As businesses grow, we often experience times of plenty and times of drought. The balancing of these â€˜feast or famineâ€™ cycles is important to growing your business while steadily increasing profitability and business value. Early on in a companyâ€™s startup phase, sales can be slow in coming, and come in bursts and corresponding dry spells. This is part of early-stage business that every business goes through. We do our best to anticipate company growth, but reality often throws us curves. Either it takes too long to get enough sales to be profitable, or we are swamped with orders we cannot fullfil. Neither of these is what we set out planning for. As a more mature business, these cycles have a less dramatic effect, but must be anticipated and planned for. Cycles in business and nature are a given. So, what can a business owner do when these cycles occur?
Any good business plan starts with estimating anticipated sales through forecasting. Forecasting is an art form, and yet all forecasts are wrong. Good forecasting methodology can predict business seasonality, continued growth at historical levels, and potential sales. They do help us plan based on what we have seen in the past, or what we expect to continue in the future. But what happens when things donâ€™t continue as before? What happens if we have a world-wide event that shuts down the global economy? What happens if a hurricane, tornado, flood, drought, or alien invasion hits our region? The last couple of years have alerted us to the potential impacts of such enduring and global events.
Backlog is defined as the work we have sold but have not executed.
This could be due to constraints on capacity or resources.Â It could be because of scheduled delivery to a larger project.Â It could be that your supply chain is not able to fulfill your raw material or parts needs.Â Whatever the reason, this backlog should be managed with intentionality.Â A lack of a healthy backlog can cause starts and stops in your operations that can cost you money. Large parts or raw material inventories are a drain on your capital. Â During a drought, you may have idle resources that are not easily or quickly â€˜scalable.â€™Â In these current times, employee retention and hiring are serious issues having to be addressed with new and creative methods.Â Optimum operational efficiency is obtained through managing â€˜flowâ€™ through the operations by equalizing capacities, minimizing material travel, eliminating waste and maximizing both human and capital equipment utilization.Â These optimum flows are built by a solid forecast and involve investing in capital equipment and human resources.Â These processes are not operating at optimum output when they are slowed down or stopped.Â Â This is also true of the opposite extreme where your resources are being stretched to the limit to meet demand.Â If this is â€˜temporaryâ€™ and does not turn into the â€˜norm,â€™ this works for a time.
Having too large of a backlog can indicate a lack of capacity to meet demand.Â This increase in demand could be a result of the natural â€˜cyclesâ€™ that all industries face.Â If it has been adequately planned, the ebbs and flows can be balanced out. Â Production and Operations can then deliver on a more consistent schedule with predictable efficiency. Â As demand continues to increase over time, additional capacity for fulfillment must be considered.Â This is not usually something that can happen overnight.Â It requires strategic decisions and capital investment.
So, how does a savvy business owner deal with these cycles and maintain a healthy backlog?
First, â€˜healthyâ€™ needs to be determined for each business. For some businesses that have months or years of backlog due to construction schedules, this could be considered â€˜healthy.â€™ It would not be considered healthy if you have months or years of product that you need to produce and might lose customers to alternatives if you canâ€™t deliver within customer expectations. Each business needs to determine what their â€˜healthyâ€™ backlog should look like. The ideal â€˜healthyâ€™ backlog should balance out the cyclical or growing demand with more metered operations and growth. This means that a business model that either expands or contracts with demand or seeks to consistently meet the demand within customer expectations.
The symptoms of not having a healthy backlog can be recognized and addressed. One of the most obvious symptoms is human resources that are idle, or not producing at capacity due to lack of backlog. This can be seen in Operations and Production KPIs. This can also be seen in constant â€˜stopsâ€™ and â€˜startsâ€™ in your operations. The other end of this spectrum is having too much overtime, that can cause burnout in your resources, and a feeling like they will never â€˜catch up.â€™ Most employees appreciate knowing they are accomplishing their mission, producing the expected results and not feeling overburdened for extended periods of time.
Another symptom to look for is orders being canceled due to a lack of delivery based on customer expectations. This is an indication that customers are not willing to wait on your product or service and have either gone to a competitor or resolved the need themselves. This can be due to a cyclical surge in demand, or possibly a growth surge that is clearly a trend. Knowing the difference in these two circumstances helps you decide which approach to take.
Temporary demand spikes can be fixed with a season of â€˜overtimeâ€™ and potentially sub-contracting to catch up with overall demand. If this goes on longer than a couple of months, it may be time to consider other options to meet the demand. This may require hiring additional staff or investing in additional capacity. This later approach should be reserved for ongoing demand growth and not just to meet temporary or seasonal surges in demand. A company that regularly has these seasonal or temporary surges should consider seasonal or part time labor to overcome the temporary demand. By hiring too quickly, you could have increased payroll costs after the demand surge is satisfied, resulting in decreased gross profit. But you must be careful not to send a message to current and potential employees that you are not committed to long term employment.
Backlog is good for any business. However, too much or too little backlog could indicate issues that need to be addressed. The amount of backlog is not as important of the cause of the backlog. As mentioned previously, sometimes backlog is part of the cycle. You need to discern if the backlog is caused by a temporary cyclical condition or a growth trend that will continue to require additional capacity. So, given some tools to determine the backlog and its origin, business owners can plan and adapt to these needs with the appropriate approach.