The two (2) managers of the large multinational consumer goods corporation coined it steady-stream. Both managers, one from sales and the other in charge of orders processing, agreed that the constant volume rushes every month-end were not acceptable. It would be more beneficial to have a smooth flow of supply rather than a spike at the last few days of every month.
Steady-stream is a state where volumes of merchandise flow smoothly through enterprises’ supply chains from vendors to in-house operations to trade outlets, i.e., distributors, dealers & retailers, and then to the consumers who buy and use the products.
In steady-stream supply chains, merchandise, i.e., materials, work-in-process, and finished products, move in sync with true demand, which is equivalent to actual usages or consumptions of end-users.
Both managers of the multinational consumer goods firm were frustrated with the current state of demand fulfilment they both oversaw. Merchandise flow was anything but steady. It was more like stop-and-go traffic. Shipments spiked at the end of every month as field sales personnel brought in most customer orders at the very last week in their race to meet volume quotas. The month-end surge of shipments would swamp the trade with stocks such that distributors, dealers, & retailers wouldn’t have much to order at the start of the succeeding month. The cycle would repeat itself as consumer demand gradually exhausted trade inventories and field sales pursued their quotas once more at the end of the month.
Spikes in demand cause the same cycles of stress in supply chain operations. Purchasing, production, and logistics would work below capacity at the beginning of every month and go flat-out in a rush in the final week. Supply chain planners would try to second guess sales orders and schedule purchases and production of items they believe would be critical. Planners never could predict accurately, however, and inventories would end up with some items out of stock and some over-stocked.
In steady-stream thinking, our enterprises would make and buy based on the cumulative volumes of what consumers are truly using. These cumulative volumes comprise what is called true demand.
True demand is equivalent to how much consumers use products based on their needs or wants. The foundation for true demand is that consumers buy based on what they use. Consumers, in this basis, use products at just about the same rate of quantity over any given period. Households wash dishes with the same amount of dishwashing liquid, do the laundry with the same amount of detergent, and bathe with the same amount of soap.
Even as individual consumers have their own unique preferences and usages of products, they have habits that over time reflect steady consumption. In that sense, it translates to consumer buying behaviours which cumulatively show up in the purchasing of products at the retail level, i.e., the supermarkets and stores where the consumers buy from.
Steady-stream supply chains match availabilities with true demand. They produce based on consumption downstream at the retail level and buy correspondingly from upstream vendors. We keep inventories only as buffers for the unforeseen but at not-too-significant variations from true demand. Buffers would usually not exceed 10% of true demand.
Steady-stream leads to steady growth. We build market share by wider distribution, not via marketing gimmicks that spike artificial demand and lead to beat-the-deadline rushes. We ensure products are distributed and served responsively, that is, fully and completely available such as at the retail trade and delivered fast such as same-day delivery via e-commerce. With effective distribution and service, we can grow our markets easily especially when we expand into new territories or market segments.
Steady-stream does not necessarily mean the same volume of product day-in and day-out. It means steady fulfilment of true demand. Depending on the industry, true demand may be subject to trends and cycles. Volumes may fluctuate depending on the time of the year or from economic upturns or downturns. As long as we are in tune with true demand and we are capable to make available output to fulfil it, we are achieving steady-stream.
Enterprises that adopt steady-stream benefit by just having enough inventories and operating capacities that minimise waste, keep costs low, and experience better cash-flow. We gain a competitive edge in pricing and can grow market share without having to spend heavily in promotions and incentives.
But as much as there are arguments in favour, there are also those that would disagree in the merits of steady-stream, if not dismiss them outright.
Steady-stream does not take into account speculative demand, which is more of a norm than an exception for some enterprises. As much as end-users like consumers of household products may buy based on what they only need, there are enterprises who buy to hedge based on prevailing perceptions about a product’s future value or availability.
Many consumer goods supply chains, for example, rely heavily on commodities as raw materials for their products. Brokers, traders, and vendors buy & sell commodities to make money from price speculations. Demand is based more on second-guess buying & selling than on actual need.
When we speculate, procure, make, and deliver to maximise margins, we often end up with inconsistent inventories not in sync with true demand. This in turn leads to further speculation which ends up governing our policies and strategies.
There are many factors that cause speculation. The following are a few examples:
- Price Increase Announcements
We buy materials in larger than usual bulk quantities in reaction to vendors warning of price increases. We fill up storage facilities and lease more space from 3rd parties. The result is larger-than-demand inventories in which we have no idea how long they’ll keep.
- Product Recalls & Endorsements
Consumers will stop buying products and switch to other brands if they get an inkling there’s something wrong with the brand they had regularly been buying. It gets worse if companies announce a product recall. Inversely, consumers would flock to products that have strong word-to-mouth appeal such as celebrity endorsements or positive viral social media feedback. Michelin’s published ratings, for instance, have propelled demand for restaurants and chefs who otherwise would not be too well-known.
- Competitive Marketing
Some of us may stick to supplying items based on true demand; our competitors, however, may not. Competitors may try to wrest market share by offering incentives such as discounts and freebies and cause customers to speculate when they purchase products. Incentives, especially the time-based ones, fuel speculative demand not only for our enterprises initiating them but also bring the same to our rivals. A telecom company’s launch of a new smartphone, for example, may threaten competing brands, such that competing firms would counter with launches of their own to defend their market positions.
Unanticipated events or disruptions can cause consumers to change their minds quickly about what and how much to buy. A faraway war, for example, drives price surges in commodity prices which spurs consumers to stock up as they speculate in fear of shortages. Disruptions stimulate speculation at just about every point in the supply chain from procurement to production to logistics.
- Out-of-Stock Incidences
The moment items run out at any trade outlet, there will be speculation. Trade outlets who have no more items to sell would order much more than usual to pressure suppliers to deliver. If out-of-stock persists, consumers may switch to cheaper options which may lead to customers in the trade cancelling their orders or even rejecting deliveries when they finally arrive.
- Wrong Inventory Models
Many of us apply simplistic inventory management models that don’t sync with true demand. Some models trigger replenishment when a re-order point is reached. Some of us order only when items run out. We just dictate all product inventories should be equivalent to the average sales per month, never mind if sales have been spiking wildly month-to-month far from average levels beforehand. When inventory models don’t really reflect what are needed, we sooner or later would be speculating about how much to stock.
Steady-stream is a state where merchandise smoothly flows through a supply chain to meet the true demand of the final end-users. It is an attractive ideal in managing costs and growing market share.
But as much as it is a state we would like to attain; it is challenging as to whether it is realistic in the first place.
Steady-stream’s mortal enemy is speculation. When we turn to speculating demand instead of determining and planning versus true demand, steady-stream becomes a worthless pursuit.
We must also ask if determining true demand can really be done given the fickleness of consumers and the never-ending speculation that is standard among traders.
One thing for sure, if our supply chains can sync to what consumers and end-users really need, it would make it simpler for us to manage the complicated operations that underlie them.