How to Meet the Challenge of Demand Variability in Your Supply Chain
A 2010 survey of supply chain executives identified demand variability as the biggest challenge. Five years later demand variability remains at the top of the list – EFT’s 2015 Chief Supply Chain Officer Strategy Report identified demand variability as one of the top three business challenges driving the supply chain agenda. Meeting the challenge of demand variability is critical to supply chain optimization and to your business.
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
To address these factors and meet the challenge of demand variability it is necessary for manufacturers to identify and adopt new strategies and tools for forecasting and demand response.
As we all know demand variability at the Finished Goods level leads to the commonly known “Bull Whip” effect upstream. This effect escalates based on the number of echelons between end customer and the supply base. For e.g. if the OEMs are directly connected to Tier 1 suppliers, the effect is minimal where as if the end customer goes through distribution channels who then rely on manufacturing companies who then rely on contract manufacturers and suppliers, the bull whip could get very nasty
One way to deal with this situation is to assess and position the inventory at the right place to minimize the multi-echelon whip lashes. 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.
Ultriva has built an architecture for this supply chain loops. As Ultriva’s product modules like Collaborative Demand Portal (CDP) and Collaborative Supply Portal (CSP) benefit from this architectures, 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.
Similar methodology is being promoted by DDMRP council as well. To get a better understanding on how the supply chain loop driven architecture reduces the effects of demand variability, contact us and we will provide with white papers and case studies.
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