Four best practices to address demand volatility

Inventory of clothes displayed in retail store

An enterprising toy manufacturer introduces a new product before the Christmas season. Before he knows it, demand for the new product shoots up. The manufacturer scrambles to hire more workers in its assembly line. But as output is just about catching up versus demand, one of the manufacturer’s key suppliers emails that he cannot deliver on time. With materials fast running out, the toy manufacturer finds an alternate supplier who can deliver the needed materials at the same quality. But as things seem to be settling down, the toy manufacturer is informed that his delivery-services provider doesn’t have enough trucks.

The toy manufacturer’s traumatic story is a common case in practically all industries. When demand becomes volatile, processes across the supply chain are challenged. If demand is not met, the firm may lose ground to competition who would pick up what the firm cannot serve.

Results of surveys of supply chain practitioners indicate demand volatility is a key business issue. Indeed, entry of new competitors, product and pricing initiatives of competitors, changing customer demographics and buying behaviors, and evolving new sales channels are some of the many reasons why demand becomes uncertain and exhibits a high degree of unpredictability. Coupled with seasonal factors (e.g. holiday seasons, school openings, etc.), the factors behind demand volatility constitute a major challenge for executives as they complicate the management of supply chains.

Failure to adapt to demand volatility leads to demand being unmet. Unmet demand results in lost sales, lost profit opportunities, and long-term loss in market share especially when customers switch to the competition.  Some measures are worth discussing to address demand volatility.

Strategic Inventory Build-Ups

In the ideal world, supply equals demand. However, in reality, materials have to be ordered and delivered, products manufactured, and then shipped to be made available at different locations. These processes have lead times and make necessary inventories between them. Inventories act as buffers to allow for the availability of goods to customers at a moment’s notice, especially when the total demand from these customers suddenly spikes for whatever reason.

The higher the demand volatility, the higher the inventory level required to meet customer orders all the time. When products have short shelf-lives with tight expiry dates, keeping high inventories may result in slow and non-moving products, which would cost companies in scrap or obsolescence.

Flexible Manufacturing Systems

Some companies opt to improve manufacturing flexibility to address demand volatility and avoid high inventories. Quickly changing over from one product to the next or scheduling variable lot quantities allows firms to adapt to shifting demand patterns. Moving towards higher flexibility may require radical changes in how machines and work-stations are laid out on the factory floor. In such cases, focus is more towards serving customer orders but at minimal impact on efficiency.

Responsive and Reliable Suppliers

A flexible manufacturing system can only be effective if inbound materials are made available on a reliable basis. Companies may require vendors to adopt a higher standard of delivery performance for both planned and un-planned materials requirements. While many suppliers have been successful in delivering at 95% reliability, a good number of vendors cannot react or respond quickly to un-planned surges in materials requirements. Many seemingly un-responsive suppliers do have the capability to respond to changes in materials requirements but traditionally low-tech purchase-order systems have made it difficult for some companies to obtain needed materials on a timely basis.

Demand-Supply Visibility

With new technologies and declining information technology (IT) data-storage costs, demand and supply information can be made available across the enterprise more so with those who have the functional responsibilities to make well-timed decisions. Present-day best-in-class companies not only share demand and supply information across the enterprise but across trading partners as well. Customers are informed on current and medium-term product availabilities while suppliers are given medium to long-term materials requirements plans. On top of that, customers and suppliers have developed systems to share billings-and-payables schedules as a means toward greater collaboration and as a way to remove roadblocks in the delivery of needed merchandise.

Demand volatility is a major issue for firms. Companies who are ahead of the pack see demand volatility as an opportunity to increase their lead in serving customer demand by employing measures such as those discussed above. It’s not easy but getting there may mean the difference in competitive advantage or simple stagnation.

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About the author

Jovy Jader

Managing Partner, Prosults Consulting LLP

Jovy is a supply chain consultant and speaker of Prosults Consulting LLP. His clients include multinational companies in the food, pharmaceutical, consumer goods, energy, and export industries. He is the author of Speed Kills…Your Competition “Driving Growth Through Supply Chain Excellence”, and has been a regular contributor to BusinessWorld. Jader was with Procter & Gamble Philippines and PriceWaterhouseCoopers, assisting companies across Asia in Supply Chain Management improvement projects. Jader holds MBA from the University of the Philippines and a BS in Chemical Engineering from Pamantasan ng Lungsod ng Maynila.

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