Demand Amplification within the supply chain
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It comes as no surprise that actors within the supply chain (suppliers, distributors manufacturers etc) influence each other. The concept of an integrated network is nothing revolutionary and the cause and effect nature of these relationships has been at the center of various studies for many years.
An area of specific interest are the difficulties associated with schedule of supply and production to meet demand. Demand can be erratic with peaks and troughs commonplace within most organizations. These variations in requirements and supply are amplified within the supply chain when re-orders are made – this is then rippled through the tiers of the supply chain (distributors, manufacturers, raw material suppliers). Accommodating these fluctuation increases the cost of doing business by building inventory throughout and lengthening lead times.
Much of the early work in analyzing these patterns was carried out by Jay Forrester. Forrester was a systems theorist who utilized computer simulations to monitor the effect of interactions between actors and industrial business cycles.
The research carried out by Forrester focused on the disturbance to the supply chain as a result of reorder patterns. He used computer simulation to demonstrate the distortion of order information that occurs along the supply chain demonstrating that fluctuations in demand patterns had dramatic affect on inventory levels and manufacturer output. Through computer simulation, in one case Forrester was able to demonstrate that a 10 per cent increase in sales rippled through suppliers and distributors (through increased inventory holdings) to an output increase by manufactures of 40% resulting in unnecessary costs.
Forrester showed that the lag in information between supplier chain participants produced medium term demand amplification which rippled through the supply chain. In understanding the nature of the integrated supply chain and the need to ensure the smooth flow of information and materials, Forrester was perhaps an early pioneer of supply chain management
The subject of demand amplification has been researched by various professionals apart from Forrester. Jack Burbidge carried out studies around the same time as Forrester (early 1960’s) and identified similar issues (although focused on the topic from a manufacturing perspective and focused on short term demand amplification as a result of internal decisions on the timing and size of batches).
Despite Forresters work being carried over 50 years ago – it’s still acutely relevant today – and modern improvement programs often utilize the theory – overlaying it on modern organizations, recognizing similar patterns and reviewing how improved communication
and sharing of information and forecast data can reduce the bullwhip effect that Forrester defined.