Discuss how a firm can respond to predictable variability of demand in the supply chain

Question

What will be an ideal response?

Answer 1

Answer: Faced with predictable variability, a company's goal is to respond in a manner that maximizes profitability. A firm must choose how to handle predictable variability by utilizing techniques in two broad categories:
1. Manage supply using capacity, inventory, subcontracting, and backlogs.
2. Manage demand using short-term price discounts and trade promotions.
The use of these tools enables the supply chain to greatly increase its profitability because it is able to match supply and demand in a much more coordinated fashion. One way to meet seasonal demand requires carrying enough manufacturing capacity to meet demand in any period. The advantage of this approach is very low inventory costs, because no inventory needs to be carried from period to period. The disadvantage, however, is that much of the expensive capacity would go unused during most months when demand was lower.

Another approach to meeting demand would be to build up inventory during the off season to keep production stable year round. The advantage of this approach lies in the fact that a firm could get by with a smaller, less expensive factory. High inventory carrying costs, however, make this alternative expensive. A third approach would be for a firm to work with their retail partners in the supply chain to offer a price promotion during periods of low demand. This promotion shifts some of the demand into a slow period, thereby spreading demand more evenly throughout the year and reducing the seasonal surge. Such a demand pattern is less expensive to supply. A company needs to decide which alternative maximizes their profitability.

Often companies divide the task of supply and demand management between different functions. Marketing typically manages demand and Operations typically manages supply. At a higher level, supply chains suffer from this phenomenon as well, with retailers independently managing demand and manufacturers independently managing supply. With supply and demand management decisions being made independently, it is increasingly difficult to coordinate the supply chain, thereby decreasing profit. Therefore, maximizing profitability depends on these decisions being made in a coordinated fashion and requires supply chain partners to work together across enterprises.