If you get the information today about demand changes for the current or next month, you will want it to be reflected in your demand picture, right? But does it also mean you can react? Often, demand changes have a direct impact on supply and cause severe disruptions. Read this article to understand the interdependencies of demand changes on the supply side and find out how to become more responsive.
Before you can determine whether you need a frozen demand horizon, you first need to answer the following questions:
- Will the demand change have a critical impact? It cannot be covered by your buffer or safety stocks, or it will cause a significant exceeding of inventories, which might end in intense scrapping?
- Are you able to react on your supply side?
- If supply is tight, can you ensure the demand update will not cause major disruptions by trying to react on short notice and replan at the cost of even getting tighter on the supply side?
Will The Change of Demand Have An Impact?
Not every demand change is of relevance and necessarily needs to be reflected. Depending on your supply chain set-up you might have inventory stocks which are designed to buffer against certain demand and supply variabilities. So, a slightly greater or less demand than initially thought should not automatically let you jump. But if it makes you jump, instead of passing on the panic you might rather want to revise your supply chain set-up and inventory policies. Are you buffering strategically important products? Are you accounting for certain variabilities? Are inventories aligned with promotions and sales activities? And if it is not a strategically buffered product, is it worth making your entire supply chain go crazy?
Of course, there are demand peaks or drops which are typically not buffered and cannot be foreseen. Losing or winning an important high-volume customer or getting the opportunity to increase your market share because your competitors have major delivery issues in their supply chain are examples of events for which you have not been prepared but potentially need to react to. However, before passing on the opportunity or threat, the question is still how you pass it on and whether you are able to react.
How Flexible Is Your Supply Chain to React?
Very often, the degree of flexibility heavily depends on the availability of buffers in your supply chain. The most important ones are finished goods inventory buffers, capacity buffers on your production lines, component buffers, and lead time buffers. The right positioning and sizing of the buffers can be a competitive advantage in terms of responsiveness. The DDMRP concept is an example of how to get your buffers right.
However, buffers are often not actively managed, used, or do not even exist at all. It needs to be highlighted that having dynamic safety stocks in place sometimes even makes it worse and should not be seen as a suitable approach for active buffer management. Any demand change that is not buffered directly bullwhips the demand through the supply chain. Consequently, the less active buffer management is in place, the higher the pressure is mainly at your production stages to allow for flexibility. While it is easy to increase demand accuracy the closer you get to today, the more difficult it gets to react from the supply side. Supply lead times are often beyond a couple of days, and consequently, you base your supply decisions on rather unreliable demand signals from a couple of months ago.
So, when demand is changing on the short-term horizon, very often it is already impossible to react for production or purchasing. Relevant key components are purchased months ahead or, in the case of multi-level production, require production lead times themselves, which often cannot be reduced. And even if it is possible, it will often come at a cost, either by de-prioritizing other demands or by causing overtimes and additional shifts for production. Therefore, many companies sometimes apply frozen periods to ensure a kind of stabilization. A frozen demand horizon typically represents a horizon in which no changes to demand should happen. But often this is rather a theoretical concept or seen as very flexible, or the horizons are not at all aligned with supply lead times.
Before passing on demand changes or applying a demand frozen horizon it needs to be clear if and how your supply chain can react and if the update creates a rattail of supply disruptions.
How To Avoid Major Disruptions in Your Supply Chain?
In addition to strategic buffers, you need a stable prioritization framework to ensure that in case the buffers are used up, it is clear on how to react. Which customer or demand elements will you prioritize in case supply falls short and capacities are at their limits? And is your complete supply chain prepared to follow the defined priority framework? Is it transparent, consistent, and aligned with customer service, production, and procurement? And, the most relevant question, is your organization, while prioritizing, also able to take the consequence of deprioritizing?
A very common approach is that the one who screams the loudest typically wins and threatened demand elements are often escalated via management to be taken care of. A lost sales value is more tangible than the intangible cost of re-planning at supply or unforeseeable future lost demands. Consequently, I have often seen supply planners jumping, firefighting and trying to make the impossible possible at all costs, resulting in low OEEs and a potential decrease in overall service levels.
Therefore, having a prioritizing framework also means having clear deprioritizing rules and mindset. This should be supported by a clear transparency on how great the supply chain cost for reacting is, compared to a potential lost sales value. While a responsive supply chain process via buffers and a prioritization framework is needed to avoid disruptions, the next relevant question is if your IT landscape is prepared as well.
Is Your Advanced Planning System A Killer Or An Enabler of Responsiveness?
We probably all agree that demand changes should be transparent and that there is no point ignoring the change, even if it is not possible to react. But does your planning system prevent you from passing on the variability?
Often, changes of demand figures in the planning systems directly change the picture on the supply side. While everything looked green from supply perspective yesterday, the complete view can immediately shift to red and let everyone jump if demand numbers are changed, latest at the monthly release of the new demand figures. And if it is a significant change, you can even question whether waiting for the next-month demand release will be the cleverest approach.
So, after a defining a responsive planning process you need to ensure that your planning system supports it. First, it must be possible to create transparency on demand changes while staying in control of what you release towards supply. Second it must be flexible and responsive enough to directly pass on the information to supply in case it is needed and agreed, so no waiting for the next-month demand release cycle. And third, ideally you always have transparency of unconstrained and constrained demand elements to ensure you will be able to react as soon as capacities are released. That means that, in the case of tight supply situations, you need to be in control of the demand changes applied, while as soon as capacities are released again, you can directly react and realize additional sales opportunities due to clear transparency of unconstraint demands.
To sum it up, instead of using a frozen demand horizon and constantly ignoring it, rather increase responsiveness by:
- Being clear on which events you really need to react to
- Building up responsive processes via buffers and a clear prioritization framework
- Ensuring your IT landscape is a supporter and not a killer of responsiveness