Dealing with Demand Volatility

Demand Planning is probably at the forefront of your thoughts these days. You don’t want too much inventory, because you can’t afford to tie up working capital, but you don’t want too little inventory either, because, with sales down, you can’t afford to lose even a single sale. You need to operate lean, mean, and ready for anything at a drop of the hat. You do this by harmonizing sales, marketing, and supply management into a cross-functional team that focuses on meeting demand in the most effective and efficient way possible.

This team should start by segmenting demand by volume and variability, as per this TBM Consulting Group Graphic found in an Industry Week article from earlier this year on demand management. This allows the company to optimize planning, control, and manufacturing around each product depending on whether it should be pulled, made-to-stock, made-to-order, or rationalized (where it may be replaced with a similar product or discontinued altogether). Furthermore, by analyzing and understanding the demand patterns of different product families, looking at average volumes and variations in demand, managers [may] determine that their own inventory management policies are responsible for creating the sharp spikes in production and shipments that historically caused inventory shortages and liquidations in the past.

It’s important to note that demand planning is not a game of chance, but a strategy, as highlighted in this recent Industry Week article by a principal of Tompkins Associates. Done right it eliminates, or greatly reduces:

  • out-of-stock situations
  • long, unknown, or unreliable lead times
  • inventories with discontinued and obsolete SKUs
  • overstock of slow-moving SKUs
  • non-optimal inventory deployment

But done wrong, each of these problems magnify. That’s why it’s important to have a demand management plan that not only addresses each of your products, but addresses how you will respond to demand volatility. The reality is that the plan can never be completely accurate given the certainty of daily changes that will occur inside the planning horizon. You need to be able to rapidly sense and respond to shifts in demand that deviate from your current plan, work with your colleagues and supply chain partners to understand true demand, identify plan updates and alternatives, and use decision support tools that will help you identify profitable responses to demand changes.

The best way to insure that you stay on top of demand volatility is to implement a multi-tier, multi-enterprise visibility solution that allows for near real-time demand data to be shared downstream, that can alert suppliers when demand unexpectedly rises and falls, and that can allow partners to collaborate on the best way to respond to unexpected demand spikes and drops. The system should be able to tap into the relevant CRM, ERP, SCM, POS, forecasting, and demand planning tools in place and not require manual re-entry of data and should consolidate the data for easy “what-if” analysis and reporting. As the article notes, good demand planning and response management can represent the largest opportunity for companies to increase customer service, enhance margins and attain more predictable revenue across the entire value chain, and allow supply management to simultaneously increase profit as it avoids unnecessary cost.