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Demand Volatility in SCM

Demand volatility is a reality in many industries, from Discrete Manufacturing to Process and Defense industries. Not only are retailers serving end consumers facing volatile demand, but this volatility is being passed on to manufacturers and distributors at different stages of the industry value chains. Many factors contribute to demand volatility, including increased customer choices, product customization, rapid technological improvements, global competition and upstream supply fluctuations. From High Tech to Retail to Chemical industries, this is a challenge faced by companies across all verticals. Managing volatile demand in a cost effective manner can lead to significant benefits for a company from lower supply chain costs to improved customer service levels. More importantly, managing volatile demand efficiently can be a huge competitive differentiator for companies.

Supply chain processes were traditionally designed to be push-driven. The transition to becoming pull-driven or demand-driven is slowly occurring in many industries. Managing volatile demand efficiently in a demand driven environment is a significant challenge and requires companies to employ robust supply chain strategies. Often the focus tends to be on one area of the supply chain (e.g., inventory optimization) without consideration of all aspects of the supply chain, resulting in sub-optimal results. In this paper we outline comprehensive supply chain strategies that companies can adopt to manage volatile demand efficiently.

Strategies to manage volatile demand efficiently include:

  • Supply Buffer Management — Inventory Buffers — Capacity Buffers
  • Cycle Time Reduction Strategies
  • Postponement Strategies
  • Collaborative Processes

Supply buffer management includes the use of various buffers to manage the volatility in demand. These include inventory buffers and capacity buffers.

Inventory Buffers: Theoretically speaking, the best way to manage volatile demand is to build a lot of inventory. If you have a high enough stock of inventory, all fluctuations in demand are absorbed within the inventory. This was the traditional approach maintained by companies wherein sufficient stock was built ahead of time. But, building up high inventory levels takes up supply chain resources, cost and time, and is not feasible in today’s environment. The situation becomes even more complex in cases where products have very short lifecycles and there are high obsolescence costs such as in the High Tech industry. In such cases, maintaining high inventory levels can be disastrous for companies.

While maintaining high levels of inventory can be expensive and retaining low inventory levels can negatively impact customer service, a middle ground can be found by building carefully planned inventory levels. This right balance of planned inventory buffers (safety stock) can be designed to cushion most of the shocks from the volatility in demand. The challenge is determining the right level(s) of the supply chain (finished good, sub-assembly or component level) at which safety stock should be maintained, the right locations at which to maintain inventory and the right quantities. By planning these effectively, companies can significantly improve their ability to respond to volatile demand in a cost-effective way. Several companies are embarking on implementations of inventory optimization solutions which analyze a company’s demand patterns and supply chain processes and determine the appropriate inventory levels to maintain across various locations of the supply chain.

Capacity Buffers: A more attractive alternative to inventory buffers in many industries is the use of capacity buffers. Through internal or external resources, capacity buffers provide more flexibility to companies to manage unexpected variations in demand. External subcontractors are increasingly playing the role of providing buffer capacities in several industries. Capacity buffers can be used to manage unexpected surges in demand not only for unplanned demand but also for planned demand such as with an urgently planned promotion to counter a competitor’s promotion. Capacity buffers also come at a cost and the tradeoff between the cost of maintaining buffers and the cost of missing service targets needs to be carefully evaluated before selecting the option to use capacity buffers. In addition, use of capacity buffers through subcontractors requires the use of strong partnership approach with sufficient quality measures implemented to ensure that subcontractors can meet the quality standards of the company. In industries such as semiconductor the practice of maintaining capacity buffers through the use of subcontractors has become increasingly prevalent — given the short product lifecycle, this practice has proven to be highly critical for semiconductor companies to manage volatile demand.

Cycle Time Reduction Strategies: Reducing total supply chain cycle times is critical to speed up the flow of information through the supply chain. Companies with shorter cycle times can transfer information quickly across the supply chain thus responding faster to changes. This improves the ability of companies to respond quickly to changes in demand. Total supply chain cycle time is the cumulative sum of the physical cycle time (production time and transportation time) and planning cycle time across the supply chain — strategies to reduce cycle time should consider both these components of cycle time. Lean manufacturing initiatives have been proven to help companies reduce cycle times by eliminating non-value added activities in the supply chain. Planning cycle time can be reduced by employing advanced planning solutions which can automate several plan generation activities and also provide analysis capabilities to help planners quickly make decisions. Use of constraint based planning approaches, which are embedded in most advanced planning solutions, can help companies identify and resolve bottlenecks ahead of time thus helping reduce cycle time.

Postponement Strategies: Strategies to postpone production include shifting from MTS (Make-to-Stock) production to ATO (Assemble-to-Order) production. By retaining inventory at a sub-assembly level and assembling product only when a firm customer order is received, companies achieve more flexibility — this is applicable in cases where a sub-assembly (or sub-assemblies) can be used to make multiple finished products. Such a shift enables a company to be more flexible and better respond to changes in demand. Companies across several industries are already evaluating such a shift as part of their overall supply chain strategy. However, a shift from MTS to ATO strategy may not be the right strategy for all companies. The decision to implement a postponement strategy should be based on careful consideration of a company’s supply chain characteristics such as commonality of sub-assembly products, length of production cycle times, customer lead time expectations etc. While such a strategy shift can significantly improve a supply chain’s performance in its ability to respond to changes in demand faster, implementation costs could be a deterrent. Shifting a company’s strategy from Make-to-Stock to Assemble-to-Order can be very costly to implement since it requires changes to supply chain activities (production, transportation etc), processes and enabling systems.

Collaborative Processes: Responding quickly to changes in demand requires fast information flow not only within a company’s four walls but also with a company’s suppliers and partners. Collaboration with customers enables companies to receive demand information from customers sooner and more frequently thus enabling them to respond faster. Similarly, collaborating with suppliers enables a company to send forecast data to its suppliers faster, enabling the suppliers to plan their supply chains and respond faster to demand changes passed on. Establishing collaborative processes with suppliers is especially critical for companies for whom a significant part of the supply chain is outsourced. Several companies are embarking on implementing such solutions to enable collaborative processes with their production, logistics and distribution partners. Collaborative technologies enabled by the Internet can help companies across the globe share information within a matter of seconds. Visibility to supply chain events can be transferred to all supply chain partners, thus helping them all work together to achieve the goals of efficiently meeting customer demand.

In conclusion, while demand volatility is a reality faced by companies across many industries, by employing the right supply chain strategies companies can efficiently handle volatile demand. Key supply chain strategies required to manage volatile demand are outlined in this article. All strategies outlined here may not apply to all companies — selection of the right strategies to adopt would vary. Adoption of the strategies should be based on a careful consideration of supply chain attributes, supply chain costs, competitive considerations and implementation costs.

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