When Demand Strains the Supply Chain


I’m sure you’ve seen it. Grocery store shelves, 20 – 30 feet long and three levels high, completely sold out of…toilet paper? There’s an interesting behavioral phenomenon occurring right now, as panic buying is driving people to purchase 5X more toilet paper than they would ever use. Interviews with grocery executives from Kroger, Wal*Mart and HEB reiterate the confusion of why people are stocking up? What isn’t seen is how this panic buying is straining the supply chain.

The attached news article link briefly covers what Georgia Pacific is experiencing, with demand between 120 to 150% of normal. To their credit, they are ramping up their supply chain to try and manage, but it takes time, resources, supplier partnership and strategic planning. Having worked in seasonal categories for many years, I can attest to the challenges of ensuring adequate supply during massive demand surges. In some of our seasonal categories, we had to manage up to +300% increases in demand, for a shortened period of time, which no supply chain is built to handle consistently and seamlessly. However, here are three best practices:

  1. Plus 20 to Plus 100. Non-seasonal businesses are typically built to handle a +20% increase in near-term demand without cuts or out of stocks. Seasonal businesses, defined as categories that typically have 65% – 75% of sales within a 4 – 6 month window, have to be better prepared to deal with the season demands, and will typically be able to handle up to a +100% increase in demand without material cuts or out of stocks.
    1. Why not more? As businesses continue to review ways to cut costs, improve efficiency and drive profitability, having idle capacity ready “just in case” is not a sound & feasible business model, and neither is running product lines to load warehouses full of product.
    2. Allocation. As you assess a demand surge, be aware that customers will place massive orders just to try and protect their shipments AND ensure they get product at another’s expense. You can combat this by establishing a clear allocation plan. For example, let’s assume demand is running +200%, and three of your top (read: 80) customers place an order for +350%. If you have been planning ahead, you would have an allocation plan established that would be communicated to all customers. In this example, your allocation plan may be fulfilling +180% of previous 3 months demand, with a flexibility to increase pending some operational actions. This ensures all 80 customers will have product, but clearly establishes there may be additional support or some cuts depending on the supply/demand balance. If you focus on only supplying your top customer (ie, just Wal*Mart or Costco), you run the risk of alienation and losing merchandising, distribution and support from other customers. And being singularly tied to just one customer has inherent risks that you definitely need to consider.
  2. Integration & Partnership. To have any chance at successfully managing demand surges, your supply chain has to be built through partnership & collaboration, not oppression and penny pinching. An integrated supply chain will include elements like shared capital investment, seasonal shifts in raw material inventory held by the supplier, improved real-time data exchange so market rate of demand can be assessed daily, service & metric sharing to both align and incentivize superior performance, and agile decision making to ensure a focus on the “80” – that is, the core products/sku’s/segments that drive 80% of the business. Remember, integration through the supply chain includes all functions that touch product, from sales & customer service placing the order to the logistic provider who delivers it. After all, if you can make product, but cannot deliver it, you’ve not met demand. There has to be alignment, integration and collaboration throughout the entire supply system.
  3. Strategic Planning: The Whipsaw Effect. There are two golden rules when dealing with this type of demand surge. (1) Any and all forecasting will be wrong; (2) The demand surge will slow down as fast as it accelerated. This is where communication with sales & customers, discussions with other industry professionals and government agencies, and good strategic planning are invaluable. The last thing you want to do is build for a continued surge, then have it abate, leaving you with warehouses full of finished product that has no route to market. What can you do?
    1. Know your 80. Your customers, products, materials & channels that are responsible for 80% of your sales. And make sure you focus on keeping your 80 in-stock and supplied. Keeping your 80 in-stock will demonstrate your dependability to your customers and enable you to focus your resources for maximum value.
    2. Create Agility in Your Assembly/Filling. Having a warehouse full of finished goods that have no home is working capital tied-up, extra inventory that may have a short shelf life, and is asking for huge, unprofitable discounts to remove, damaging EBITDA. Instead, through your investment & strategic planning, ensure you have built-in agility to increase or decrease the final assembly or filling in-line with demand (with a focus on the 80). If you need to “lean-in” on something, make it a critical raw material that has use beyond the surge, can be used in other product lines or can be sold in the market at market prices.
    3. Think holistically. When you consider how much inventory you need, remember to think holistically through the entire supply chain. How much stock is in-store, in-transit, in your shipping docks or 3PL and in your plant? How much raw material is in your plant, in your tier 1 and 2 suppliers, and is there an industry dynamic that is impacting availability of any key materials? Once you map this out, you can accurately assess the risk/reward profile, where you need to invest, how you can share investments with 80 suppliers and what your contingencies are once the demand surge slows.