Introduction
I was recently looking at a collaborative article on LinkedIn about dealing with uncertainty. This got me thinking. I have been in the supply chain planning field for 25+ years and have heard words like uncertainty and volatility from the very beginning. However, it seems these words are being mentioned more often these days by the general media as well. According to a survey conducted by Gartner, 89% of Chief Supply Chain Officers (CSCOs) believe that we are in a prolonged Volatile, Uncertain, Complex and Ambiguous (VUCA) environment.
Over the years, I have seen how different companies deal with these uncertainties. One essential idea is to position buffers (safety stock) along the supply chains. To understand buffers, imagine driving along a highway in a car. As long as the pavement is smooth, the ride is smooth. But, say you hit a pothole. Or maybe a series of potholes. Now, if the quality of the shock absorbers in your car is good, you may feel these a little bit but keep on going. On the other hand, if the shock absorbers are not in good shape, you will feel the need to stop the car and check if something broke. In some extreme cases, things will break, and you will have to call a mechanic to fix the car.
The volatility and uncertainty in a supply chain is roughly equivalent to those potholes. The buffers act as the shock absorbers. The CSCOs are saying via that survey that there are too many potholes on the road. And therefore, they are highlighting the need for these buffers (or shock absorbers).
Now, there have been buffers in the supply chain for as long as I have been aware of the phrase.
Types of Safety Stock
- Capacity – Companies may install extra (safety) capacity and have that available to deal with a surge in demand. This can be in the form of machine capacity of internal facilities or external tollers but also could be in the ability to call in an extra shift to produce more.
- Competition – Some companies prefer to negotiate with the competition and decide to deal with the volatility by bringing in extra supply from the competition. It may be a slightly higher cost at the moment but might be cost-effective in the overall scheme of things.
- Flexibility – Some companies will follow delayed differentiation or postponement techniques to deal with the volatility related to the packaging of products or forward locations. By holding the inventories upstream, be it in the location or the BOM hierarchy, these companies create the desired agility to deal with the expected volatility.
- Inventory – All companies create some type of cushion via inventory so that in case there is too much demand or insufficient supply, they can still supply their customers for some time. This leads to safety stocks in the supply chain.
Register now and join us on Wednesday, December 13, 2023 at 11 a.m. ET as Sujit Singh discusses how to calculate safety stock and evaluate different methods in our next live webinar.
