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Designing a Supply Chain for Demand and Supply Side Uncertainty

Supply chain management is a powerful management tool to win over competition. Well designed supply chain for different products will l... thumbnail 1 summary
Supply chain management is a powerful management tool to win over competition. Well designed supply chain for different products will look different. Supply chain for supplying pasta will be different from supply chain for selling fashion jewelry or rushing airline spare parts. Supply chain for producing and delivering pasta will be designed for productivity and efficiency. Supply chain for airline spare parts or offshore drilling equipment will give utmost importance to timely delivery and availability at any cost. Nature of the product, customer expectation, production method and parts used are some of the factors to be considered when designing a fitting supply chain. Demand and supply side uncertainty are the key determining factor when designing a supply chain for a product. Well designed supply chain that suits a product or category is a
competitive advantage.

Product nature can be broadly classified as either functional or aesthetic. Functional products like pasta have stable demand whereas demand for aesthetic products like fashion goods is erratic. Innovative aesthetic products enjoy high profit margins but at the same time have seasonal demand and short product life cycle. It is difficult to stock enough of each items from broader product portfolio but a stock out of a popular item can tarnish brand reputation. On the other hand functional products like pasta or bread have predictable demand. Product nature determines demand uncertainty which in turn determines the nature of the supply chain. While product nature lends demand uncertainty, supply side uncertainty can emanate from multiple factors. Uncertainty at the production stage can originate form unpredictable yield or change in production technology or change in process. Uncertain lead time, small supply base and weather are also some of the non-production factors that contribute to supply side uncertainty.

When the supply side and demand side variations are low, operational efficiency is the key to successful supply chain. Production intensive industries can improve operational efficiency by optimizing the production process and eliminating non value adding activities. An important issue to keep in mind during supply chain design is visibility to actual demand from end customer. Stable demand from end consumers may become lumpy and unpredictable to second and third level suppliers due to bulk ordering practice of distributor and retailer. Supply chain planning becomes difficult when the demand is unpredictable. Trust based collaboration between the supplier and buyer for sharing real demand information is the solution for avoiding demand lumping in the supply chain. Stable and even demand facilitates better demand forecast, effective planning, optimum levels of safety stock, better customer service levels, less waste and improved profit margins. Logistics is core to operation of distribution intensive firms. Firms in distribution intensive industries like retail and 3PL must focus on improving logistic efficiency. Careful review of transportation, storage and distribution network and practice will through some light into non value adding logistic tasks. Redesign of end to end supply chain can improve logistic efficiency. WalMart, a pioneer in retail supply chain, ships stable demand products directly to the store from its supplier thereby eliminating expenses due to intermediate handling, inventory management and transportation.