The Impact Of Demand Variability Business Essay

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The consumer market place is becoming increasingly volatile, dynamic and fragmented. People tend to demand different levels of quantities within different time periods to fulfill their needs and wants. Due to this high demand variability, companies face many difficulties when carrying out their demand forecasting processes to identify future demand. Therefore, these changes in marketplace ask for a process of dynamically assessing and managing demand. Shrinking product life cycles and volatile market place are sharply increasing the costs of demand management errors.

Struggling and coping with uneven demand is one of the toughest challenges faced by the cement manufacturers. Most cement related organizations experience cyclical (weekly, monthly, etc.) fluctuations in the level of demand and if not addressed properly, it will result in either reduction in customer service level (when demand is high) or in underutilized resources (when demand is low). Mitigating the above mentioned consequences requires that the organization adjust its capacity with the variations in demand (capacity management), or change the demand pattern to better match the available capacity (demand management), or use these two strategies in combination.

Currently cement industry is facing a higher level of demand variability as the consumer requirements are very hard to predict with the current economic context of Sri Lanka. As the numbers of construction projects are increasing, it is difficult to predict when customers will ask for massive volumes of cement from cement manufacturing organizations. Even within the retail segment also customer buying patterns are unpredictable. Due to this higher level of variability in demand levels, it will affect how manufacturing companies design and manage their supply chains and also it affects the level of relationship between retailers and suppliers. Due to this unpredictable demand patterns, retailers and manufacturer's reduced the level of finished goods inventory hold within their premises.

Due to the inventory levels being streamlined within the manufacturing organization, it will have a greater impact upon the entire manufacturing supply chain within cement industry.In order to reduce costly excess inventory, cement manufacturing companies store cement within silos according to the forecasted demand levels and the cement will be packed in to a bag when an order from a customer received by the manufacturer. In turn cement manufacturers and their suppliers have to bear rapid changes in demand while maintaining a less inventory of raw materials and components.

In the past, when the consumers were more predictable, the companies produced product and pushed it downstream close to the customer. With cheap fuel costs, it didn't matter if inventory was in the wrong location. Now with freight costs so high and consumer behavior so unpredictable, the manufacturing organizations have begun to hold product upstream as long as possible. Due to the higher level of demand variability for products, it will result in an increase in the supply chain costs and activities of an organization.

Cement manufacturers in Sri Lanka are operating in an oligopolistic market where, only few number of cement manufacturers are established in the industry. These few players have a good market share within the cement industry of Sri-Lanka (Mainly 07 large players within Sri Lankan market including Holcim (Lanka) Limited).

Due to a small number of competitors, the level of competition among each other is very significant, each and everyone tries to capture a higher level of market share and try to be the market leader in the Sri Lankan cement market. Sometimes, many of the large players negotiate with each other and fix price limit for the products which they offer. This is also defined as price cartels. This practice is normally carried out by the oil producing companies, as they have a good market share globally, as well as no one has still found an alternative energy source, which is effective and efficient as oil. Due to this reason those companies dominate in the global business world.

These price fixing practices put a huge burden upon consumers as they will not be able to find an alternative product within the short run as well as in the long run. But in the context of cement industry, there is no such practice in Sri Lanka and the entire cement suppliers are trying their best to provide their products at a competitive price towards their end customers. Government of Sri Lanka has intervened in the cement market as a regulator, in order to reduce unfair market practices carried out by cement manufacturing companies and they have established a price ceiling of maximum retail price of Rs.940/= for a 50 Kg bag of cement.

In order to reduce the higher level of demand variability faced by an organization, the management of an organization should implement proper demand management/demand smoothing practices within the organization, in order to reduce the level of supply chain costs of the organization as well as the level of supply chain activities of an organization. These demand management practices are more applicable up on organizations which are in to manufacturing processes.

Demand management is a broader concept and it tries to capture a more complete view of the business operations of an organization. Demand management is not only forecasting. Demand management is all about managing all the activities associated with discovering markets, planning products or services for those markets and then fulfilling the customers demand. It is anintegrative set of processes across, where not just the enterprise, but the trade partner networks also need to be monitored.

A good demand management process can enable a company to be more proactive to anticipated demand, and more reactive to unanticipated demand.

In other words we can explain demand management as the process of changing the demand patterns to match the available capacity of the organization.

1.2 Aim of the Research

"Finding out the impact of Demand variability up on Supply Chain costs/activities of HLL and aligning demand for products with the available resources to ensure customer needs are met and their satisfaction is maximized." (Managing demand with the available capacity levels)

This particular project was carried out in-order to investigate whether there is any relationship between demand variability and supply chain activities/costs of HLL. According to the findings, methodologies have been introduced to smooth the demand levels (demand shaping) of the Holcim Lanka, in-order to provide an efficient and effective customer care and service to the end customers. It includes a brief review on the existing level of demand variability with in HLL and how it affects the supply chain costs and activities of HLL. Finally, has suggested ways in which demand can be smoothen or reduce the level of variability in demand, in order to face the higher level of demand variability in future.

There is a smooth demand pattern within the cement industry and there are no such high peaks or declines can be seen when we analyze industry related demand data. But when analyzing the company data, there is a higher level of volatility within the company sales data. It means that the demand for cement has been manipulated by the intermediaries in a way, which is supportive for them. Intermediaries have created a pattern on their own and it affects the smooth operations of the manufacturing plants of HLL within the short run as well as in the long run.

As the demand variability of HLL is too high, company is facing many difficulties and has to conduct many costly operations to satisfy their ultimate customer needs. When the demand variability is very high, the company has to face many difficulties such as, customers waiting until the final product being loaded to their trucks, increase in wage costs due to the payment of overtime charges to the workers, increase in transportation cost, loss of market share, stock out situations in the market, maintaining a higher level of safety stock, supply chain planning discrepancies and etc.

Therefore, in-order to reduce the unwanted costs incurred by HLL within their supply chain, due to large variations in demand levels and in order to plan the supply chain processes in a cost effective manner, a demand smoothing process need to be implemented within the organization. It means that this project gives more priority upon identifying the relationship between demand variability and supply chain costs/activities of HLL and finally it suggest demand smoothing (sensing/shaping) methodologies need to be introduced within HLL to gain more benefits in near future.

1.3 Profile of the Company

Holcim (Lanka) Limited is the only company who engaged in the cement manufacturing process in Sri Lanka and also they import cement when the demand levels from customers are too high. But their main concern is to manufacture cement within Sri Lanka as much as possible as they have enough resources within the country and to aware all the Sri Lankans that the cement is a final product which manufactured within Sri Lanka, in-order to create a brand image of made in Sri Lanka. Holcim Lanka is a part of the global Holcim group. Being the market leader in the cement industry, the company focuses on economic, social and environmental performance along the triple bottom line of sustainable development.

Holcim (Lanka) Limited is operating in an oligopolistic market where, only few number of cement manufacturers are established in the industry. These few players have a good market share within the cement industry of Sri-Lanka (Mainly 07 large players within Sri Lankan market including HLL).

The company currently operates one fully integrated cement plant in Puttalam, while also operating a grinding plant in Galle (425,000MT). The Puttalam plant has a clinker manufacturing capacity of 530,000MT and a cement grinding capacity of 975,000MT. Limestone deposit is obtained from Aruwakkalu quarry which is located 41 km away from the plant.

Holcim Lanka currently has 04 main fixed warehouses in different parts of the country and they are located in Colombo, Kurunagala, Jaffna and in Trincomalee. These warehouses are mainly contributing to satisfy the demand of end customer in an effective manner (without any delays) and to show the presence of the company cement and market coverage around different parts of Sri Lanka. All the products of HLL will be distributed to the respective dealers via a complex distribution network consisting of main distributors, sub distributors and direct dealers.

The Holcim cement range meets customer requirements with the application based sub-brands such as, Supiri (concrete applications), Pedereru (masonry applications), Ambuja (concrete product applications), Readyflow and Extra for infrastructure and project applications. Holcim Lanka also manufactures special cements for large scale infrastructure projects. In addition Holcim Lanka provides a host of technical services as construction solutions to its customers. The company operates in all regions of Sri Lanka selling cement and providing services, creating approximately 15,000 (direct and indirect) employment opportunities.

Holcim Lanka has defined two methods to distribute/sell the final outcomes of their manufacturing processes. (i.e. - Cement) They are,

Pick-up - this is where the customer comes in to the manufacturing plant straight away and picking up the cement from the packing terminal. Within this definition it also captures the customers who pick up cement bags from the warehouses of Holcim Lanka.

Delivered - this is where the Holcim Lanka Company delivers the cement directly to the end customers place. This operation can be seen mainly in bulk operation. Transportation of cement is carried out by a third party contractor.

Holcim Lanka experiences a low demand situation within the period of 2008 to 2009, due to the war era of the country. Currently Holcim Lanka is facing a market situation called high demand situation (sold out market), where customers are asking for more and more cement, but the company doesn't have enough production capacity to cater that level of demand. It means that the demand and supply of cement is not matching and there is a scarcity of cement availability within the market. This will be a great opportunity for our competitors as they can establish a good market for their products. Therefore, in-order to avoid market share losses, profit losses, customer losses and etc. the organization should develop a plan to dispatch their products to all the customers in an effective manner, by safeguarding the existing levels of market share of the company. From mid of 2010 onwards, Holcim Lanka is facing a high demand situation (sold out market).

Company also divides their current and potential market in to two categories. They are,

Retail Market - End customer (small scale cement users) or intermediates (hardware owner, distributor) in the supply chain of cement are included in this category

Industrial Market (B2B market) - End customers who will be using cement in a large scale manner, (i.e. - for projects) and manufactures who are involved in manufacturing cement related products, such as asbestos sheets, asphalt and etc.

Illustration No. 01:

Management Structure of HLL

Source: Intranet Network of HLL

1.4 Objectives of the Research

To find out demand patterns and trends of HLL within last five years

Identifying the level of demand variability by analyzing historical sales data from year 2007 to year 2011.

To understand key factors affecting up on high demand variability in HLL

Discovering the factors affecting upon high demand variability

Identifying factors which are specifically having effect upon high demand variability in Holcim Lanka

To find out the factors of supply chain costs/activities of HLL varies with the level of variability in demand for HLL's products

Discovering key supply chain activities/costs get affected by a higher level of demand variability

To investigate and identify the relationship between demand variability and supply chain costs/activities of HLL

Identifying and calculating how supply chain costs get affected, when level of demand variability changes within HLL

To identify and recommend demand smoothing/management techniques within Holcim Lanka, in order to reduce the level of demand variability of HLL

1.5 Significance of the research at Holcim Lanka Limited

Demand management is not expected to reduce the scope or standard of products (cement) to offset management deficiencies elsewhere in the company. It aligns demand for products with the available resources to ensure genuine needs are met and customer satisfaction is maximized.

Successful demand management requires the organization to clearly understand that their corporate role is not to provide larger number of products (cement), but to provide:

Effective product outcomes to meet identified customer needs

Assess if the customer needs are changing and

To respond appropriately and within the available resources.

This requires that the organization should develop a close working relationship with their customers based on thorough knowledge of their characteristics, needs and expectations.

An important component of demand management is finding ways to reduce demand variability and improve operational flexibility. Reducing demand variability aids in consistent planning and reduces costs. Increasing flexibility helps the firm respond quickly to internal and external events. Most customer driven variability is unavoidable, but one of the goals of demand management is to eliminate management practices that increase variability, and to introduce policies that foster smooth demand patterns. Another key part of demand management is developing and executing contingency plans when there are interruptions to the operational plans of the company.

Most demand management efforts may be characterized as demand smoothing as they primarily aim to increase the demand during slow periods and reduce the demand during peak periods. The reason for this is clear: smoother demand lessens the need for costly adjustments in capacity. Therefore, Holcim (Lanka) Limited should try their best to smooth their demand levels by either trying to influence their customers to change the target achieving dates or by scheduling the arrival of customers towards the company premises in advance.

Demand management can be used in both market situations, which are defined as high demand (sold out market) situation and low demand situation. In a high demand situation, customers are asking for more cement, but the organization doesn't have enough capacity to cater that level of demand. In a low demand situation it is vice versa, that is customers are not demanding for more cement, but the company have enough capacity to cater a higher level of demand than the existing level of demand.

In both these situations, if the company doesn't take much required actions to manage the level of demand variability, by smoothing the demand levels or scheduling the distribution process and etc., then Holcim Lanka will face many consequences/circumstances in the short run as well as in the long run. Consequences can be classified as follows,

Short run

Loss of sales and it reduces the profit levels of the company

Higher levels of complaints from customers (Unsatisfied customers)

Higher level of congestion within the manufacturing plants

Increase in safety stock maintenance cost

No proper smooth terminal running (ad-hoc running)

Opportunity cost of not running the grinding units in an effective manner

Higher level of overtime (O/T) payments will need to be paid to workers

Increase in the number of handling damages due to the higher level of work load

Long run

Loss of market share to competitors

Loss of higher level of profits

Lower level customer retention within the organization

Discrepancies in supply chain planning processes

Large sum of money stuck in the stocks

Increase in the staff turnover due to the higher level of work load (unsatisfied employees)

Unnecessary machinery running cost and importation of raw materials/cement will need to be carried out

In-order to avoid above circumstances, Holcim Lanka should implement an effective demand management system within their organization. The levels of demand of the organization play an important role in the supply chain planning process. Because the level of demand is the key input which plan out the whole process of supply chain and therefore, managing it in an effective manner will create many benefits towards the organization as well as towards their stakeholders as well.

When the level of demand is low or high, based on the situation, supply chain planners should develop plans to smooth the day to day operations of the organization. If there are any discrepancies in the supply chain planning process due to the demand variability, then it will have a higher level of financial as well as non financial impact upon the organization.

Now you can understand the significance of demand management for an organization. The impact which demand variability creates will differ from organization to organization based on their level of operations. A manufacturing organization like Holcim Lanka will have a greater impact upon its operations due to the demand variability, as the organization is planning out all their activities based on the demand levels.

Therefore, when the demand levels starts to change, the smooth operations of the factory as well as the whole value chain of the organization will get affected. In-order to avoid those circumstances, Holcim Lanka should plan and implement an effective demand management system within their organization in the future, in-order to survive in the market without losing their valuable competencies to the competitors.

1.6 Limitations of the Research

Although this research was carefully prepared and has reached its aim, there were some unavoidable limitations and shortcomings.

First, because of the time limit and based on available data, the analysis have been carried out utilizing the historical sales data, up to past five years from 2007 to 2011 of Holcim Lanka Limited

Second, this particular project only observes the level of demand variability faced by Holcim Lanka Limitedand it propose methods/techniques which need to be put into operation within the organization to smoothen/overcome the high demand variability levels in future. If there were more time being offered to carry out the research, then this research would have extended towards the cement industry of Sri Lanka as a whole.

Third, demand pattern/trend identification and discovering correlation between variables have been carried out based on the secondary data collected from the ERP system of Holcim Lanka Limited. The level of accuracy and integrity of data is not high as primary data and data had to be modified in-order to cater the needs of the project.

Fourth, Due to the lack of reliable data, the analysis has been carried out only upon Holcim Lanka Limited. There were some good sources of information from this particular company and therefore the scope of the analysis have been reducedand decided to carry out research only upon Holcim Lanka Limited.

Fifth, the findings of the study were based on the assumption that information provided by the respondents is correct. Some of findings are substantially based on the information given by the respondents. The bias attitude of the respondent can be a limitation. The survey is limited to 50 respondents from employees within supply chain of HLL and 50 respondents from customers of HLL, which is very small compared to the population. Hence, this sample size may not be truly representative. Due to their busy schedule, many respondents did not cooperate.

Finally, there were very limited numbers of articles available upon the research topic. Due to this scarcity of resources it was very difficult to lay a good foundation to understand the research problem, which has been chosen as the research topic. Because of this reason, new model have been developed to identify whether demand variability have a significant impact upon the increase in supply chain costs of Holcim Lanka Limited.

1.7 Definitions of Key Terminology

Demand Variability - Range of values for demand (quantity demanded), which is variable based on effort in marketing or promotions, seasonality, holidays, special events and other extrinsic factors.

Supply Chain - It is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer

Supply Chain Relationship Management - Management of relationships with supply chain partners to match performance with measurements and rewards so that all companies in the supply chain are fairly rewarded for overall supply success

Independent Demand - The amount of product demanded (by time and location) by the end-use customer of the supply chain

Derived Demand - Demand that is derived from what other companies in the supply chain do to meet their demand from their immediate customer (i.e., the company that orders from them).

Dependent Demand - Demand for the component parts that go into a product.

Oligopolistic Market - It is a market form in which a market or industry is dominated by a small number of sellers. Lack of competition can lead to higher costs for consumers.

Regulator - An agency established by central government for the control of or intervention in the operation of markets

Cartel - It is a formal agreement among competing firms. Cartel members agree on price fixing, total industry output, market shares, allocation of customers, allocation of territories, division of profits and etc.

Anticipated Demand - Expected/forecasted level of demand for a product

Unanticipated Demand - Unexpected/sudden rise in the level of demand for a product

Proactive - Creating or controlling a situation by causing something to happen rather than responding to it after

Reactive - Acting in response to a situation rather than creating or controlling it