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Pharmaceutical Manufacturing and Packing Sourcer

Reducing Volatility by Demand Chain Management

When designing a production system we are often confronted with the challenge of providing adequate capacity to meet demand as it arrives in the factory. Wild fluctuations in demand can, unless interrupted, lead to the over-provision of capacity and therefore higher unit costs. Underlying demand, the demand chain amplifications and inflexibilities and variabilities in the plant, must all be managed if this effect is to be avoided.

We can observe that there are significant differences between actual consumption or demand arising at the consumer level and orders as they arrive at the plant. Even where we have an underlying seasonal fluctuation, we observe that there is an amplification of this volatility. This effect is explained by the fact that there are several stages in the demand chain and each of them introduces an additional disturbance in the signal as a result of queuing and batching, and tactical over-ordering.

There are two ways of handling variation in the demand chain, either by reducing variability and inflexibility of the in-house processes, or by reconfiguring the demand chain completely so that the producer picks up the demand signal earlier.


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By Peter Willats, Director of Manufacturing Practice at McKinsey & Company

Peter Willats is Director of McKinsey & Company's manufacturing practice and a Director of McKinsey's Production Systems Design Centre (PSDC). An economist by training, Peter Willats moved into the industry as a member of the board of GKN Automotive in the 1980s.

Subsequently he founded the Kaizen Institute, before joining McKinsey & Company in 1996 as part of a deliberate policy by the management consultancy to build up expertise in manufacturing systems.

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