In our continuing discussion of supply chain management, this article will examine some of the challenges and opportunities related to effective demand management. Obviously, without customers there would be no demand and no need to worry about the supply chain.
Looking back through the supply chain, there are a multitude of organizations affected by demand management – your organization, your supplier(s), the distributors, the wholesalers, the manufacturer and their suppliers. All of these stakeholders need to manage the demand of their customers. So when we talk about “managing demand”, we are talking about the overall demand of the supply chain as well as your individual customer demand.
Customers are the lifeblood of your organization: they provide you the opportunity to satisfy their needs with the right products at the right time at the right price. Your organization is the supply and the customer is the demand. The challenge is to properly identify the demand and match it with the appropriate profitable supply.
The Problem: Forecasting Demand
A significant problem in the supply chain is forecasting customer demand. Without an accurate forecast, how does management know how to set up the facility, or how much material to carry? Because the world has become smaller and more competitive, the need for more accurate forecasts has never been greater.
The problem is that customer orders may vary greatly in size from one month to the next. In some months, customers will order a lot and in other months they don’t order at all. Some customers will be running a promotion and order two months’ worth of material in one month, and then nothing, in the next two months. For a manufacturer or distributor, these big swings in order size can be frustrating and extremely unproductive and make inventory planning very difficult.
The traditional answer to these wild swings in customer orders has been to adopt the position that “we should never run out of material or products”. Planners will look at history and try to establish an amount of inventory that covers the wide swings.
In turn, those planners order more than is needed from their suppliers. Then, suppliers are faced with the same wild swings in their demand, so they build in extra safety stock for their orders. The pattern repeats itself all the way back up the supply chain. This ultimately results in excess inventory at every step in the supply chain.
This phenomenon of everyone in the supply chain ordering more than they need (safety stock) is called the bullwhip effect. Because demand for products swings wildly, no one can effectively plan. Not having a plan leads to problems in inventory, problems in scheduling, problems in production, problems in logistics, and problems with the bottom line.
The Answer: Customer Collaboration
Although much has been written about customer demand and demand planning, it all boils down to collaborating with your customers to more effectively plan for their needs. Collaboration and communication are the keys.
One of the first goals of an effective supply chain management strategy is to share information with your customers. Organizations need to develop strategies and programs to share information between the organizations in order to satisfy customer demand in a profitable manner.
Customers need to understand that in order to be productive and profitable, manufacturers and distributors need to be able to plan and forecast. You need to plan and forecast in order to properly configure the manufacturing operations and warehouse distribution processes. Wild swings in customer demand can be devastating to the bottom line.
Here are some topics that you need to discuss with your customers:
- Will the customer share sales plans with you? Can you gain visibility of what they expect to sell?
- Will the customer provide warning as to when they want to run promotions, thereby preventing a run on capacity or inventory?
- Will the customer accept smaller orders delivered more frequently?
- Will the customer participate in a consignment inventory program?
- Will the customer let you manage its inventory?
You should discuss all of these topics with your customers in order to provide visibility to upcoming demand. If the supplier (you) and the customer can work together to provide visibility to demand, the relationship will prosper.
One of the overarching principles of effective supply chain management is the sharing of information. This sharing occurs between customer and supplier in order to build more solid relationships and to facilitate more effective production and distribution planning.
To learn more about supply chain improvement, please contact Joel Rosenthal at 412-697-5387 and read Supply Chain 101 - The Basics: Customers and Suppliers.
Schneider Downs provides accounting, tax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.