In a world where market trends are fast-evolving and unpredictable, companies must be able to respond to disruptions and changing customer whims on a dime. This requires the ability to flexibly reallocate inventory based on demand, and quickly locate component alternatives when supplier issues arise. But as their operations grow more fragmented across the globe, businesses are stuck with rigid inventory management and ordering systems that aren’t designed to react to rapid demand shifts.
For supply chains to adapt to demand rather than being blindsided by it, businesses should be aware of where their inflexibility stems from and how to fix it.
What’s Hindering Your Operations?
Demand is volatile — that’s why forecasting it can feel like trying to read tea leaves. Since most orders are made in large, infrequent batches to cut logistics and shipping costs, it’s the sisyphean task of inventory planners to forecast not only what consumers will be buying next week, but what they’ll be buying three months out. And they’re left to deal with the consequences of decisions they made weeks or even months ago, based on data that no longer reflects reality. This is why so many companies lose money holding excess inventory — they know that their data is too old to give a clear picture of demand, so they overstock to compensate.
The Communication Factor
In the phenomenon known as the “bullwhip effect,” relatively small distortions in consumer data amplify as they cascade up the supply chain, propelling much larger and unpredictable swings in demand further upstream. The result? Empty shelves, inventory in the wrong places, or excess product sitting in warehouses and tying up millions in cash. These costly supply chain casualties are all results of siloed operations that inhibit communication and cross-functional collaboration. With no better option, supply chains have to rely on rigid planning systems based on infrequently updated spreadsheets. Decisions about how much of a product to order or manufacture are made with inherent blind spots.
At its heart, the bullwhip effect is a communication and information flow problem. When factory managers and inventory planners have to respond to changes in demand without having a full arsenal of data at their disposal, they overcompensate. And when communication between brands, suppliers, and manufacturers isn’t strong, trust breaks down. Instead of trusting the signals from downstream partners, manufacturers and inventory planners try to make their own judgments based on a patchwork of knowledge and intuition.
New Technologies and Habits for a More Flexible Supply Chain
Digitizing to unlock better communication will open up opportunities for brands to not just be big, but to leverage their scale to become agile as well. In other words, accessing data about components, products, routes, and locations — and having that data available across their supply chain ecosystem — will empower large companies to react faster to issues or demand fluctuations, allowing them both to decrease buffer inventory and meet customers’ high expectations.
The transparency and rapid-response communication facilitated by digitization will help build trust across partner ecosystems and within organizations. Instead of waiting for signals from upstream or downstream, businesses and their suppliers will be able to monitor and respond to changes in demand, inventory, and production — in real time. The right digital platform will not only provide instant updates when issues arise along the supply chain, but will also offer actionable insights so inventory planners can adapt fast.
Get Everyone on Board
Digitization is not a fix-all solution, but a process. It requires a smart digital strategy that involves everyone in and across a company’s operations. Aligning employees and partners on a strategy will require grit and the right kind of leadership to make tough decisions. Within their organizations, leaders will have to confront resistance to leaving behind outdated (but familiar) systems. And across their supply chain ecosystem, they may have to reassess how they think about partner relationships. But to successfully leverage digital opportunities to make quick decisions across functions, everyone needs to be on board.
Your Bottom Line Will Thank You
In the long run, a more adaptive supply chain will help companies achieve leaner inventories. With the cash that is no longer tied up in warehouses, they will be able to invest in what really matters — making products available when and where customers want them.
The Transformation Your Operations Can’t Live Without
If your supply chain isn’t responsive to customer expectations, your business won’t last. Creating a more responsive supply chain is thus not a question of “if,” but of “when.” And it’s not just going to rely on changing tactics or even adopting a digital platform. It’s an arduous process that requires a focus shift from demand prediction to adaptability as the guiding light of your operations. And being adaptive depends on strengthening communication so that everyone making decisions along the value chain has the information they need to align on supply flow and get products where they need to be.
By Kalvin Fadakar - March 13, 2014
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