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What are the best strategies for managing demand variability?
One of the main challenges for manufacturers, supply chain managers and materials planners is demand variability. Here are 10 strategies for gaining control.
Materials planners must always work to manage volatility, uncertainty, complexity and ambiguity, four major causes...
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of demand variability in the supply chain. However, the strategies and tools you use can go a long way toward better demand variability management. Here's a look at 10.
- Reduce lead times. Finding ways and means to reduce lead time from sources of supply ensures a company is able to quickly react to the changing demand. Long lead times increase the probability of a bullwhip effect, a situation that occurs when changes in customer demand have a cascading and incrementally negative effect on the entire supply chain.
- Implement a demand-driven supply chain. Adopting a demand-driven supply chain, where the actual demand of products drives the supply chain instead of the other way around, often leads to better management of demand variability.
- Use S&OP and LTP processes in SAP ECC. Sales and Operations Planning (S&OP) and Long-Term Planning (LTP) are two materials planning tools in SAP ERP Central Component (SAP ECC) that enable a company to simulate probability and scenario analyses to see which demand model leads to least variability.
- Use buffers. Timely review and proactive adjustments of the three buffers -- stock, time and capacity -- ensure better handling of demand variability.
- Focus on demand-supply visibility. Having good visibility of both demand and supply enables faster reactions to any significant changes and in turn, helps ensure a smoother supply chain.
- Adopt postponement strategies for product assembly. The ability to postpone assembling a final product as late as possible -- and only when the actual demand is known -- leads to better inventory management and helps prevent obsolete stock, overstock and stock-out situations.
- Put experiences to better use. Frameworks that can provide materials planners with insights and lessons learned from past experiences lead to an effective demand variability management when similar instances reoccur.
- Create an action plan for managing volatility. Having the capacity and the capability to respond in a timely fashion to any noticeable interruptions in the supply chain provides an effective means to address demand volatility.
- Align supply and demand management. Effectively aligning demand management with supply management enables both business functions to quickly react to changing realities -- be it a sudden demand surge or an unexpected supply disruption.
- Smooth demand variability. A better understanding of demand variability and its causes can bring a certain degree of sanity to demand variability. For example, use the five smoothing factors that the materials forecasting tool in SAP ECC offers. A smoothing factor gives higher value to a more recent historical value than an older one to bring forecast values as close to actual as possible. Here are the factors involved:
a. Alpha factor: To calculate the basic value of a constant forecasting model;
b. Beta factor: for smoothing the trend of historical values of the trend forecasting model;
c. Gamma factor: for smoothing the historical values of the seasonal index forecasting model;
d. Delta factor: for smoothing deviation of the mean average values of forecast; and
e. Sigma factor: To calculate boundaries of outliers, while calculating outliers of forecast values.
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