Supply Risk Management: Exploring Demand Risk
This post is based on the following FreeMarkets white paper (published in 2003) co-authored by Jason Busch and Mark Clouse, Global Supply Management: Strategies for Identifying and Managing Supply Risk. I recently dusted off the paper for my own research into supplier relationship management and found an analysis that was nearly every bit as relevant then as now.
As context for this post, “demand risk” is one of five drivers of supply risk we originally identified in this paper. The others are strategy risk (reference here and here), market risk, implementation risk, and performance risk. Enjoy!
Demand risk stems from two primary sources: fluctuations in external customer requirements, and managing internal customer requirements. In many cases, predicting overall demand and supply chain elasticity is more of an art than a science, especially in markets characterized by high volume and short product lifecycles (e.g. high tech). In all markets, though, supply managers must also understand the implications of asking for more than is really needed.
The most critical drivers of demand risk include:
- Over or under specification—A common misstep is over-specifying the goods and services companies need. Buyers become enamored with the myriad of optional features, high-tech capabilities, and logistical conveniences that suppliers increasingly make available. Engineers argue that this part is special while HR managers say that service is strategic. Either way, customizing goods or services that could be standardized raises costs and limit supply options.
- Demand volatility—In high-volume industries where demand is often difficult to predict before a product is introduced, volatility can be a huge issue. Predictive supply chain modeling can help address demand volatility concerns. But companies must incorporate overall volatility risk into their supply management decisions and choose suppliers in part based on their ability to scale up—and scale down—to real-time demand needs.
- Poor internal coordination and communication across functions—External collaboration is challenging enough. But many organizations have not mastered communication between internal teams. What if the sales organization promises a certain delivery date to meet the needs of a key account, but has limited visibility to determine if the promised date can actually be met? And what prices—or ideally, price curve—can they offer based on different delivery dates and quantity levels?
Demand risk offers some of the more colorful examples of what can go wrong across the extended supply chain. Recently, a number of enterprises have publicly blamed—and even litigated against—vendors whose solutions, they claim, resulted in incorrect inventory levels. A candy division of a leading consumer goods manufacturer was faced with severe inventory challenges when overall demand for a popular product was out of synch with production. And a leading shoe and apparel manufacturer blamed their software provider for millions of dollars in excess inventory they were forced to write off when the forecasting and planning system they had in place provided incorrect information.
In many cases though, managing demand risk is less about software and more about process. Companies must address the demand component of supply risk early in the GSM planning process. Assumptions made early on can have significant—and unintended—consequences further down the road. In approaching demand risk, implementing the right processes that cross-functional areas can use to model and forecast demand should always come before making technology decisions.
Curious? Drop Sydney a line (email@example.com) and we’ll send you out a copy of this dusty old analysis! Some topics are timeless. And supply risk is one of them.
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