Demand driven supply chains

Demand for products and services ultimately drives supply chains. As the demand pattern for products varies, so does the supply chain

Take a simple example like grocery shopping. Depending on where we live, we may choose to do this on-line or actually visit the shop. We may visit different types of shop, with different frequencies. But overall there will be different type of demand patterns for different products or SKUs (Stock Keeping Units) as they are referred to by the supply chain.

There will be some products (such as bread or rice) they we buy almost every day, or every week. We buy them in a very regular or predictable way that creates a relatively stable demand pattern. The overall demand is high, and variability is low. This is the ‘ideal’ demand pattern against which to balance supply. We require minimum buffers (stock, spare manufacturing capacity, raw materials) to ensure we can fulfil demand and not have empty shelves and disappointed customers. It enables what is commonly called a ‘lean’ supply chain response.

Demand for other products may be more unpredictable. The use of an exotic ingredient in a popular TV cookery show may lead to a surge in demand for that product. In 2015 sales for salted caramel went up by 33% after 2 contestants in the Great British Bake-Off, including the winner, Nadiya Hussain, used it. Promotions and new product introductions can also be cause of surge demand. Demand is more variable, potentially unpredictable and requires a more ‘agile’ supply chain response. Given the greater degree of variability, bigger buffers are required to buffer against the uncertainty if customer demand is to be met. As a result, good supply chain managers only use this type of supply chain when they really have to as it tends to be more expensive.

Extreme events can create a very unpredictable demand pattern. This could be the launch of a radically new product, an opportunity created by an extreme weather event or other disaster. The 2011 floods in Thailand, wiped out 60% of the global production for computer hard drive arms. It was the companies that recognised this most quickly, were ‘fully flexible’ and could identify a new source of supply that were able to turn a disaster into a source of competitive advantage. Responding to such extreme events and developing ‘fully flexible’ supply chain responses is also a critical requirement for many humanitarian supply chains.

Talking point

• Can you think of examples of products that require lean, agile and fully flexible supply chain responses?
• Do you think that one product can have more than one demand pattern?
• What are the challenges of matching the right supply chain response to the demand pattern?