The Importance of Production Planning
You’re a farmer and you grow corn. You face risks every year: severe weather, disease, infestation, perhaps even vandalism. At harvest, you face the final risk, that of corn demand and supply. You want a strong demand, without oversupply, that drives a strong price.
Much is out of your control, and some things you control — somewhat. You can work to prevent disease, infestation and protect the crop from thieves. But you can’t control what others produce and how much consumers want to buy. Indeed, attempting to control supply (outside of your own production) is illegal.
Ultimately, you want to maximize your yield to maximize your income. You work to find ways to produce more corn so that you have more to sell. But so is every other farmer. To some degree, your model depends on the bad luck or poor management of other farmers. If other farmers’ yields are low, whatever the reason, while yours is high, then you get more share of the market and the price is better. If every farmer gets maximum yield and no bad luck, the market would be saturated and your selling price very low. You have creditors for seed, equipment, perhaps even land leases to pay back. You may have harvest and other workers to pay. You may still be paying back investments that were not recouped in past years.
I’m not an agronomist, but this basic understanding of farm markets is not hard to derive, as the same basic fundamentals underscore any market.
No matter what lessons of economics any generation learns, it seems every following generation must learn them over again. For some reason (it seems to me), changing technology leads business leaders to believe that somehow, the basic fundamentals of economics don’t apply to them. Or, if they do, that they can use this new technology to avoid the fundamentals.
The age of internet retailing is indeed leading many brands, particularly of specialty goods, to ignore the fundamentals. Specialty goods enjoy one huge advantage that commodities like corn do not: they have the power to manipulate demand, and create their own market within a market. What I mean is that the very nature of specialty goods offers the opportunity to create something distinct — something that gives the customer a unique experience. If the experience is unique and desirable enough, the brand may drive its own demand regardless of what the other suppliers of similar products produce. In fact, if the experience is indeed special enough, that brand can dictate its own price somewhat independent of the price of other similar products.
I am increasingly concerned right now that we are disrupting and shrinking many of our specialty industries today because too many brands have lost focus on driving a distinct customer experience unlike that of competitors. Instead, brands are focusing on filling multiple retail selling channels with as many units as possible of their version of the same thing that everyone else sells in the attempt to squeeze out profit through market share. Like commodity farmers, their success depends somewhat on the uncontrollable bad luck of other brands that just happen to not be able to make or sell as much for whatever bad-luck reasons.
Is that so bad? Well, actually it is. It is bad for consumers who are not really excited about products that start to perform the same from one brand to the next. It is bad for specialty retailers when price becomes the only differentiator, and they lose on price against commodity selling channels (big box & internet). It is also bad for both consumer and specialty retailers when brands force product through opening more dealers, even when the market isn’t growing, to create artificial growth without corresponding demand. This is because it increases specialty retailer failure, and displaces quality established retailers with less experienced ones who often also fail before becoming established. Customers lose their favorite stores and outlets where they can learn about the product and stay engaged while influencing their friends. And, ultimately, brands lose when customers leave participation in that product, further straining oversupply with under-demand.
What is better for selling more units sustainably and profitably — growing the market share or growing market size? Market size never grows through price competition, shoving units into the pipeline, and making products that perform merely similarly compared with competitors. Opening new dealers next to existing dealers that are already struggling is not going to grow the brand, just poison it with dealers and risk the brand failing in all stores.
Production planning is the art (truly) of making something special, estimating how many people will want that experience, adding in the cost of effective marketing to make sure that everyone who is likely to want this experience actually knows it is available, and then pricing the product that delivers the experience enough to reward everyone that helps to make it happen. Then, the right number of units is made, not necessarily the maximum number possible to make, and profit is maximized with the financial reward that allows reinvesting in additional R&D to keep making new, special experiences.
Seems like a “duh”, old lesson in brand management, doesn’t it? Then why is this so rare? I think it is because those who learned have aged out, new selling methods have emerged (eCommerce), and younger brand managers think once again that they have figured out the secret to selling more stuff — just make more stuff and let all retailers who are willing try to sell it.
The secret they have not yet learned: their brand will become commoditized, profits will fall, and many brands will fail pursuing this new understanding. How markets work is never really new. What is new are the people who are new to profitable brand management.