“No one in the supply chain has sold till the time the end customer has bought.”
This seemingly simple diktat is hard to put in practise, after all, why do I care if my customer’s customer is buying my stuff or not.
Err.. Turns out that you should!
In one company, the Brand company was making an outright sale of stock to 1 partner and to the other it was selling on SOR (Sale or return) – which meant that ‘headache’ of inventory was the brand’s in this case.
Guess where was the company actually selling more stock? And how much more?
The Brand company was able to sell 5 TIMES MORE stock to the partner where they were keeping tabs on availability and ensuring the best sellers were available!
Turns out knowing the end customer demand can solve a lot of heartaches 🙂
Consumers signal demand by buying things, and companies in the chain respond by placing orders upstream. But when there are many companies in a chain, the signals can run amok.
Demand forecasting is often based on order histories—what did the customer buy last month? When demand is stable, supply chains just chug along. But when you get a sudden spike in demand over a short period (as happened often during the pandemic), things can go haywire.
The problem is the spikes are often misinterpreted as fundamental shifts. The retailer says, “These are hot sellers, let me increase my order.” Then the product planner at the manufacturer says, “Wow, people love our product. This is a hit. Let’s order more so we don’t lose sales.” Everybody in the chain turns optimistic, and tries to prepare for upside, and it’s pretty easy for the true demand signal going up the chain to get exaggerated. By the time the orders get all the way to the factory, the demand signal may have been amplified several-fold.
Eventually, that demand signal gets turned into product that starts making it back down the chain. That’s about the time people start to realize that perhaps they ordered too much, so they slash their orders. This is called the “bullwhip effect,” because the amplification and oscillations in product volumes moving along the chain look like the cracking of a bullwhip. We saw it in toilet paper and exercise bikes, and we are seeing it right now in many products such as bedding, clothing and furniture. All this because people along the chain misinterpret or make erroneous judgments about demand signals.
Thanks Willy Shih for this!
