In a fiercely competitive global market, demand fluctuations pose on-going supply chain risks and require companies to do more than just invest in better forecasting tools to avoid inventory understock, overstock, and supplier capacity risks. While there are numerous sophisticated tools and algorithms for demand forecasting, more companies are realizing the importance of a supply chain’s design in determining its agility and demand-responsiveness. Consumer demand is volatile and statistical forecasting models have their fundamental limitations. Thus, the question is: how do resilient companies facing uncertain demand organize their operations to respond optimally to unanticipated fluctuations in demand? In this post, we check out three steps your organization can take towards a more flexible, agile, and demand-responsive supply chain.
1. Utilize ‘Range Forecasting’
Since forecasting for a single demand figure can be unwieldy and inaccurate, more resilient organizations are turning to forecast a range of potential outcomes as a way to prepare for changing market conditions and increase supply chain flexibility. Range forecasts can be used to inform supply contracting terms and contingency plans. By establishing a range of uncertain yet potential outcomes, a company gets a better idea of how to respond when demand is on either the high or low end of the range. With a fleshed-out range forecast, companies can be confident that they will sell at least the low end of the range while being as prepared as possible to sell at the high end of the forecast range.
Range forecasting is useful for more than just modeling future demand volume. A company can develop a range forecast for future supply volumes and prices for its variety of products as well. Let’s suppose Company X compiles all the possible outcomes for a new product, then assigns probabilities to each possible outcome that has more than a 15% likelihood of occurring. Company X can then develop contingency plans according to these outcomes. By utilizing range forecasting as such, Company X’s planning effectively covers nearly 80% of the possible outcomes, thereby increasing its flexibility and resilience.
2. Establish Flexible Supplier Contracts
Companies can use range forecasts to establish flexible contracts with their suppliers and manufacturers. In addition to aiding process integration, flexible contracts spell out the range of acceptable supplier performance and grant a company the flexibility to ramp production up or down as demand fluctuates.
Flexible contracting allows companies to specify to their suppliers the amount of time it should take for the supplier to ramp up production to meet demand. For example, a company can embed flexibility in its contract by specifying that its suppliers should be able to ramp up production by 50 percent within two weeks and by 100 percent within a month’s notice. Contracts with this level of specificity encourage the supplier to think in terms of multiple demand scenarios.
3. Implement Strategic Multi-Sourcing
Multi-sourcing is a strategy whereby an enterprise chooses to procure a certain component/material from multiple, different suppliers. Unlike single-sourced and sole-sourced scenarios which can be prone to bottlenecks and diminished flexibility in responding to demand fluctuations, companies involved in multi-sourcing can spread demand across numerous suppliers that together would collectively have more capacity. Multi-sourcing leverages the respective strengths and competencies of supply chain network partners to achieve greater responsiveness to market needs.
With an appropriate multi-sourcing strategy, companies can prioritize suppliers according to different stages of the demand range forecast and activate those suppliers when needed. Let’s say Company X manufactures computer monitors at two different plants, one in Calgary and one in Thailand. While its Calgary plant is more flexible, speedier, and closer to the market, the Thai plant has lower manufacturing costs. Company X may assign its more predictable, high-volume manufacturing to the Thai plant while reserving the Calgary plant for the uncertain segment of the demand range. The Calgary plant could be used to satisfy temporary demand surges and be used during a particular product’s end-of-life, a time when demand begins to dry up and grow more uncertain.
4. Automate Supply Capacity Visibility and Analysis
Supplier Capacity Management tools may provide a proactive capacity management system to ensure you have the necessary supplier capacity at a part-level to meet fluctuating demand forecasts. The first step is to map your supply chain and survey suppliers for capacity information (e.g. total capacity, line capacity, allocated capacity, etc.). Analytics on data collected can then focus you on high-risk suppliers and parts based on risk thresholds you define, while alerts, mitigation workflows, and complimentary event monitoring services may facilitate on-going capacity management excellence.
Conclusion
Demand variability and inventory planning are fundamental challenges facing supply chain operations and require strategic supply chain design initiatives. While too much product equates to high inventory carrying costs and product value depreciation, too little inventory can mean lost sales and customers. Considering the limitations and inaccuracies of conventional statistical forecasting models, companies can minimize forecasting errors by designing more responsive and agile supply chains through range forecasting, flexible contracting, strategic multi-sourcing, and tools to gain visibility to supplier capacity and manage risks in a more proactive and responsive way. While the aforementioned steps are by no means an exhaustive list of the ways a company can foster a demand-responsive supply chain, they bolster an organization’s strategy to ensure supply is synchronized with the peaks and troughs of demand.
