Flexibility and efficiency are a trade-off that most companies make while building their supply chains. To make supply chains more cost-effective, companies often choose offshore production and sacrifice accessibility and visibility. The popular efficiency approaches such as just-in-time inventory or seeking the lowest cost supplier contributes to the illusion that efficiency is the only important aspect. However, the weakness of these popular approaches has become more apparent in the ongoing pandemic. These methods aren’t really capable of ensuring resilient supply chains because they aren’t built to tackle demand uncertainty. Demand uncertainty is a situation that can happen at any time with or without a pandemic -- and can leave businesses grasping at straws to keep their supply chains functioning.
What is demand uncertainty and how is it linked to high supply chain costs?
Demand uncertainty refers to the external factors that cause demand to unexpectedly increase or decrease. This situation can be caused by a public health crisis or even a sudden shift in the customers’ tastes. Many software help companies to forecast demand and develop relevant production and supply chain strategies. But most businesses account only regular demand and forget to include uncertainties in their production plans. This mistake can cost a fortune due to excess inventory, excess capacity, and expensive transportation that companies may need to resort to swiftly respond to demand shocks.
How to manage demand uncertainty while keeping costs in check?
Resilient and flexible supply chains that are capable of absorbing demand shocks require collaboration and agility among all players in the network. Some ways to manage demand uncertainty are as follows:
Adopting a variable cost approach
During periods of no demand or less demand, continuing to pay the same costs for warehousing dents the bottom line further. Hence, it’s important to collaborate with supply chain service providers that adopt a variable cost approach. H&S is the only company in India that helps enterprises save fixed costs by charging for services that are availed on the units sold. This works wonders in keeping supply chain costs to a minimum when sales fluctuate unexpectedly.
Enabling digital collaboration
Information sharing is the key to ensure that each node of the supply chain is aware of the current status of the operation. Companies can use cloud-based applications and collaborative platforms to assist every partner in the chain to access information quickly and securely. This enhances the speed and quality of decision making within the organization as critical information is shared with relevant parties as soon as it is received.
Real-time visibility and analytics
Control tower solutions refer to central command centers that integrate data from all supply chain partners using technologies such as 5G technology and blockchain. This enables companies and their distributors to know the exact location and state of the goods. With this data, organizations get visibility into the operations of all the partners in the chain. Furthermore, they receive real-time demand signals which enables them to reevaluate production. Companies can also adopt machine learning and artificial intelligence to generate early warning signals, simulate risk scenarios, and develop appropriate responses to disruptions in the supply chain.
Supplier assessment and inventory optimization
During a period of uncertain demand, it’s imperative to critically analyze every supplier in the chain. Some suppliers are more critical than others, hence different strategies must be developed to handle each segment. Additionally, companies must diversify and collaborate with local suppliers if their current partners are situated abroad and are inaccessible.
Lastly, manufacturers must keep track of inventory levels at different locations and re-route distribution to locations with high demand. As soon as there is a hint of demand uncertainty, companies must update their demand forecasts and revise their production schedules to meet the new estimates.
The strategies that once allowed companies to become efficient have now caused them to struggle during demand uncertainties. However, efficiency no longer has to come at the cost of flexibility. Increased output, reduced financial loss, and minimized product development cycles are just a few benefits of investing in resilient supply chains. The benefits, as well as the current instability in the global economy, are pretty good signs that the time to build nimble supply chains is here.
Sources
● https://home.kpmg/in/en/home/insights/2020/05/ramping-up-the-supply-chain-post-covid-19.html
● https://www.bain.com/insights/supply-chain-lessons-from-covid-19/
● https://pdfs.semanticscholar.org/043f/02d995bfc37425b0b898e37920ee31477bd8.pdf