The fundamental objective of good supply chain management (SCM) is to balance demand and supply. If demand is greater than supply, then customers don’t get the products and services they want, when they want, which leads to unhappy customers and poor customer service. If supply is bigger than demand, there is a different problem. There is an excess of products. Products that need to be stored, moved and if left for too long, they become obsolete, all of which increases the SC cost. Good SCM balances demand and supply, so customer demand can be met, at the lowest possible SC cost.
If the fundamental objective of SCM is to balance demand and supply, the easiest demand signal to do this for is a stable demand pattern. Given that we use the majority of products in a relatively predicable way, we create stable, predictable demand for 70-80% products. The problem occurs when we create surges in demand for unpredictable reasons (e.g. increase in sale of cold drinks in a heat wave). This can lead to a mixed demand signal which is difficult to respond to. This creates inefficiencies in the SC which increases costs, or stock-outs that lead to dissatisfied customers. The key is to protect the stable demand signal, by separating out the lumpy and stable demand and creating a different supply chain response for each demand profile. In this way customer demand can be met at lowest possible SC cost.
The ultimate objective of a supply chain is to deliver products and services to customers when they want them. SCs are designed to meet the demand patterns of the customer. However, customers require things at different rates. We consume some things daily, others weekly or monthly. Big purchases such as a car or new domestic appliance may only occur once every 3-5 years. A critical aspect of good SCM is to understand these different rates of customer demand and how they translate into different rates of flow. It is then possible to design different supply chains to respond to the different flow rates. In this way customer demand can be met, at lowest possible SC cost.
Strategic Role of Buffers
One of the reasons that SC mangers prefer stable demand, is that it enables the delivery of customer value at lowest possible supply chain cost. This is because customer demand is known, and so minimal buffering against uncertainty is required. Buffers occur across the supply chain in the form of finished goods, parts, components and raw materials. For stable demand all of these buffers can be minimised. However, if the demand signal is more unpredictable, if customer service is to be maintained, then the buffers along the SC need to be increased to protect against that uncertainty. This increased stock holding, increases SC cost. An absolutely critical part of SCM is to understand the different types of demand signal, and resultant degree of uncertainty. This is to enable SC buffers to be ‘right-sized’ in line with the degree of uncertainty. If the buffers are too small, customer demand may not be met. If they are too large, it results in additional costs. Only by ‘right sizing’ SC buffers, can customer demand be met, at lowest possible SC cost.
One thing we know for certain about the current business environment, is that change is the only constant. This applies to customer demand as well. A good SC manager, needs to be able to monitor, evaluate and adapt to changes in demand. They need to be able to evaluate changes in demand to ensure that the right demand profiles are in place, that respond to the right rates of flow, protected by the right size of buffer. This will help to ensure that customer demand can be continually met, at lowest possible SC cost.