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.