Strategies to manage demand volatility in your supply chain

February 17, 2022

Demand volatility is something that most businesses have had to deal with since the start of the COVID-19 pandemic. However, it would be wrong to label demand volatility as something new to supply chains since the beginning of 2020.

That said, the pandemic has certainly brought significant lessons to businesses around demand planning and dealing with overnight changes in customer demand. Furthermore, given how the 24-hour news cycle and, in particular, social media dominates people's lives, demand volatility in your supply chain is likely a "new normal", to coin a phrase we've all grown accustomed to in the last two years.

So whether you're an e-commerce retailer, run a traditional brick and mortar store, or work in any other niche, your supply chain strategy should proactively work on the basis that consumer demand will always be volatile. Adopting this mindset will give you a competitive advantage in your field and ensure you always have the correct inventory levels to meet customer demand.

What is demand volatility?

As the term suggests, demand volatility refers to fluctuations in market demand for whatever product you sell. While it's common to talk about volatile demand from a consumer perspective, it's vital to recognise that it can permeate right to the top of your supply chain.

What causes demand volatility?

Numerous factors can drive volatile demand.

In the past two years, we've all seen how the pandemic has been responsible for demand volatility. In 2020, the world went crazy for hand sanitiser and toilet rolls in the early months. Then, as lockdowns came into force, demand for hospitality bookings fell to zero.

Likewise, events like natural disasters or unseasonal weather can also drive demand volatility on top of the inevitable supply chain disruptions.

Outside of such events, social media can drive demand volatility to a significant extent and massively affect product life cycles. For example, an influencer promoting a product on Monday can spike demand and sales on Tuesday and Wednesday. In reaction, your procurement team sets about sourcing more products with a short lead time. But the following Monday, another influencer promotes something else, and last week's trend is dead. As a result, you end up with excess inventory that you might have to discount to clear through your warehouse.

On top of all this, customers have more choices than ever before. Competition is global, and the variability of products available via customisation initiatives is enormous.

Even dealing with one of these variables would be challenging. However, modern-day supply chain management will usually see you simultaneously dealing with all of them.

Why is managing demand volatility vital?

Failure to manage demand volatility can lead to the bullwhip effect across your supply chain. Even small shifts in demand can cause significant shortages and stockouts and put pressure on things like the supply of raw materials and the efficiency of your distributors.

In turn, this can put significant pressure on your inventory management, warehousing practices, and the service levels you're able to deliver to your customers. Therefore, dealing with changing demand should be a vital pillar of your internal supply chain management and enterprise resource planning (ERP) strategy.

Read more about the bullwhip effect and how you can counteract it.

9 ways to manage demand volatility in your supply chain

1. Hold safety stock

Holding safety stock used to be a common strategy for riding out fluctuations in supply and demand. However, many businesses have recently moved away from this strategy due to expensive warehousing costs and a desire to have leaner supply chains.

However, holding safety stock once meant retailers having full warehouses, which would cause bottlenecks in their internal distribution. Today, technological advances mean you can achieve much more accurate demand forecasting based on real-time data and metrics. This means you can order quantities of products to give yourself a buffer of safety stock without disrupting your operations or committing vast volumes of cash to products that will sit in your warehouse until a time TBC. But, at the same time, you'll have enough inventory to meet short-term fluctuations in demand.

2. Improve your forecasting

Better forecasting means better decision-making.

Numerous tools can help you with forecasting optimisation. The best ones typically offer some automation where they track your sales and uplift in demand and then place the necessary orders to keep your stock levels where they need to be.

Enhancing your forecasting can be hugely influential if you have a global supply chain and longer lead times for specific products. While your competitors scramble to find ways to get more products into their stores, you can attract their customers with enough inventory to sell to all.

3. Consider risk pooling techniques.

Risk pooling can help you with everything from achieving better supply chain sustainability to ensuring you can counteract bottlenecks and always have products on your shelves to offer to your customers.

Learn more about risk pooling in supply chain management.

4. Leverage technology to your advantage

Technology has a vital part to play in your demand forecasting.

However, it's also vital to recognise that technology can also act as an early warning system for demand volatility from the supplier end. For example, if a natural disaster affects your supplier or another business they supply suddenly ramps up orders, you don't want your business to be unable to order products due to a shortage of raw materials or for any other reason.

Dealing with direct volatility can be challenging enough. You don't want to find yourself managing demand volatility started by others, too!

5. Review your supply chain model

When was the last time you did a proper review of your supply chain model?

Identifying and implementing strategies to make your supply chain leaner can make reacting to short-term demand fluctuations easier. Vitally, doing so can also prevent bottlenecks at those vital moments when you need to get products onto your shelves or into your customers' houses.

6. Diversify your supply chain

While only working with a small number of suppliers is a great way to mitigate risk, it can also lead to bottlenecks, shortages, and stockouts during periods of volatile demand.

Say you only have one supplier for a particular product or range. If they don't have much headroom to increase production of the in-demand product, you're going to be at the mercy of their supply or production capacity.

However, if you have several suppliers for specific products, you can ask them all to uplift production on a smaller scale to satisfy increased demand.

In a similar vein, having a more diverse distribution network can be helpful, too, as you'll have more partners to help make deliveries during periods of high demand.

7. Diversify your SKUs

Whether you're shopping in-store or on an e-commerce platform, the best retailers always have an alternative product on hand should something be out of stock.

While many retailers are reducing their SKUs as a means of risk pooling and streamlining their supply chain management efforts, it's vital to retain some variety in your range so you can react to volatile demand.

8. Distribute your inventory

If you operate from multiple locations or deliver to numerous territories, it makes sense to distribute your inventory across as many of these as you can.

This approach will make it easier for you to deal with volatile demand, as you may have high demand in one location but dwindling demand in another. Having inventory distributed in multiple locations means you will have good product levels in the area where demand is growing to meet your short-term need. Plus, you already have the stock in your business that you can transfer out of locations where the market is slower.

9. Add new sales channels

In a similar vein to inventory distribution, having multiple sales channels can make it easier for you to deal with demand volatility and even drive demand if it isn't there. For example, you operate both physical retail locations and an e-commerce platform. If demand drops in-store, you can react to that by pushing an online promotion to clear through stock or creating demand through social media marketing.

At the same time, having data from additional sales channels will feed back into your forecasting model. This will give your procurement and sourcing teams even more accurate sales predictions and ensure you always have the stock you need to meet immediate sales demand while dealing with any short-term fluctuations.

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