How to Manage Demand Variability and Other Supply Chain Risks
Customer demand and sales will fluctuate, regardless of how well a business can advertise its products. However, by anticipating changes, companies can ready their supply chains to avoid negative repercussions.
With forecasting software, organizations can calculate their demand variability and ready internal operations to be able to adapt to emerging market trends.
What is Demand Variability?
Demand variability measures the variance in a business's customer demand. In other words, it calculates the difference between the company's expected outcome and the actual customer demand.
There are several factors that impact demand variability, including-
- The demand's complexity
- Variation of demand across the entire market
- Visibility into the supply chain
- Forecasting at both the business and customer level
- Lead times
- Inclusion of suppliers and distributors
- Size of the suppliers
These factors make demand variability one of the biggest challenges that companies throughout the supply chain have to tackle. When not handled adequately, demand variability can create significant supply chain disruptions.
For example, if a company expects a spike in customer demand, they may increase their inventory orders to maximize potential sales.
However, if the actual customer demand does not meet the prediction, the distributors, warehouse, and retailers are left with too much stock. This not only increases storage costs but also exposes the threat of creating dead stock.
On the other hand, if businesses experience an unexpected increase in customer demand, they have to scramble to find a supplier that can fulfill the order.
If this demand is market-wide, manufacturers may reach capacity and still not be able to satisfy orders in a timely manner. This creates a bottleneck further up in the supply chain, stalling sequential operations and elongating lead times.
5 Steps of Demand Variability
Demand variability management must be flexible to be able to adapt to sudden fluctuations. Businesses should also proactively try to minimize their demand variance by-
1. Maintaining Healthy Relationships with Suppliers
A company's primary suppliers should have full visibility into the projected demand so they can prepare their internal operations accordingly.
By establishing full transparency, vendors can ready safety stock, plan logistics ahead of time, and improve their responsiveness to customer requests. This makes it easier to maintain a smooth workflow.
2. Utilizing Alternative Supply Sources
Businesses are more equipped to handle unexpected influxes of customer demand when they have multiple suppliers on standby.
By only utilizing one key supplier, companies may not be able to secure critical inventory or reach capacity. Therefore, organizations should explore their vendor options.
3. Minimizing Lead Times
Extended lead times can result in frustrated customers and lost sales. Therefore, companies should reduce their lead times so they can respond quickly to changing demands.
4. Updating Inventory Policies
The three buffers of demand variability include inventory, time, and capacity.
By regularly updating inventory policies, businesses can optimize these buffers to minimize the negative consequences of demand variability.
5. Aligning Supply and Demand Management
By balancing supply and demand management, companies can quickly adapt their functions to the current environment, regardless of whether demand has spiked or dropped.
In order to find this balance, businesses need to assess their entire supply chain, from raw materials procurement to final distribution.
6. Implementing Demand Forecasting Software
Forecasting software uses machine learning to assess historical and current sales data to define customer demand trends. Integrating forecasting software with point-of-sale (POS) systems enables it to update the algorithms with each transaction to continuously improve accuracy.
With accurate forecasts, companies can anticipate demand surges months in advance, establishing a significant competitive edge over businesses that can't detect emerging trends.
Supply Chain Risks
Identifying supply chain threats enables businesses to minimize disruptions which could lead to lost sales. Generally speaking, there are two types of supply chain risks-
Internal Supply Chain Risks
Internal supply chain risks are easier to mitigate because they are within a company's control. The five subcategories of internal supply chain risks include
- Manufacturing Risks are caused by disruptions within internal processes.
- Business Risks stem from changes within personnel, management, communication, and documentation.
- Planning and Control Risks are caused by poor evaluations and planning, resulting in inadequate management.
- Mitigation and Contingency Risks stem from not having alternative solutions ready in case of emergencies, such as backup suppliers.
- Cultural Risks are caused by a company's neglect or inability to relay negative information to stakeholders. These types of businesses are typically unable to respond quickly to sudden changes in demand.
External Supply Chain Risks
External supply chain risks are harder to prevent as they reside somewhere else in the supply chain. The five subcategories of external supply chain risks include-
- Demand Risks result from an unexpected or misinterpreted change in customer demand.
- Supply Risks are caused by disruptions within the supply network, such as raw material procurement.
- Environmental Risks stem from factors completely outside of the supply chain, such as weather, economic changes, governmental regulations, and the social climate.
- Business Risks are caused by the financial state of organizations within the supply chain network, including the change in ownership of a primary supplier or management stability of a distributor.
- Physical Plant Risks stem from a supplier's facility maintenance and compliance to regulations.
While it is impossible to anticipate and diffuse all threats, learning the various types of supply chain risks enables businesses to optimize their management and improve their responsiveness.