Sample Essay On Supply Demand Mismatch
Supply and Demand mismatch problem is faced by almost each and every company in the world. Some companies face severe supply related problems, some encounter demand related issues while some other face severe inventory related problems. While some companies have supply side constraint to match demand, the main issue that always troubles organizations is the problem of matching a variable demand pattern with the given constraints on the supply side. There are several reasons for supply demand mismatch, with production constraint, supply uncertainties, transportation uncertainties and demand fluctuations to name a few. Demand cyclicity and market uncertainties are some of the major factors causing demand supply mismatch. The major effects of demand supply mismatch are increased level of inventory and stock outs. It is not easy to address supply-demand mismatch. Categorization of product based on demand volume and variability can be a good start to address the issues. Make to Stock or Make to Order production strategies should be used based on the demand and supply side constraints and should not be used as a blanket strategy for the organization.
In earlier days, most of the demand and supply used to happen at a local level as transportation was not easy or cheap. However, in the era of globalization, manufacturing takes place in one country with demand coming from a host of countries located all across the globe. This makes the supply chain process a complex issue. As manufacturing processes are becoming more and more standardized, increased focus is given on supply chain. A company can gain significant advantage over others with a well-planned and executed supply chain. However, be it a small company or a multinational company, everyone faces the supply and demand matching challenge. Many companies post loss not because they have a poor product, but they are unable to fulfill demands on time. There are many reasons why companies often falter to match supply with demand. This essay will discuss the possible causes, their implications and possible solution to the supply demand mismatch problem.
Reasons for Supply Demand Mismatch
Reasons for supply and demand mismatch can be categorized into two groups broadly; 1) demand side problems and 2) supply side problems (Vitasek and Manrodt, 2003). Demand and supply mismatch happens because of variability in both demand and supply patterns. There are several reasons for that variability, which will be discussed below.
Demand Side Variability
Demand variability is the main issue that affects the demand-supply matching problem. If a company has a stable demand, then that company may not face any issue in supplying those demands. However, stable demand pattern is not something observed in many product segments. For example, commodities such as wheat, corn, and rice may see a relatively stable demand pattern over the months and years, but that is not a general trend for other products (Vitasek and Manrodt, 2003). For example, demand for iPhone shoots up high during the holiday season in December. The demand in other months of the year is much less than those in holiday months.
Figure 1: Seasonal Demand Pattern at Tahoe Salt (Snyder and Max-Shen, 2008)
Seasonality is one factor that creates demand variability (Snyder and Max-Shen, 2008). For example, ice cream has a high demand during the summer months and almost no demand in the winter months. Similarly, there are thousands of products such as non-alcoholic beverages, winter coats and air conditioners that have distinctly seasonal demand pattern.
Cyclical demand is like seasonal demand, but it does not happen every year. Demand variability happens in every few years when the overall demand goes up or down (Snyder and Max-Shen, 2008). For example, demand for gold, copper and steel sees overall demand cyclicity every few years. Therefore, while planning for the supply of this kind of products, industry cyclicity effects should be taken into account.
Apart from these two major factors, there are many macro and micro economic factors that contribute to the demand variation. For example, if the government announces a subsidy on electronic goods such as TV and refrigerator, then the sales of these products may see a spike immediately after the implementation of the subsidy. Also, sometimes due to weak economic predictions, customers tend to cut back on purchases of luxury and non-essential items. In such conditions, demand for items such as car, high end fashion accessories and cosmetics may see a significant drop in demand.
Supply Side Variability
There are several reasons for supply side variations. In many cases, it is not possible to produce in accordance with the demand because it is not economical. In those conditions, products are manufactured in batches. Even if there is no variation in demand side, minimum batch constraints causes supply demand mismatch (Snyder and Max-Shen, 2008). For example, in a glass manufacturing industry, it is not possible to change the color of glass coming out of the furnace frequently. Therefore, when the furnace produces a specific color, often it is not economical to change the color of the molten glass for weeks. Even if many different colored glasses are required during that time, it is not possible to manufacture those.
Apart from manufacturing lot size constraints, often manufacturing capacity plays a role in supply variability. For example, ice cream production units may not be able to fulfill the demand during summer months due to capacity constraints whereas they may be sitting idle during winter months due to little demand (Snyder and Max-Shen, 2008).
Figure 2: Single layered and Multi layered transportation systems (Snyder and Max-Shen, 2008)
Transportation time is also a variable in many cases due to logistics issues. Sometimes, due to hub and spoke model, the complexity of the supply chain increases and it results in the increase of the overall supply chain time and variability owing to multiple layers and uncertainty associated with each leg of transportation (Snyder and Max-Shen, 2008).
There are also other microeconomic factors such as labor issues, raw material constraint, policy issues and even environmental policies that can cause supply side variations.
Implications of Demand-Supply Mismatch
There are several big implications of demand-supply mismatch. The ultimate effect of demand supply mismatch is always an increase in supply chain cost. This may happen due to various reasons.
Figure 3: A Typical Supply Chain (Vitasek and Manrodt, 2003)
The supply chain of a company generally has many layers. In case of variability, many layers can cause huge issues if the information flow between multiple parties in the supply chain is not seamless. The most watched effect in case of demand variability is called “Bullwhip Effect” (Vitasek and Manrodt, 2003).
Figure 4: Bullwhip Effect in a supply chain (Vitasek and Manrodt, 2003)
Demand side variations can cause bullwhip effect, whereas supply side constraints can cause stock outs or high inventory pileup due to batch constraints, production lot size constraint and transportation related variation and constraint.
Solutions to address supply chain issues are well-known to almost all, but in many cases, those are not used in practice. One of the most used processes for companies to match supply and demand is to model the whole supply chain on the basis of Enterprise Resource Planning (ERP) system for the whole organization and then make plans for production based on the forecast in the system. However, the main problem in most of those cases is that planners often use make-to-stock (MTS) planning process to plan all products (Hendricks, 2007). Although, MTS is good for products that have a stable demand, but these ERP based planning systems are not so good for make-to-order (MTO) based planning. These planning engines are good at optimizing between customer demand fulfillment and inventory level, but in case of MTO, items where the demand is sporadic, these systems often end up suggesting more production plan than the demand (Hendricks, 2007).
Figure 5: Volume-Variability Profile (Hendricks, 2007)
Demand supply mismatch is a common problem in all supply chains. Almost all companies face the issue of demand supply mismatch. If not managed properly, demand-supply mismatch can ruin a company completely. The major causes of demand supply mismatch include demand side variability, manufacturing constraints, variations in transportation, microeconomic factors (labor issues, raw material constraint) and macroeconomic factors (policy constraint, quota constraint, subsidy etc.). Due to demand-supply mismatch, a company may end up holding excessive inventory or may fail to fulfill customer demands. These effects may have a huge cost impact on the company and may cause significant stress. To improve this situation, it is important for the supply chain planners to categorize the products (MTS, MTO) based on volume and variability and plan accordingly.
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