We’re all aware of how demand and supply form the heart of all organisations but what is Demand Volatility? In a single sentence, Demand Volatility is a measure of the amount of variability in customer demand.
Demand Volatility in Supply Chain – Why is it important to understand demand volatility?
In the past decade, the manufacturing industry has been dealing with the rising impact of demand volatility. There are multiple reasons as to why demand is becoming more volatile but one of the prime reasons is because customer expectations have changed. They want a variety of products, at the lowest cost possible, and they want it now. This is what causes the disruption. Let’s understand how.
Traditionally, supply chain processes were designed to be push-driven. Today, not only are retailers serving end consumers facing volatile demand but this volatility in demand is also being passed on to manufacturers and distributors at various stages of the supply chain. The transition to becoming pull-driven or demand-driven is slowly occurring but simultaneously managing it efficiently is becoming a significant challenge and requires companies to employ robust supply chain strategies.
Often the focus of organisations tends to be on just one area of the supply chain (i.e, inventory optimization) without acknowledgment of other aspects of the supply chain. This results in sub-optimal results, meaning that you have not been able to manage demand volatility.
Factors contributing to Demand Volatility
A lot of people struggle to jot down the causes of demand volatility. While there are plenty of factors that contribute to demand volatility, here are some of them:
– Increased customer choices
– Product customisation
– Rapid technological improvements
– Global competition
– Upstream supply fluctuations
Why is it important to manage Demand Volatility?
In 2020, the COVID-19 pandemic majorly highlighted the effects of uncontrollable world events on product demand. While some companies struggled to meet the rapidly increasing demand, others were left with excess inventory because the demand for non-essential items plunged. The entire consumer buying behaviour changed within hours of lockdowns worldwide. This is what caused demand volatility.
Situations like these have set a standard for manufacturing companies to be able to quickly adapt to the market’s demands. When the demand is not met, they are the ones that stand at the risk of losing their competitive advantage in the market and will see a fall in sales in the future because of the same.
Although managing volatile demand in a cost-effective manner can lead to significant benefits for a company like lower supply chain costs and improved customer service levels, it is a challenge for companies across all verticals. More importantly, it can be a huge competitive differentiator for organisations.
Conclusion: Since a lot of supply chain companies are slowly figuring out the importance of demand volatility, it is not hard to say that demand volatility was the supply chain disruptor of 2020. Companies that did not previously pay heed to use demand planning and forecasting software are the ones that majorly suffered the loss.