The idea of supply-chain has become part of our lexicon in recent years. But understanding the need can seem complicated. In fact, it’s anything but. However it’s clear that some businesses face challenges which require immediate action.
A supply-chain simply describes the journey from demand to supply. In its simplest form we can think of our most basic demand – we need to regularly hydrate. Our body creates the demand. Just by going to the tap we can satisfy this demand with an online supply. Unfortunately in a global marketplace supply and demand normally become physically distant. Also demand becomes more specific and complex or multiple parts are needed to satisfy it. Consequently, businesses establish replenishment inventories to satisfy the customer’s demands. This is like where, being away from a water source for a time, one carries a bottle of water for replenishment of your thirst.
The amount of replenishment inventory held is guided by three factors:
- The supply requirements specified by the customer – how fast/how often?
- The demand variability – variation you experience from your customer.
- The supply variability – variation you experience in your supply.
Whether businesses are aware or not, they usually operate a relationship between how much stock they hold and the three factors above. A competent person responsible for distribution will understand how much stock they need to cope with normal variability. However large scale variability can result in stock-outs and/or big overstocks, generating loss of customers and/or money. On one hand the business cannot supply the demand. On the other, the investment in stock is ineffective and wasteful.
This is why we are facing the “perfect storm” currently. Brexit has significantly impacted supply variability due to delays in distribution for many industries. And demand variability in some industries due to Covid 19 has been on a scale from very disruptive to disastrous.
Working capital increases due to the variability experienced, increasing the cost of doing business. A clear picture of the supply-chain variables and the variability detail is important. Otherwise business owners will struggle to maintain service and minimize costs in very difficult circumstances. In these times of great difficulty it pays to invest in supply-chain support to understand the variables and react accordingly.