Marketing Segments Customer Behavior, Why Can’t Supply Chain?

Ben YoKell, Sr. Manager, SIOP Practice Wednesday, March 21, 2012 As the ski season winds down here in Colorado, I’m driven to draw a parallel...

Ben YoKell, Sr. Manager, SIOP Practice
Wednesday, March 21, 2012

As the ski season winds down here in Colorado, I’m driven to draw a parallel between the notorious congestion on Interstate 70 and the importance of understanding demand in supply chain planning.  Two miles above sea level, I-70 passes right under the Continental Divide via the Eisenhower-Johnson Memorial Tunnel.  Despite the feat of engineering it represents, “The Tunnel” is cursed every weekend by thousands of people as it is the most common place traffic comes to a dead stop, oftentimes turning a 50 mile drive into a five hour journey.  Like many supply chain planning challenges, the basic issue is how to use available capacity to effectively meet demand.  On this particularly mountainous stretch of I-70, adding more capacity turns out to be prohibitively expensive and the demand signal is variable, unpredictable, and hopped up on Espresso.

It’s a lot like having a set of orders with extremely short fulfillment times suddenly hit a production line (apart from the road rage). There’s a limited amount of capacity available to produce those orders and if there’s not enough inventory on hand to cover the immediate need, service levels can fall (similar to people not arriving on time) and lost sales may occur (people turning around).  However, it is important to note that the I-70 gridlock happens only at the peak hours of weekend days; the rest of the time, there is plenty of capacity.  The question we should be asking is “What’s the best solution when overall capacity is sufficient but demand is spiky?”

If you happened to catch my previous blog, then you know that the answer to this question probably requires more than one initiative. I suspect it would have aspects of demand sensing and forecasting, demand shaping and portfolio management, and advanced production planning and scheduling. However, before we can be effective at deploying these techniques, we need to understand the topology of our demand and draw from my colleague’s “one size does not fill all in supply chain” discussion to realize that not all traffic behaves the same way.

Consider a solution inspired by demand shaping such as a toll during peak weekend hours.  With an economic disincentive for peak times, we’d hope that people would either carpool or drive off-peak.  Sounds pretty clever, until we realize that not every vehicle on I-70 will be equally price sensitive or have the option to drive off-peak; thus, the efficacy of the demand shaping approach may be limited.  For instance, what portion of typical peak traffic is high-income visitors who would be unaffected by a toll, and what percent is made up of commercial traffic or locals going to work with no schedule flexibility?

Consider your own organization.  What percent of your product portfolio is made up of high variability seasonal items, and what portion of your customer base actually contributes a margin loss once a total-cost-to-serve view has been brought to bear? To maximize returns, you should employ differentiated supply chain strategies; to employ differentiated strategies, you need to first segment and understand your demand.  Companies invest extraordinary time, effort, and money to understand customer behaviors for pricing and promotion.  Perhaps some of that investment should be diverted to understanding how customer behaviors drive the supply chain.

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