Luckily, your new equipment and new staff finally come online. But then, the nightmare part of this story sets in, as customer demand starts dropping. How can this be? Surely everybody loved you? Yes, but some of the loving has cooled off in the past few months, as your quality kept going down and delivery delays continued to go up. This was as a direct result of your firm's capacity shortfall when customer demand grew faster than your capacity could accommodate. Now that you have the capacity to serve your customers well, you discover that they have left you.

Fortunately, you haven't lost them all. So, if your finances can survive a sustained period of losses, while demand is smaller than your capacity to serve, there may still be hope. The customers who do remain are now served very well. Delivery delays are very short, and quality is fine. So, gradually, the word starts to spread once more that your business is a great one, and sales slowly start to increase again. Meanwhile, you try to shed any excess overhead as quickly as you can, though not necessarily your latest equipment and staff, just excess capacity. Again, these things take time, especially in welfare-state Europe. But, provided you do not go bankrupt during the process, there may be a brief moment where supply actually meets demand.

It is odd that classic economic theory starts with assuming equilibrium, because in my world, as well as in this example, equilibrium is the exception and not the rule. Just as you have finally been able to shed excess capacity, customer demand has grown so much that your delivery delays and quality start deteriorating rapidly again. You are ready for the next tumble on your roller coaster ride. As mentioned before, success can be hazardous for your health!

Stories like this one are likely to appear in the business press this year and next. But, the analysis behind it goes back to the sixties. In 1971, Professor Jay Forrester, the founder of the field of System Dynamics, published an article entitled "Market growth and under-investment" in the predecessor of the Sloan Management Review. In this paper, he described precisely the behavior and structure discussed above. Forrester's insights were based on his experiences with Digital Equipment Corporation, a high-tech company. But, just about any high-tech firm has a similar story.

The fundamental problem here is that changes in the supply capacity typically take longer to implement than changes in the behavior of the customer base. And, because of the perceived delays involved, decisions to change capacity always lag behind the real need to change capacity. As soon as there are more new orders per time period than there are orders shipped, called the book-to-bill ratio in many industries, backlog goes up and delivery delays increase over time. There is some lag time before customers start to get annoyed and leave. Moreover, it takes the company even longer to realize that capacity is inadequate. And then, when the company has decided that more capacity is needed, it takes quite some time to get this operational. High performance strategies will focus either on shortening these perceived implementation delays, or saying "No" to customers sooner, or a combination of both. That requires synchronizing sales and production, and in most companies, "Sales is Sales, and Ops is Ops, and never the twain shall meet." Indeed!

This article is the third in a series of eight articles by Akkermans about Supply Network Dynamics. The 3rd Wave will be described in the May/June edition of the Connector. To read the introduction to this series, click here.