Effective supply chain management is increasingly being recognized as a key driver of shareholder value, because it impacts all of the levers that influence that value—costs, customer service and revenues, and asset productivity.

For that reason, many companies now are paying greater attention to supply chain management. But there is one area I believe they consistently overlook, and that is supply and demand balancing.

Supply and demand balancing is one of the most underplayed levers for achieving superior financial performance and creating shareholder value. Too many companies do a poor job of balancing supply and demand. It's a shame, because those companies leave a lot of dollars on the table. Effective supply and demand balancing is critical for maximizing profitability and achieving strong productivity of both fixed assets and working capital.

Five business practices are essential for successfully balancing supply and demand:

1. A rigorous planning process. This should include both long-term and short-term planning. The long-term process sets aggregate capacity and resource requirements, usually in monthly buckets over a 12- or 18-month period. This forecast should be revised quarterly or on a rolling monthly basis. The short-term planning process matches actual and forecast demand with machine-level production capacity. I am seeing many companies carry out short-term planning with increasing frequency—at least monthly, and often on a weekly or daily basis.
2. An "owned" forecast. A company must have a demand forecast that is "owned" by senior marketing and sales executives. The top-performing companies establish a best estimate of anticipated demand, and do not simply plug in numbers to meet financial projections. They also operate with a single forecast, rigorously monitor forecast errors, and hold sales and marketing accountable for those errors.
3. SOPMs. Leading companies conduct a formal "sales and operations planning meeting" (SOPM), where sales, forecasts, pricing and promotional plans, supply constraints and plans, and inventory positions are reviewed and reconciled. It amazes me how many companies either do not conduct or only have a perfunctory SOPM. This is a formula for disaster.
4. Collaboration and visibility. The ability to have visibility and carry out collaborative planning up and down the supply chain, with both suppliers and customers, is essential for success. Having both of those capabilities allows companies to have more accurate demand estimates and a more responsive supply base.
5. Shaping demand. We are seeing more companies "shaping demand," that is, they are using pricing to shift demand to products they can make or have in inventory. Clearly, companies want to make what their customers want to buy, but ultimately, they have to sell what they make. The top-performing companies use pricing as a key weapon in balancing supply and demand, and they rely on tight, cross-functional collaboration among marketing, sales, finance, operations, and other functions to make it happen.

By implementing these practices, which enable effective supply and demand balancing, supply chain managers can have a huge and beneficial impact on their company's profitability, inventory levels, customer service, and asset productivity.