A demand waterfall is a graphical representation of an organization’s ability to satisfy its customers’ demands.
Demand waterfall provides a visual snapshot of how the purchase of a given product or service relates to the demand from that customer base.
Without taking into account the time lag between various levels of supply, it can also be used as a means of predicting future sales based on current sales and inventory levels.
Some marketers use the term “waterfall” because it depicts a potential downward trend in revenue if there is not enough demand at the lower levels to equate with higher levels of supplier capacity.
The idea behind a demand waterfall is that there are three parts:
- Volume – The level of production required by each customer.
- Capacity – The potentially available inventory (or other productive capacities such as manufacturing lines, assembly teams, or retail space) within the whole organization.
- Lead time – The amount of time it takes for a specific level of production to produce and deliver another unit to the next stage in the selling process.
Ensuring that these three variables are in the correct balance at any given time is critical for maximizing profits.