Tuesday, February 03, 2009

Certainty of demand

In a demand and supply economy it is the interaction of both sides of the market that sets the price. Adam Smith's 'invisible hand' working with self-interest to ensure the market serves for all. He wrote about the self-interest of the individual but over time, non human entities were given the legal status of an individual and it has been the corporation i.e. companies that have taken up the self-interest mantel and almost made it their own.

While I find the notion of demand and supply economy a historical definition, lets keep with it for now. A corporation makes the goods and services for the demand side? Right? No demand equals no sales, no sales = no revenue, no revenue no cash to pay for wages, materials, energy costs etc. of creating the goods. There is risk and corporations have felt it right to minimise the risk and thus started extending their reach to the demand side and supported it with large sums of resources, cash to people. It is a straight forward logic, if we are taking on this risk, it would be better to have the probability of customer demand at 100%, or as close as you can get it.

New industries emerged, broadly called marketing and advertising and all support the goal of establishing demand. This involves the demand side receiving information for the corporation, how that is done is a topic all on its own. Let just say, the corporations are prepared to pay cash (to a level that keeps them profitable) to a value that will mean, what they make will be sold. Over time economies of scale, compound to produce larger volumes, goods tend to commodities and prices drop dramatically. The corporation make more profit so has more resources to spend on the demand side and for some aspects of life it would appear to be a complete take over of demand. It is a completely self fulfilling cycle and a triumph of self-interest.

Looking from the supply side for sure, but what about from the demand side? The demand side has benefited greatly, abundance of goods at commodity prices. That is a massive improvement from a pre-industrialized society. But corporation have gone past demand now. The self-interest model has no stop button. If the speed of turnover of goods can increase then supply can increase further, then more sales will result and we are off on another cycle. The demand side does not live life solely out of one corporation. Individual demand may use many corporation but much of life is still lived out with supply e.g. meeting with friends. But have no doubt that the supply side knows of the massive opportunities to get involved in those activities too. This is not surprising as the the supply side, while a legal individual is made up of human individuals. Each living life and it is no surprise their experiences of real life bring ideas and opportunities to their work. Entrepreneurs even have the vision to live a whole life doing this.

The blurring of demand and supply exists, I'd argue their is only demand. What is more, the certainty of demand is always going to be a holy grail chase for the supply side. Why put so much energy into that chase when with certainty of demand of the demand side is known exactly every second of every day? The demand side is far from networked let alone perfectly networked but the build out to achieve that started years ago, just watch as demand self-interest asserts itself to control the whole economy.

2 comments:

wsxwhx729 said...

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clive.boulton said...

No. Demand side is badly fragmented; to such a degree companies are still toying around trying to improve the MRP algorithm inside the four walls of supply chain, DDMRP the latest attempt to improve a 30-year-old standard. Concretely as more traditional companies follow Amazon online, matching consumer expectations for instant ecommerce shopping basket lead times. And in turn down stream demand chains become more globalized for least cost most carbon and also independent demand is interconnected in Asia or where ever is cheapest. Business reverts to building supply and blindly stuffing retail channels with inventory guesses and kicks of marketing and advertising campaigns to bring demand to supply. Well we are today with FMCG like sneakers, and electronics, perhaps even processed food, how unsustainable. A few forward looking companies, looking years out can see the writing on wall. Checkout @wardcunningham's work on the worlds smallest federated wiki. What I'm toying with is canonically folding and pubsub linking independent demand outside the four walls of companies to make demand more predictable or at least demand sensing.