Variability Magnification

Maintaining an efficient supply chain is paramount to ensuring efficient production. Variance in supply volume can create bottlenecks and starvation at different stages of the supply chain, and thus will impact different stages of production as well. Variance, then, leads to inefficiencies in production.

End-user consumption of finished goods carries inherent variability. As such, the retailer will add safety stock to its numbers. Later, the manufacturer will build a greater amount of variability into production numbers in order to meet the retailer’s needs. As a resultant, the supplier of the raw materials must produce the raw material with even greater variability in order to meet the cascading demand variance communicated through the manufacturer. This is known as variability magnification.

If consumption varies 10% at the consumer level, the retailer must stock buffer quantities equal to that amount in order to meet consumer demand. If the retailer’s order from the supplier has a 10% variance, the manufacturer must maintain an additional buffer – let’s imagine that’s a 10% buffer, as well. Finally, the supplier must also build a buffer of safety stock into its numbers in order to meet the previously mentioned buffers. If that variance is also 10%, we now have greater than 30% variability built into the supply chain. As you can see, even a small amount of consumer demand variance can have a great effect upstream in the supply chain.

For this activity, respond to the following:

• Imagine you are a manufacturer who produces finished goods for the end-user or consumer. Identify at least three important qualities you would look for in a supplier of raw material, such as agility or financial stability.
• Describe at least two different ways to reduce variability, such as synchronizing parts of the supply chain or automating your ordering process.

A minimum of one reference is required.