The Increasing Volatility of Consumer Demand

Jovy Jader // Uncategorized


June 14, 2018  

In a recent Supply Chain survey we conducted in the Philippines, 2 out of 3 respondents cited increasing demand volatility as their number one challenge in managing their supply chains. This strengthened our hypothesis that one of the biggest opportunities to business improvement lies in the superior understanding of buying and consumption patterns of consumers.

Demand volatility is a standard attribute of the global marketplace.

Modern-day consumers are consistently presented with a comprehensive array of products and services and have become more aware of the various choices to satisfy their needs. Moreover, they have become more value-conscious with some anticipating the regular markdowns employed by manufacturers and brand owners to quickly move old inventories to make way for new products. Consumer brand loyalties have short life spans as product features continue to improve and no longer provide a competitive differentiation except in the attractiveness of their innovations.

These consumer-buying behaviors are further reinforced by the entry of global players in the domestic market. These players add more product choices to already “confused” consumers.

New sales channels (e.g. the Internet) are providing consumers the capability to quickly compare price offerings from multiple sources and offer them the means to procure them at the best price.

The traditional response to demand volatility has been to increase inventories or to let consumers wait until products are available. Both solutions have become unsustainable and inefficient. Higher inventories result frequently in unwanted stocks that end up as costly accounting write-offs. On the other hand, asking customers to wait or defer buying when stocks are not available leads to negative customer views and in many cases to switching to the products of the competition, which is ever present and growing in the modern marketplace.

Two approaches to managing the impact of high customer demand volatility have helped in minimizing inventories and sustaining customer loyalties:

Understand the sources of demand volatility

Demand volatility comes either from uncontrollable external forces or from internal factors, which can be directly influenced. Uncontrollable external forces include competitive activities and government policies. A trade promotion by a rival firm, for example, is a competitive activity that cannot be controlled. Another example is the schedule of holidays and paydays which a firm cannot change but influences consumer demand.

Examples of internal factors that the firm can control or influence include price increase announcements, which incite customer demand speculation. Likewise, a firm may initiate a marketing campaign to offset an external force such as the aforementioned rival’s trade promotion.

Develop a more flexible and responsive supply chain

Making one’s supply chain more flexible and responsive is the second approach to demand volatility. Firms use a variety of tools from their arsenal to achieve this:

  • Build in additional production capacity to accommodate peak demand swings. The energy industry, for instance, invests in reserve capacity to ensure continuous power supply
  • Collaborate with vendors. Collaborating actively with suppliers, especially when they’re the bottleneck, would help the firm coordinate inbound delivery schedules and ensure continued materials supply for manufacturing
  • Re-engineer the logistics network. Firms sometimes overlook that they can decide the structures and policies that govern their delivery networks. Whether it is in centralizing or de-centralizing depots or satellite factories or reviewing policies such as minimum order quantities and deciding who to sell to, how a firm establishes its logistics system directly influences its level of responsiveness

A case in point is the bakeshop industry. A large Philippine bakeshop chain constantly faces intense competition from rival chains and indirect franchises such as doughnut shops and cupcake stores. Demand is volatile as per the whims of consumer tastes. To stay relevant in business, the large bakeshop has set up a national network of franchised branches sourced from a central production facility. Its logistics consist of an efficient transport network that delivers within 24 hours to ensure product freshness. In off-peak months, the bakeshop offers promotions. In peak seasons, it utilizes reserve production capacity and deploys additional freight resources to the provinces. It coordinates closely with suppliers for on-time inbound deliveries. The results speak for themselves: the bakeshop has been the industry’s leader for more than two decades.

Demand volatility is a norm. The firm that can better deal with the external and internal forces of demand and who can quickly develop the most responsive supply chain will be better positioned to compete in the modern marketplace.

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