Supply Chain Forecasting

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Factors Affecting Supply & Demand

Supply chain managers should have a clear understanding of the different factors that can influence supply and demand. Managers should be able to capitalise on increased demand and look for cost savings and opportunities provided by increased supply. Failing to understand supply and demand will make it difficult to anticipate and manage supply shortages and may increase the negative impact of a reduction in demand.

Supply can be negatively affected by factors totally outside of the control of organisations further down the supply chain. For example, a factory that supplies raw materials to a manufacturing plant is badly damaged in a fire and is unable to operate for two weeks. The manufacturing firm that relies totally on their supplier has no contingency plan in place and as a result, they have to close for two weeks. As a manager at a retail store, you run out of products to sell, are unable to replenish your inventory and your sales are badly affected.

This example highlights the risks of total reliance on a single supplier. Ideally, managers should aim to source products from more than one supplier to reduce their risk, or alternatively, they should have an agreement with a backup supplier in Factors Affecting Supply and Demandcase of emergencies.

There are also factors that can negatively affect the demand for an organisations products and services. An example of this would be a downturn in economic conditions. Customers have less money to spend, resulting in them purchasing less and impacting on demand for products and services. As supply chains become more global, variable economic conditions continue to have a greater impact on the effective management of supply chains[1]. It can often be difficult to address factors resulting in reduced demand, however, you can use marketing, competitive pricing and product diversification to maximise your profit making potential during difficult times.

Demand can be impacted by either independent or dependent factors. Independent demand is the demand for a primary product, for example a car. Dependant demand is the demand for a secondary product related to the primary product, for example car tyres. The demand for the secondary product is dependent on the demand for the primary product.

During periods of increased demand, it is vital that managers are able to work towards maximising the profit earning potential of their organisation. Demand may be increased due to favourable economic conditions, seasonal changes or emerging and popular trends. Positive changes in supply can be caused by new suppliers entering the market, beneficial environmental factors or even through changes in government policy. An increase in supply should provide managers with an opportunity to reduce costs through new agreements and seek opportunities with new suppliers.

[1] Dec 2009, ‘Survey shows significant supply chain risks: material costs, supplier stability cited by manufacturers', Industry Week, vol. 258, no. 12, pp. 26.