Jeremy Tancredi, partner and leader of the Supply Chain Practice of West Monroe, recalls the plight that merchandisers found themselves in when they responded to a surge in demand during the pandemic, only to be left with excess inventory and capital equipment when it was over.

Artificial demand happens when an anomalous event such as the COVID-19 pandemic triggers a surge of purchasing that is unsustainable over the long term. That event caused many sellers to adopt “a rosy outlook that [demand] would continue when things stabilized,” Tancredi says. “So they ramped up operations and their supply chains to meet it, and now they’re stuck holding the bag on demand that’s no longer there.”

Many businesses responded by building up inventory, which they were subsequently forced to discount heavily or liquidate to work off excess stock. But the more serious problem occurred in cases where manufacturers acquired new machinery to increase production, then saw those assets go unused when the surge was over.

Sellers were caught in an impossible bind. Either they had to purchase the assets needed to support a temporary level of higher production, or take no action and possibly lose customers in the long run. The question facing one apparel printing company, as posed by Tancredi: “Even if I realize this may not last forever, is it worth the cost of losing out on that revenue, even if I have to buy expensive printing machines to capitalize on this short-term profit?” 

When demand plunged, some companies simply got rid of the extra equipment and took the loss. But the more creative ones sought to broaden their customer base. Some that had previously restricted sales to within certain regions took steps to expand their presence over a wider network. In the process, they acquired new revenue streams by making use of those “excess” assets.