Profit projections may improve if another parameter is relaxed, but one must consider the impact of all aspects of the relaxed parameter on profits. For example, if customers are lost because response time is too slow, then the profit projections may be artificially high.
Average fill rate can be improved by carrying more inventory in order to reduce stock-outs. The optimal balance must be achieved between inventory cost and lost profits due to stock-outs.
Response time often can be improved at the expense of higher overall costs. As with fill rate, the optimal trade-off should be found. If response time is sacrificed in order to achieve higher profits, sales forecasts may have to be modified if the elasticity of demand with respect to service is significant at the chosen service levels.
Capacity utilization should be high enough to reduce overhead sufficiently, but not so high that there is no room to grow or to handle fluctuations in demand. Problems often are encountered when capacity utilization exceeds 85%. Lower capacity utilization in effect buys an option for increased output in the future. Higher capacity utilization decreases downside risk since costs are reduced, but also limits the upside gain if future demand should outstrip supply.
Make-To-Order
To reduce inventory and increase flexibility, some firms have turned to make-to-order production systems. Some companies can reap great benefit from such a system. Make-to-stock is better for other companies, such as those whose customers are not willing to wait for the product.
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