Take a simple example like grocery shopping. We may choose to do this online or visit the store. We may visit different types of shop, with different frequencies. But overall there will be different type of demand patterns for different products.
Some products, for example bread or rice, we buy almost every day or every week. We buy them in a very regular or predictable way that creates a relatively stable demand pattern. The overall demand is high and variability is low. This is the “ideal” demand pattern against which to balance supply. It requires minimum buffers – stock, spare manufacturing capacity, raw materials – to ensure demand can be fulfilled, avoiding empty shelves and disappointed customers. It enables what is commonly called a “lean” supply chain response.
Demand for other products may be more unpredictable. The use of an exotic ingredient in a popular TV cookery show may lead to a surge in demand for that product. In 2015 sales for salted caramel went up by 33 per cent after two contestants in The Great British Bake Off used it. Promotions and new product introductions can also be the cause of surge demand.
Demand is more variable, potentially unpredictable and requires a more “agile” supply chain response. Given the greater degree of variability, bigger buffers are required to buffer against the uncertainty if customer demand is to be met. As a result, good supply chain managers only use this type of supply chain when they really have to as it tends to be more expensive.
Extreme events can create a very unpredictable demand pattern. This could be the launch of a radically new product, an opportunity created by an extreme weather event or other disaster. The 2011 floods in Thailand wiped out 60 per cent of the global production for computer hard drive arms. It was the companies that recognised this most quickly, were “fully flexible” and could identify a new source of supply that were able to turn a disaster into a source of competitive advantage.
A good business strategy creates a base level of demand for its products and services that accounts for 70 to 80 per cent of all demand. It enables the business to develop a
lower-cost lean supply chain response and provides stability for the business. The business then has the management headroom to be able to manage more proactively the 20 to 30 per cent demand that truly requires a more agile or fully flexible response. It adopts a segmented approach to supply chain strategy.
Unfortunately, too many businesses do not consider the supply chain as they develop their business strategy. They develop strategies for growth that create unpredictable demand, requiring a costlier supply chain response for the majority of demand. This one-size-fits-all approach leads to issues with product availability and ultimately higher prices.
Last summer WMG, University of Warwick, in conjunction with JDA, conducted a study of the supply chain strategies of 101 manufacturing companies in Europe. Reflecting the strategic importance of the study, 77 per cent of respondents were senior managers or executives. Over half the organisations involved were above £500 million in turnover and 71 per cent had annual revenues exceeding £100 million.
The study identified a significant window of opportunity. Only 8 per cent of companies were found to have the higher degree of supply chain segmentation maturity required to sustainably deliver customer value at the lowest possible supply chain cost.
The more mature organisations were able to adopt an end-to-end business process perspective. Performance measures were an equal balance of customer-facing, business and functional-related measures.
These organisations also used the sales and operations planning or integrated business planning process to ensure best-for-business decision-making that balanced the revenue and end-to-end supply chain cost implications of decisions.
They took a top-down approach to implementation. It started with the consideration of the supply chain as an end-to-end business process that is driven by an understanding of the different types of demand. They were also data-driven companies. They had good demand and supply planning processes, supported by an advanced data analytics capability, encompassing historic, current and future time horizons.
Companies only need to be slightly better than their competitors to achieve competitive advantage. With such a small percentage of companies currently leveraging the advantage of supply chain segmentation, there is a huge window of opportunity. Why not consider how your company could segment its supply chains for sustainable success?