How Do Supply Chains Deal with Volatile Demand?

Every industry has to deal with demand volatility at some point due to factors like product customization, global competition, and increased customer choice. However, there’s now been a more explosive shift than ever before across nearly every vertical. Immediately following the COVID-19 lockdown dash, nearly every industry has had to deal with volatile demand.

Some industries, like airlines and hotels, saw demand dramatically plummet. Others, like personal goods (toilet paper), saw demand skyrocket. Panic buying, staying inside, and a surge in ecommerce (particularly holiday ecommerce) has dramatically disrupted previously predicted demand, and this is hitting particularly hard on unprepared supply chains.  

The largest concern with demand volatility is what is known as the bullwhip effect. Even the smallest shift in demand can create a sort of ripple effect that leaves suppliers, warehouses, and transporters struggling to keep up with an unstable supply chain. Now that modern supply chains are more demand-driven than product-driven, the bullwhip effect can oftentimes have disastrous influences not only on revenue but also on customer service, return rate, operations efficiency, and more.  

So, how can supply chains handle volatile demand and stay at a competitive advantage this season?  

Hold safety stock  

Companies used to carry high levels of stock as a buffer for volatile demand. They would never run out of inventory because they always held sufficient stock in nearby warehouses and stores. Today’s environment discourages holding large levels of inventory, though, considering distributed national and global demand, diverse product offerings, short product lifecycles (especially with fluctuating trends), and high costs for warehousing. It’s simply too expensive and risky to hold abundant stock.  

So, there’s a problem. Housing high levels of inventory can drain resources, but levels that are too low can impact customer service. The solution is to find a middle ground with “safety stock.” Safety stock is an excess of stock, but it doesn’t fill warehouses up. It utilizes predictive analytics to anticipate projected demand and then safety stock offers a small percentage on top, just in case of unexpected shifts. This gives you a cushion or buffer of inventory in the case of unexpected demand volatility, without holding on to too much stock at one time.  

Will retailers be able to maintain inventory levels this holiday season?    

Leverage key technologies

But finding the perfect sweet spot of safety stock is one of the struggles that come with inventory forecasting. There’s still a risk of over- or underestimating demand. The companies that see success with a safety stock strategy are those that have continuous stock review models and implement demand forecasting technologies like AI and predictive analytics.  

That means you need to start with the most efficient and quality forecasting. Predictive technologies can more effectively forecast demand than humans, and they can detect potential problems in advance and then respond to issues in real-time. Automating forecasting alongside other digitalized supply chain systems is how the strongest companies are predicting and responding to demand volatility. Investing in an inventory management system with predictive AI might just be the best decision you can make to safeguard against demand volatility and other supply chain disruptions.  

Learn more about how to successfully forecast and leverage inventory velocity data here.    

Leaner supply chains handle volatile demand better

As with technology, the supply chain’s goal has to be agility in order to address volatile demand. One of the best ways to respond quickly to changes in demand is with a “lean” supply chain or shorter supply chain cycle.  

This doesn’t necessarily mean reducing partnerships or cutting off your network. Rather, a “lean” supply chain automates activities and streamlines communication and collaboration (like with blockchain tech). This helps identify and address obstacles quickly and efficiently, so any unexpected shifts in demand can be met with a unified supply chain strategy across all partners. Without collaborative processes and transparency between partners, bottlenecks are inevitable. Focusing on streamlining processes and cutting off the fat can make your supply chain more flexible and resilient.    

Diverse product portfolio

Retailers are quickly diversifying their available products so there is always in-demand and available stock. By creating a more diverse product portfolio, companies can better anticipate changing market trends while also ensuring there is always stock on-hand to offer to customers. A product portfolio range also opens up the doors to consumer choice within the brand, and increased customer options drive revenue. Retailers should also diversify with products of varying life cycles, which helps to reduce the inventory sitting in-house. Varying lifecycles can help account for demand volatility while continuing to push revenues.  

Diversifying products is also a great way to diversify manufacturing partners, which has become a key risk management strategy as of late.    

Diverse partner portfolio

Having a lean supply chain is one way to mitigate the bullwhip effect. The other is to diversify your suppliers, manufacturers, and transporters so that if there is one upstream disruption, the rest of the supply chain doesn’t automatically fall like a row of dominos. Having a range of supply chain partners gives your business the flexibility to address shifting supply and demand without having all of your eggs fall out of a single basket.  

COVID-19 has especially caused companies to diversify international supply chains, as trade shut down and countries locked up. Even if international trade worked perfectly, diversifying partners allows for a more flexible and disruption-resistant supply chain. Things happen. If one partner runs into an issue (whether inside or outside their control), you don’t want to be beholden only to them.    

Distributed inventory

Another diversification strategy is to use a distributed inventory model. Distributed inventory divides your available stocks into multiple warehouses and fulfillment centers in different locations in order to bring products as close as possible to the consumer. This helps create more efficient freight movement and optimize last-mile logistics, but it also helps ensure you have stock when and where you need it when demand volatility strikes at its worst.  

Distributed inventory keeps your transportation flexible and reduces shipping times to the consumer, but it requires strong predictive analytics and forecasting technology to ensure you’re meeting demand even more precisely. Learn more about the pros and cons of inventory decentralization here.    

Multiple sales channels

You’ve diversified your products, partners, and warehouses, why not diversify your sales channels too? If you’re finding that one sales channel is dealing with significant demand volatility, your business might want to consider leveling out demand through multiple sales channels. This may be able to create a more predictable level of demand, especially if you utilize both direct-to-consumer and distributor models.  

Keep in mind, though, that adding more sales channels also requires a deep understanding of who your customers are, where they’re located, and how you’ll adjust your supply chain to add individual layers of flexibility for each sales avenue.    

Supply chain resilience  

We can’t control demand volatility. There are several immovable factors that impact demand, and we only have so much control over market fluctuations.

What we can control is how we prepare for it and respond to it. The way to handle volatile demand and other disruptions is by creating an agile and resilient supply chain through diversity, technology, and transparency.