Building a Dynamic Supply Network: Responding to Consumer Demand Volatility

Jovy Jader // Uncategorized

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January 10, 2018  

2017 was a barometer of how company supply chains performed. Consumer good firms in North America built up inventories and logistics capabilities, which resulted in the best sales results in years. Global shipping lines cut costs but balanced the reductions with investments in large ocean vessels, which resulted in higher than expected profits. Asian firms who decided to stay conservative by just keeping cash in banks did not experience significant growth.

Firms are optimistic about 2018. But they are also cautious. While international ports are experiencing higher levels of traffic, companies are wary about limited transport and storage capacities, higher freight prices, and erratic commodity prices.

The biggest concern, which really hasn’t changed, is demand. Executives continue to worry about out-of-stock or having too much inventories. And they worry even more as firms’ supply networks are more sensitive than ever to demand volatility. While supply networks could efficiently serve demand during normal times, many may not be dynamic enough to adapt to volatility. This puts firms at a disadvantage especially when demand swings occur which can result in lost revenue opportunities or getting stuck with too much stock in storage.

There are many factors to consider in building a more dynamic supply network. Some of these are:

Customer Expectations

With more products and less storage space, customers expect firms deliver at small lot sizes and more frequently. In the grocery industry for example, 2 to 3 deliveries per week is not uncommon.

Demand Sensing & Communication Processes

Firms that focus on capturing actual customer demand would be better off than those that rely solely on forecasts. Whether it be by linking information systems or simply having sales representatives work with key accounts, firms who become familiar with their customers’ needs can plan their responses for a more efficient replenishment and delivery process.

Procurement & Manufacturing Responsiveness

How responsive and agile one’s procurement and manufacturing systems are would be a major factor in how well a firm can adapt to demand as sensed and communicated from the trade. Some firms that opt to build smaller plants versus large production factories have been successful in becoming more flexible in meeting customer needs especially if the facilities are located nearer to customers. This is however still a controversial issue as the costs to sustain these lower-scale facilities can outweigh the benefits already derived from larger-scale factories.

Distribution Center Capacity & Location

Firms that locate storage facilities close to customers have a better service advantage. Space determines how many facilities would be needed, not in how big the facility should be. This is what many firms have learned in 2017. Companies have realized that there is a justifiable rate of return for the higher lease expense of smaller depots versus the higher transport cost of large warehouses placed far from customers.

Transport Capacity

Firms often pre-contract delivery vehicles from 3rd party providers to buffer against peak demand swings from customers. Similarly, big firms reserve space in inter-island shipping vessels to ensure uninterrupted deliveries to the Visayas and Mindanao regions. Knowing how many vehicles to pre-contract and how much interisland shipping space to reserve requires planning similar to how many storage facilities are needed and how much demand is anticipated.

Procurement & Manufacturing Responsiveness

How responsive and agile one’s procurement and manufacturing systems are would be a major factor in how well a firm can adapt to demand as sensed and communicated from the trade. Some firms that opt to build smaller plants versus large production factories have been successful in becoming more flexible in meeting customer needs especially if the facilities are located nearer to customers. This is however still a controversial issue as the costs to sustain these lower-scale facilities can outweigh the benefits already derived from larger-scale factories.

How much finished products to stock is a contentious topic. For products with short manufacturing lead-times, companies could opt to keep inventory on raw materials. Thus when demand swings upwards, for example, firms can quickly convert the raw materials into finished products. For items with long manufacturing lead times, firms would need a consistent Sales & Operations Planning (S&OP) process to determine the right inventory levels needed to respond effectively to demand.

Meeting customer demand is a continuing challenge with most organizations having to go up a notch higher in responsiveness in the wake of greater demand volatility. Building a dynamic supply network that is agile enough to respond to large swings in demand would entail a superior understanding and anticipation of customer demand patterns, frequent alignment on demand numbers and generation activities across the organization, real-time capture and communication of customer demand and strong collaborative partnerships with 3rd party warehouse and transportation providers. Best in class companies are way ahead in all these.

About the Author

Mr. Jovy Jader is a Management Consultant and Regional Speaker on Supply Chain Management. He has directed and implemented Supply Chain Management projects both local and international which have resulted to company-wide improvements in revenue, working capital, total cost, and service levels. Mr. Jader was formerly with Procter & Gamble Philippines and Coopers & Lybrand/PricewaterhouseCoopers.

Jovy Jader

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