A 2020 survey of supply chain executives identified demand variability as one of the top three challenges driving the business agenda. Meeting the challenge of demand variability is critical to supply chain optimization and to your business.
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. Demand variability is driven by several factors including:
- The complexity of demand in general
- Variation of demand across global enterprises
- A lack of visibility within and across supply chains
- Variable forecasting approaches at both the plant and customer level
- Variable lead times at both the plant and customer level
- Increasing inclusion of more suppliers and subcontracts
- Increasing inclusion of smaller suppliers
Demand Variability and the Bullwhip Effect
To address these factors and meet the challenge of demand variability, it is necessary for companies to identify and adopt new strategies and tools for forecasting, demand response, and operations management in manufacturing.
As supply chain practitioners know, demand variability at the Finished Goods level leads to the commonly known “Bullwhip” effect upstream. This effect escalates based on the number of echelons between end customer and the supply base. For example, if Original Equipment Manufacturers (OEMs) are directly connected to Tier 1 suppliers, the effect is minimal. However, if the end customer goes through distribution channels that rely on manufacturing companies who then rely on contract manufacturers and suppliers, the bullwhip effect could get very nasty.
Why Inventory Placement Matters
One way to minimize the multi-echelon whip lashes is to assess and position the inventory at the right place. Instead of dealing with end customer with upstream suppliers, follow the material flow.
If you are servicing the customer from stock, identify the closest replenishment point. Understand the inventory velocity, usage, lead times and coefficient of variation to determine the optimal inventory for that loop. Perform similar calculations for each of the echelons. What this does is converts multi-tier variability in to one tier at a time.
Turn Insights Into Action
Ultriva has built an architecture for this supply chain loops. Ultriva’s product modules like Collaborative Demand Portal (CDP) and Collaborative Supply Portal (CSP) benefit from this architectures, so our customers dramatically benefit by improving the service levels to their customers while minimizing the amount of average inventory they carry for Finished Goods and Raw Materials.
Interested in learning more? Contact us to see Ultriva in action.