5 key steps to strengthen demand variability management
- Disruptive world events such as the COVID-19 pandemic and Russia-Ukraine war have caused significant fluctuations in the demand for certain products or raw materials
- Demand variability is one of the top three challenges driving the business agenda
- These five actions can improve your demand variability management plans in times of uncertainty
Demand variability during the pandemic
During the COVID-19 pandemic, healthcare products and routine consumer products both experienced sharp, unexpected demand spikes as consumers went into panic buying mode, owing to regional lockdowns and fear of shortages.
Conversely, many consumer durables and industrial equipment providers experienced 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 cause increased costs, decreased revenues, increased risk and reduced profit margins.
Demand fluctuation during the Russia-Ukraine war
The ongoing Russia-Ukraine conflict has created trade and transportation disruptions which cause delays, shortages and increased costs in the supply chain. For example, Ukraine is a major producer and exporter of sunflower oil, wheat, corn and barley, but the war with Russia has caused reduced food outputs. Companies have been struggling to meet customer requirements for these products, resulting in demand variability.
The conflict has also impacted economic stability and inflation, which impacts consumer purchasing power and behavior. Companies have become more cautious and some have altered their procurement strategies. This type of behavior has caused fluctuations in demand for certain products or raw materials.
How significant is the challenge of demand variability?
Demand variability is one of the biggest challenges affecting companies at all maturity levels and throughout the supply chain. According to a survey of supply chain executives, demand variability was identified as one of the top three challenges driving the business agenda.
How can supply chain leaders deal with demand variability?
To meet the challenge of demand volatility, companies need to adopt new strategies for forecasting, demand response and manufacturing operations management.
When the market signals a sharp increase or decrease in demand, especially in times of global uncertainty, 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.
Here are five actions to strengthen your demand variability management plans:
|1. Maintain transparent, proactive relationships with your suppliers|
|Ensure your key suppliers have full visibility into 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 multisourced 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 world events. 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 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.
Global disruptions are inevitable and will continue into the future. Avoid costly reactionary activities; instead, plan for uncertainty in demand, and adopt new strategies that help to manage and mitigate the risks.
What is demand variability?
Demand variability is a measure of how much variability there is in customer demand. It is the difference between what one expects to happen and what actually happens.
Which factors influence demand variability?
Major causes include volatility, uncertainty, complexity and ambiguity. More specifically, factors such as external events, customer preferences, competition, seasonality, trends and promotions impact demand variability.
What is the bullwhip effect?
For many supply chain leaders, demand variability 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, for example, 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.