It’s not just events like the coronavirus that lead to chaos; it’s the way people react to them. Who would have ever thought a virus could cause severe demand spikes for toilet paper?
Unpredictable behavior in response to macro events creates demand volatility in every link of our global supply chain. As the bullwhip effect demonstrates, it only takes relatively small fluctuations in supply or demand to create massive bottlenecks. Huge, unexpected demand changes can bring unprepared companies to their knees.
British economists John Kay and Mervyn King describe the situation we are facing now as a time of “radical uncertainty.” In the face of such vagueness, today’s companies need to be ready for anything — and not just one thing, but a range of possible outcomes. Getting ready for anything isn’t just about responding to negative crises, but also about being equipped to seize opportunities. For instance, there currently is an explosion in demand for bidets and shatafas, the “toilet showers” commonly used in countries including India and Thailand. If suppliers of these normally slow-moving, niche items had been unprepared for demand surge, they could have benefited from this shift in consumer buying behavior.
Ready for the new normal
Many companies are so immersed in their current problems that they haven’t begun to think about what happens when the crisis moves to its next stage. Manufacturers and retailers of nonessential items must prepare to get hit with a massive spike in demand. On the other hand, those offering toilet paper and hand sanitizer are likely to see an extended period of flat demand while consumers and resale channels burn through their stockpiles.
These spikes and troughs will have implications on forecasting, replenishment and distribution center operations that need to be planned well in advance to ensure the right inventory and staffing levels. Sales history — so critical to forecasting and inventory — is no longer reliable. Instead, planning systems need mechanisms that recognize outliers and exclude them from forecasts.
There are three stages involved with this preparation:
- Predict more behaviors. As mentioned, companies need to scenario-plan for a range of different outcomes. Improve forecast accuracy with digital tools such as automation to factor in the impact of a wide range of variables — order size, location, weather, seasonality, social sentiment, the impact of promotions and more. Machine learning combined with human fine-tuning is likewise valuable for continually improving the demand model over time.
- Protect against surprises (good and bad). Even if you’ve built a robust demand model, no system can predict every random trend or act of nature. However, automated planning with advanced algorithms can help companies use inventory to hedge against the “unknown unknown” risk factors. Using these systems, companies can define service targets for different items and markets, taking into account business objectives such as minimizing working capital, maximizing margin and reducing obsolescence risk.
- Perform more efficiently. Once your forecast is fighting fit, tune your supply chain to minimize waste, meet service-level and cost targets, and achieve other key business goals. This will involve positioning the optimal amount of inventory at every point in your distribution network. A planning software that uses advanced algorithms or artificial intelligence can help you orchestrate the vast number of trade-offs this involves.
Resiliency resolves doubt
After a crisis like the coronavirus, planning for the usual will be impossible. However, supply chains that leverage digital tools including automation, advanced algorithms and machine learning will be best prepared to manage this ongoing challenge and compete more effectively. Your number-one defense against this radical uncertainty is a resilient supply chain that’s ready for anything. The better you prepare now during this time of crisis, the better you will be able to manage in the future.