Demand variability: 5 action steps to take in a time of crisis
COVID-19 took the world by complete surprise. The pandemic has had a profound and disruptive impact on the world economy and has plunged global supply chains into uncharted waters once more. It is a typical ‘black swan’, an unpredictable event with potentially serious consequences.
A unique attribute of this crisis that sets it apart from others in recent years, however, is its universal effect on both demand and supply. Businesses and consumers alike are reshuffling their activities and expenditures, triggering wild changes in demand. Healthcare products and routine consumer products are both experiencing sharp, unexpected demand spikes as consumers go into panic buying mode, owing to regional lockdowns and fear of shortages.
Conversely, many consumer durables and industrial equipment providers are experiencing a sharp decline in demand, mainly because of a slow-down in global transportation, and a shortage of labor owing to health concerns. If not properly managed, these variations can mean increased costs, decreased revenues, increased risk and reduced profit margins.
The challenge of demand variability
Demand variability is listed consistently as one of the top challenges affecting effective supply chain management at all maturity levels. Volatility, uncertainty, complexity and ambiguity are the four major causes of demand variability. For many supply chain leaders, this presents the enormous and potentially costly challenge of dealing with what’s known as the ‘bullwhip effect’.
When major swings in inventory occur from panic buying, the impact of this sudden demand magnifies as it moves upstream in the supply chain. Empty store shelves trigger even more panic buying, retailers lose potential sales, distributors scramble to determine who should get what of a particular product, and manufacturers are swamped with these sudden, unexpected demand spikes.
So when the market signals a sharp increase in demand, especially in times of global crisis, supply chain leaders’ profitability depends on being informed and agile enough to forecast and fulfil inventory in the right places, at the right speed, and at the right time. Unfortunately, with something like COVID-19, even the best-laid contingency plans may prove inadequate.
Here are five short-term actions to improve your demand variability management plans in this time of uncertainty:
1. Maintain transparent, proactive relationships with your suppliers.
Ensure your key suppliers have full visibility in your projected demand, preferably in real-time, to secure inventory for building safety stocks. Having good visibility of both demand and supply enables an organization to manage demand signals more accurately, respond to customer requests faster, and smooth the effects of demand variation.
2. Activate alternate sources of supply.
If you have multi-sourced key inputs, move quickly to activate secondary supplier relationships and secure additional critical inventory and capacity. Explore potential opportunities to establish shared resource pools for raw materials inventory.
3. Reduce lead times.
Long lead times increase the probability of a bullwhip effect, so find ways to reduce lead time from sources of supply. It also allows you to react quickly to changing demand.
4. Update inventory policy and planning.
While timely review and proactive adjustments of the three buffers – inventory, time and capacity – ensure better handling of demand variability, most companies won’t have inventory buffers for the magnitude of disruption caused by the COVID-19 epidemic. Therefore, consider how you will refine your inventory strategy to mitigate the risks of potential supply shortages.
5. Align supply and demand management.
Balancing and aligning demand management with supply management enables both functions to quickly adjust to the new reality, whether it’s a sudden demand surge or unexpected supply disruption.
Demand volatility triggered by macro events such as the coronavirus crisis affects every link in the global supply chain – from raw materials procurement to setting safety stock levels to planning logistics. A knee-jerk reaction for many companies in times of supply chain disruption is to use a ‘firefighting’ response to meet service levels.
Being ready for everything, however, means you can effectively respond to critical events to eliminate costly reactionary activities in times of disruption. It’s therefore vital to make sure that all the pieces of your supply chain puzzle fit snugly together.
When we first referred to ‘black swan’ events in our white paper Of black swans, confirmation bias, and the O-ring theory: Why cynics can help you build supply chain resilience, little did we know that the next global event was lurking just around the corner.