How are Supply & Demand Relevant to Business Decisions Made by Management?

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In the global marketplace, most companies keep a close eye on key economic indicators, such as demand and supply, the employment rate and consumer sentiment. Delving into economic reports to understand what consumers want helps companies chart adequate strategies for long-term profitability. They also rely on these data to adequately plan manufacturing processes.

Supply

  • In economics terminology, supply is the amount of some product or service available to customers at a given point in time. There are various reasons why corporate management must pay attention to supply factors. For starters, manufacturing firms rely on raw materials and other inputs to adequately produce items. A change in available market quantities can adversely affect the company's material costs. If left unchecked, these charges could go up as time passes and momentum fades -- especially if no supplier is willing to provide goods at affordable prices. Besides production costs, supply considerations affect other corporate expenses. Salaries expense is a good illustration. If a business needs a specialized workforce to thrive and there's a shortage of the preferred skill set, the firm's overall labor costs could go up. Rent and office supplies are other areas where a shortage of goods or space may have a deleterious effect on corporate decision-making.

Demand

  • Demand is the amount of good or service a client is willing to buy at a particular price. Analyzing demand helps business heads make sound decisions concerning sales and production levels. In an economy in which investors clamor for more cost-cutting, company principals often put forward the operating imperative to get more for less. For instance, department heads can work with manufacturing supervisors to evaluate customer needs, assess ways to lower production charges and set policies to spur sales without hurting client loyalty.

Internal Analysis

  • A company's management reviews internal processes that are essential to the way the firm does business and makes money. These mechanisms run the gamut from financial accounting and reporting to human resources management and corporate governance. Senior leadership pays attention to these work streams to determine how supply and demand may affect the firm's operations, as well as whether the business can effectively compete in the long term.

Financial Implications

  • A clear understanding of supply and demand -- the perennial factors that shape the economy -- enables a business to tailor a strategy that can meet its immediate operating needs and fulfill customer requirements. Adequately navigating this economic equation improves the bottom line, as the company can reap more income from higher sales. This practice also helps improve the firm's solvency-and-liquidity profile, which financial analysts gauge by reviewing the corporate balance sheet and cash-flow statement.

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