Demand risk is when a sudden and unexpected surge in demand occurs and is one of the many risks supply chains can be exposed to.
Supply chain management: Ensuring a gigantic spike in demand is not a risk
Author: Henning Kurz, Senior Consultant Supply Chain
Date: 1 July 2020
In the past four months, we’ve seen essential items such as food, toiletries and medicines increase in sales by up to 500 per cent globally. As lockdown regulations spread, incredible demand in other categories followed suit. In the US, home products and furnishing went up by 97 per cent, DIY products shot up to 136 per cent and garden essentials skyrocketed up to 163 per cent. While these sales should be welcomed by retailers, they represent demand risk to supply chain management.
Demand risk is when a sudden and unexpected surge in demand occurs and is one of the many risks supply chains can be exposed to. Other risks include the macro environment (such as the current pandemic), manufacturing, supply, IT, transportation, finance and labour. For any business there are high costs when under-prepared for any one of these risks. Mistakes could have long-lasting negative impacts with unhappy or lost customers, lost sales or accidents and legal issues due to unsafe working conditions.
Spikes in demand shouldn’t come as a surprise, as exceptional situations like the current pandemic are not entirely rare. In recent times, global supply chains have been impacted by the GFC in 2008, the H1N1 flu pandemic in 2009, the eruption of Eyjafjallajökull in Iceland in 2010, the tsunami and nuclear disaster in Japan in 2011, the typhoon Haiyan in the Philippines in 2013, the Ludian earthquakes in China in 2014 and the Australian drought and fires in 2018 and 2019. Supply chains must be prepared for the world of risks they face.
In light of the demand risk currently threatening many supply chains, companies should consider these strategies to ensure they capitalise on increasing demand rather than allowing it to become a liability.
- Creating an emergency management task-force: When a crisis arises, an organisation should have an emergency management plan in place to ensure clear rules of decision-making authority, so decisions can be made quickly and effectively.
- Investment in capability: An organisation should be supported through appropriate real estate, distribution centre design and operational capabilities, such as process optimisation based on lean principles and the use of automation to increase throughput.
- Investment in flexibility, agility and scalability: Peaks and troughs are the rule, not the exception. Organisations should design nimble supply chain and logistics networks that are modular and dynamic.
- Use of technology to increase visibility: You can’t prepare for what you can’t see – visibility and early-warning systems are crucial to be proactive. Organisations should be equipped with specialist software to ensure oversight of their supply chain.
- Ongoing investment in business continuity planning: Risk diversification is a must – scenario planning should be continually revisited to mitigate any adverse situations.
- Ensuring strong lines of communications: Leaders should communicate consistently and clearly with employees to ensure operations are streamlined and with customers to manage expectations and relationships.
How do you handle demand risk? Do you practice any of these strategies?
Having worked across a wide array of supply chains at TM Insight, we have witnessed the detrimental impacts of ill-managed demand risk. Hence, the above strategies are part of every supply chain optimisation project. Regardless of whether we design new supply chains or optimise existing networks, demand risk mitigation is an integral part of our considerations. Our team ensures increased demand is an opportunity that a retailer can capitalise on, rather than a risk to their entire business.