Supply chains had been under a lot of pressure. Since year 2020, supply chain managers had to deal with shortages in merchandise and rising costs for reasons traced to the coronavirus pandemic, natural disasters, deteriorating trade relations between countries, and military conflicts.
The need for supply chain engineering was mentioned repeatedly as a new mindset to innovate our operations. We can’t manage our way out of supply chain problems.
Or can we?
We should not underestimate ourselves as supply chain managers in terms of the things we can do to fulfil demand perfectly and productively.
One way is to manage the demand itself.
We defined demand as what our customers order, buy, and pay for. But we sometimes speculate what and how much they will buy rather than base their purchases on what they will use.
Speculative demand is what our customers buy for the purpose of hedging. A household buys more groceries than usual to stock up for a long holiday weekend. An automotive dealer buys more spare parts because she heard there’s an imminent price increase. A consumer electronics retailer doubles the number of gadgets she’ll import to ensure she’ll fill up a shipping container and save on freight. A drug store cancels its order for a new drug because of rumours in social media that it’s not safe to use.
Whereas we can estimate true demand via how much end-users need and consume, speculative demand is hard to predict as it’s based on differing decisions of individual customers. Customers speculate to get the best deal, but it unfortunately drives us supply chain managers crazy.
We manage demand via the following means.
- We supply based on true demand;
- We negotiate with our customers to order based on available supply;
- We limit the number or types of customers we supply to.
Supplying True Demand
We can forecast demand and make only what customers really need and use, which is how we define true demand. Especially for products like consumer goods, vitamins, and newspapers, we can find out how much consumers buy and use. Because usages of such items are often steady, we can manufacture and deliver steadily too. We avoid swings in inventories that cause stress to our supply chain systems.
It’s not easy, however, to figure out true demand for all products. Items like spare parts, toys, furniture, and hardware items don’t necessarily have steady and predictable demand usage. When we can’t pin down true demand or if true demand is unsteady, we have a hard time optimising our operations.
Order Only What’s Available
Another option we can use is to feedback customers what and how many items are available such that they’d buy only what we can capably deliver. Wholesalers and e-commerce companies notify customers what items they have on stock and customers decide then what and how much to buy. This avoids customers ordering blindly which results in pending orders that end up served late or not at all.
An ordering-what’s-available system, however, masks true demand. We wouldn’t find out what and how much customers really want over time. In the absence of knowing true demand, we could be missing out on opportunities in demand creation.
Limiting Our Customers
Our customers are our geese who lay our golden eggs. We treasure the invaluable revenue we get from them. But who’s to say we should serve all of them?
Serving any customer, whatever their type or size, can end up overwhelming our supply chains. A food manufacturer found that the hard way when managers found themselves serving customers such as large supermarkets, institutions (e.g. hotels, schools), and small mom-and-pop stores (e.g., sari-sari stores). The disparities in volumes and packaging caused costly inefficiencies in production & logistics. By delegating distributors or dealers to handle buyers of smaller quantities, the food manufacturer would realise enormous savings and benefit from steadier demand.
Losing touch with consumers is the risk, however, in limiting who we serve especially when we sell in favour of middlemen like distributors & dealers. As much as we may have close-in agreements with middlemen in serving volumes reflective of true end-user demand, we wouldn’t be able to avoid the speculation these same middlemen would have when they order our merchandise. We end up back in square one.
We as supply chain managers feel the pressure to fulfil demand. But as much as supply chain engineering offers innovative approaches to improving our systems & structures, we have means at our disposal to manage the problems besetting our operations.
Managing demand by delivering based on what end-users truly need & use, feeding back to our customers to order based on availability, and limiting the customer population gives us benefits in terms of fewer swings in inventories and higher operational efficiencies.
But demand management has its risks that can come back to haunt us. We sometimes forget what the demand truly is, and we lose touch in knowing what our customers really need and want. We end up potentially losing opportunities for growth.
Demand management helps us manage our supply chains but only to a point. It helps but we still should not discount that the best way to improve our operations is via supply chain engineering.
Ellery's Essays 