Chain Reaction: How to manage product demand instability

Being part of a long supply chain can be fraught with difficulties – often thanks to product demand.  As a cog in such a system, you may have experienced large peaks and troughs in manufacturing loads and inventories.  This issue is known as the Forrester Effect.

In the Covid-19 era has happened in microchips in particular.

In 1961, Jay Forrester wrote an article about the inherent instability of long supply chains.  A small change in demand gets multiplied along the chain if the supply chain is not managed as a whole.  We have seen the multiplier being a factor of three at each step. This means that at the third step a 10% fluctuation up or down becomes a 90% fluctuation i.e. nearly twice the demand when really it should be 10% of demand.

So the question is, can you manage it better and therefore reduce the impact on all parts of your supply chain?

The key is understanding the real demand and its source. Open communication in the supply chain should forewarn everyone if there is a special offer planned, a sales-driving event on TV or if seasonality will create more demand.  Being open about these potential supply chain disruptions can ease the instability they can cause so everyone can plan ahead.

In extreme cases, if a shortage is created, customers will make sure they have huge stores.  I remember shortages causing the build up two years supply of sugar, in stock, when there was a shortage in the early seventies.  A butcher in Watton jokingly has a sign saying ‘Panic Buying welcome!’  when ever there is an issue.  Customers order more than they need during a period of short supply, hoping that the partial shipments they receive will be sufficient. All of this creates inventories that cost money and make the system inefficient. We all saw this with paracetamol and toilet tissue in early 2020.

That’s why keeping all those in your supply chain informed on original demand and difficulties related to it is imperative.  Working together, you can ease the strain of these changes and collaborate to lessen their impact on each business.

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