Many organizations tend to think: “Demand levels? That’s out of our hands! The customer wants something, and they can place an order when they want to… surely we can’t control that?” However, there is much that can be done to reduce demand variation placed upon our business operations. 

Demand planning by reducing demand variation and uncertainty helps to create even flow through our operations, (which happens to be a cornerstone of the “Lean” operations philosophy). In this article we look at the practical actions that organizations can take to actively influence and smooth demand and the Bullwhip Effect.

Types of demand management?

Demand management can be split into two groups: “external” and “internal” demand management.

What is external demand management?

External demand management means to influence the behavior of customers with supply-chain demand planning techniques. Controlling the price of products and services, implementing promotions, using reservation systems, and influencing order sizes are all techniques used to manage “external” causes of demand variation.

What is internal demand management?

“Internal” demand management means to look “within” an organization’s own operations to moderate the demand placed on one’s own operations primarily through reducing self-created causes of variation and unpredictability of demand. Such measures include: reducing mistakes by improving process reliability or reducing lead-times by choosing smaller production batch sizes and reducing changeover time capabilities.

Demand management with communication, coordination, and customer collaboration

Dealing with the consequences of unpredictable demand is just as disruptive and costly as dealing with demand variation. Communication reduces this unpredictability because different people have different information which can be better shared (sounds obvious uh!…). Those working in operations often suffer because they experience unexpected changes in demand that others had some useful insight on and could have warned them about in advance (and visa-versa!).

Sharing information with other departments

Sharing information with other departments in the organization also sounds obvious, but is often forgotten. Implementing a regular routine of sales and operations planning (S&OP) meetings is a great place to start to improve communication and ultimately manage demand more effectively.

In routine meetings like this, the sales managers and operations managers of a company can share their respective insights on demand forecasting and can plan for upcoming sales, making sure they have the operational capacity to fulfill them.

Sharing information with customers

Sharing information with customers is also a useful way to better understand and manage demand, especially if the customer is another business. Maintaining a transparent and proactive relationship is important for a better understanding of demand. 

With regular communication, a customer can be encouraged to smooth their purchase orders, or at least provide warning for big orders so that they can be better planned for.

Collaborative planning and joint forecasting

When a company has a long-term business relationship with its customers, (typically other companies), this communication can be formalized into cooperative management activities such as collaborative planning and joint forecasting. During these activities, each side can share their perspective, assumptions, capabilities, and intentions to check that they align.

What is The Bullwhip Effect (Supply Chain)?

The “Bullwhip Effect” is a supply chain phenomenon where the actual demand from the end customer gets amplified in variation as it moves its way up the tiers of the supply chain. At every step in the supply chain the demand signal gets more and more distorted and exaggerated, leading to greater, more harmful swings in demand experienced by each tier.

The Bullwhip Effect happens when businesses in a supply chain fail to communicate “true” end demand – often distorted by over reaction and changes to buffer stock and speculation of future issues and shortages which creates additional swings and uncertainty.

Effects of The Bullwhip Effect

The Bullwhip Effect can lead to more harmful swings in demand for organizations all the way up the supply chain. Major effects of The Bullwhip Effect to the overall supply chain include:

• Surplus of inventory (and hence increased inventory holding costs)
• Increased transportation costs
• Increased labor costs
• Delayed shipments
• Decrease in customer dissatisfaction
• Wasted resources
• Stockouts

Communication, collaboration, and coordination with other departments in an organization and with the customers of the organization is a great place to start to improve your external demand management. The more consistent and predictable demand is, the easier it is for organizations to plan their capacity and run a more responsive, cost-effective operation, avoiding the fabled “Bullwhip Effect”.