replenishment at DCs and retailers will rise as lead times and forecast accuracy improve. The analysis of containerization, which directly affects transport and logistics costs, should come next. 

The Supply Chain team is in charge of doing this and should weigh the savings from logistics and transportation against the cost of retaining inventory, missing forecasts, and obsolesce. Your purchasing frequency should be determined by this cost-savings ratio. The marketing or category management teams should be taken into account when changing your order frequency because they conduct promotions that might affect how much inventory you require. 

Plans won't take into account the promotional volume if lead times aren't taken into account or if supply chain and procurement teams aren't informed. According to your agreements with retailers, this can result in understocking, missing sales, poor customer experience, and even penalties at the downstream level.

👉 Read More: Cumulative Lead Time: Example And Calculation


Businesses are always working to strike to find the perfect balancing supply and demand. Most mid-sized businesses or manufacturers still lack the right combination of people, processes, and fundamental facts to satisfy customers and run lean, successful businesses. 

An alluring payoff might result from doing an impartial assessment of the existing condition of supply-demand balance, lost chances, and future improvements. The maturity framework that is offered can be used to compare current procedures. It is definitely possible to improve analytics, processes, and decision-making. In terms of customer happiness, profitability, and managerial effectiveness, the findings are compelling. 

After all, by gathering useful sales data for more than a long period of time to identify consumers, shopping habits, profitability, and inventory levels, forecasting software will help businesses to strike a balance between supply and demand. Hope you have a good time with Efex.

Ngoc LeeNgoc Lee is an Content Creator Manager at EFEX. She wields her long-term expertise in Logistics and Supply Chain, harnessing her top-notch writing and research skills to bring incredibly valuable content. Whether you're a small startup or a well-established enterprise, Ngoc Lee is here to equip you with the essential knowledge of e-commerce, fulfillment, and all things business-related.