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Chaotic supply chains often choose the wrong demand signal.
Choice of demand signal is an important component of supply chain design. It is often the most important choice, which can result in either a stable or a chaotic supply chain. Chaos is not necessarily due to an external cause, our internal choices can also lead to chaos. Demand Signal is one of those choices.
A typical CPG supply chain has at least 5 choices for defining demand. The most common is the sales done by the company. It also happens to be the most error-prone. It is farthest away from actual consumption and suffers from the highest level of bullwhip effect.
Good demand signals are closer to actual consumption. Consumer offtake is closest to consumption and has the least distortion caused by bullwhip. It is possible to select it as the demand signal for certain channels like D2C through the company’s website. It is also possible to select it for certain marketplaces where consumer offtake data is shared by the platform.
Channels like General Trade don’t give us access to the actual consumer offtake. We can select the next best option of retail orders as the demand signal for this channel.
As the signal moves closer to consumption, it gets more pristine. Our ability to influence it goes down without bringing in some additional demand drivers. As a result, it has less bullwhip impact.
Supply chains can become less chaotic just by selecting the right demand signal, even with the current level of capabilities in terms of flexibility and responsiveness.