Because demand is neither steady nor predictable, it makes demand variability one of the greatest challenges to manage across the entire supply chain.
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Explore this issueApril/May 2006
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Some claim that inventory is the result of “imperfect information,” i.e. unpredicted demand. Certainly unexpected demand and demand variability – especially in the food and beverage industry – result in excess inventories of wrong products, at the wrong time, for customers who want something else.
Demand peaks and valleys can’t be eliminated completely for food and beverage manufacturers, i.e. when key ingredients are only available once during a year. Finding options such as alternate substitute ingredients (i.e. frozen vs. fresh fruit and vegetables), helps balance these hard constraints. Another option is to smooth sales demand to more manageable and consistent levels. Marketing tools are available, but also require adequate visibility across the entire supply chain. Managing variable sales demand by applying planned capacity-based pricing, has also proven effective in migrating customer demand to smoother, more predictable demand patterns.
Understanding your customers’ own demand and business needs from their perspective is also critical. Do you know your customers’ sales channels? Selling direct to end customers, through retailers, or via foodservice, distributors and wholesalers – each channel has unique requirements and opportunities. For manufacturers, this means it’s becoming more critical to forecast your customers’ end user demand. By understanding and effectively applying true demand beyond the distributor’s warehouse, using actual point-of-use information as part of the forecast process, the quality and accuracy of your own planned demand will improve.
With improved forecast accuracy, manufacturers can reduce demand uncertainty and favorably impact every aspect of their fulfillment network, offering bottom line improvements of customer service and cost reduction. The more this improves, the better customer service levels will be, and the lower safety stock “insurance” levels can fall. Lower safety stocks means literally reducing the physical quantities of material to purchase, manufacture, store and ship. Such reductions favorably impact the availability of plant and warehouse capacity, as well.
To effectively partner with demand-driven suppliers also means being able to collaborate effectively, based on adhering to evolving industry standards and best practices around how information moves between people in multiple organizations. Whether you’re sharing sales forecasts, advanced shipping notices, evaluating trading partner performance, identifying similar products with different product codes per supplier, or managing inventory availability and committing to new sales demand based on real-time inventory positions and movement – all of these critical business processes can be accomplished in a demand-driven world today, largely due to agreement about the standards for exchanging and communicating with dynamic networks of trading partners.
Timely collaboration – both internally with your own sales force and externally with your customers and suppliers – is a highly effective way of improving forecast accuracy, and providing significant benefits for yourself as a manufacturer, as well as for your trading partners. Collaborative forecasting allows manufacturers, customers and suppliers to share planned demand, identify and alert one another when significant differences exist, and provide opportunities to spot exceptions and disconnects early enough to respond effectively.
Alignment and constant focus on the end customer also provides new opportunities to improve perfect order performance. For example, when sales demand exceeds available supply, the option to outsource production to contract manufacturers provides added flexibility to increase available capacity, thus expanding sales and meeting customer commitments. But within this new demand-driven model, food and beverage manufacturers must adapt to added levels of product lot record-keeping control – to meet their regulatory mandates and provide a safe, secure supply chain, from ingredient inventories, to products, through distribution, and into the hands of the end consumer. Increasing regulatory pressures from both governing agencies and demanding channel masters, are also impacting food and beverage manufacturers, who are primary contributors to end-to-end lot trace and trace history across the whole supply chain.