Today’s global marketplace requires manufacturers to profitably respond to the dynamics of market demand in a timely manner. Due to the convoluted and often far-reaching nature of today’s supply chain, this is frequently more difficult than it seems. Pressure to cut costs, decrease inventory and raise profit margins make the process even more challenging. The end result is often a misguided effort to implement “more effective” demand-driven supply chain methods.
However, this approach is unlikely to maximize savings. Demand-driven supply chain guidance is a broken system, and no amount of precision will create greater dividends.
Manufacturers often operate on a forecast or plan for a “bucket” of time. These forecasts lead to lot sizes or economic order quantities that amplify an outcome known as the “bullwhip effect.” When actual demand varies from the forecasted plan over the course of the allotted time, the bullwhip effect creates large swings in inventory. In other words, small changes at one end of the supply chain have multiplying effects further upstream.
The bullwhip effect is primarily due to two factors. First, daily demand can be highly variable close to the customer’s point of consumption. And second, forecasts rarely consider the cost, capacity or time to produce and deliver the product (not to mention changeovers and sourcing cost, time and capacity).
Here’s a hypothetical example of this kind of demand-driven supply chain model: Based on input from sales, a customer sends a forecast to the manufacturer.
The manufacturer then consolidates this forecast with other forecasts from several customers, preparing its own composite forecast and sharing that with its contractors, suppliers and other players in the supply chain. In this scenario, the manufacturer is forced to carry substantial inventory (either owned by them or their suppliers) at each transaction point in the chain. These safety buffers ensure that stock-outs do not occur if the supplier cannot deliver on time or if there is a spike in demand.
In theory, with an accurate forecast, this system should work out well. However, reality reveals otherwise. Unforeseen variables divert real transactions from the
projected path, leading to stock-outs as well as significant excess stock throughout the supply chain.
It’s worth rewinding a bit here and returning to a more basic question of the objective of supply chain management. The goal is to source, make and deliver the product from the point of origin to the point of consumption in the least amount of time at the lowest cost. Given that goal, the two most important attributes of supply chain management are responsiveness to the velocity of product flow, and the ability to move products quickly and with agility. These attributes enable the transition from push-based replenishment to pull-based replenishment. To focus on these attributes, it’s vital to look to the channel toward the customer, the customer’s customer, or the end-user of the product.