Supply chain volatility is defined as unplanned variation of upstream and downstream material flows resulting in a mismatch of supply and demand at the focal firm. Managing supply chain volatility is often identified as one of the major challenges of modern supply chain management, as even the most accurate calculations cannot prepare you for the completely unforeseen.
When volatility exists, processes across the supply chain are being challenged. Failure to adapt to this volatility can lead to demand being unmet – and unmet demand translates into lost sales, lost profit, lost customers and eventually loss in market share, especially when competition surfaces.
Volatility is a reality in many supply chains. Not only are retailers serving end consumers facing volatile demand. This volatility is being passed on to manufacturers and distributors at different stages of the industry value chains. Many factors contribute to this volatility including:
Decades of research have been dedicated to calculating supply chain volatility. Calculating is often done by using complex systems and formulas, that rely not only on the company’s own numbers, but also factor in external influences like e.g. weather. Here, several forms of volatility have to be accounted for and calculated individually:
Managing volatility in a cost-effective manner can lead to significant benefits for a company from lower supply chain costs to improved customer service levels. Managing volatility effectively can be a huge competitive differentiator for companies, for example by being prepared for a sudden surge in demand by having the right amount of inventory stored. Competitors that do not have enough inventory to deal with the increase in demand will have to face unsatisfied customers and lost revenue.
Managing volatility efficiently in a demand driven environment is a significant challenge and requires companies to employ robust supply chain tactics. Often, the focus tends to be on one area of the supply chain (e.g. inventory optimization). Without the consideration of all aspects of the supply chain, this may result in sub-optimal results. A holistic system approach is more effective. This holistic approach contains:
The right mix of the above strategies depend on the specific context of a company.
In Inchainge’s business simulation games, managing volatility is an important recurring topic. It needs a good understanding of the system and its trade-offs. And a cross functional approach. All departments can help to reduce and/or to manage the volatilities in the goods flow and financial flow. By experiencing the cause and effect relations in the simulations a deep understanding is created. Do you want to know more about our simulation games? Have a look at our business simulation games.