“Demand volatility” can be described as: a change in demand inside of order lead time whilst “demand variability” is described as: a change in demand outside order lead time. Demand volatility will be used for the purpose of this article.
Demand volatility is the gap between what we expect to happen and what actually happens with the product that we deal with. Demand volatility is the weak link in the ostrich industry supply chain as role players have to deal with a wide range of factors impacting on demand, such as fashion trends, the fickle behaviour of customers, exchange rates and interest rates. Back at the farm the factors of avian influenza, feed costs and raw material quality also have an influential role on demand volatility.
The following table will show to what extent ostrich leather is exposed to demand volatility in the Oriental markets. Statistics are based on 2010 exports to the 4 largest markets in the region representing 30% of total annual exports.
Export info as per SARS
This volatility is not unique to the Oriental market and it is experienced in all markets to which the industry is exporting. Maintaining an effective supply chain from farm to market is therefore severely challenged.
Ostrich leather is the exotic leather least impacted by import and export regulations
Ostrich leather is the exotic leather least impacted by import and export regulations, with no CITES documentation being required to move from country to country. On average the total annual quantity of area produced is equal to 80000 bovine hides. If worldwide crocodile, python and lizard production is considered, ostrich leather is definitely the smaller leather producer compared to other exotics.
The industry is furthermore a leader in product traceability from farm to market, with a Code of Conduct which covers all areas of farming and processing. In the Klein Karoo region, the industry is also a participant in the protection of the biodiversity of the area.
The reason for referring to all of this is that the industry is doing what it needs to do, to be recognized as a responsible- and sustainable producer of exotic leather. This is a very unique situation compared to what is happening in other areas of the exotic leather industry. In my opinion the ostrich industry does not deserve the volatility in the market which it is experiencing.
What then should we as an industry do to deal with this problem?
Traditionally the ostrich leather supply chain was a push-to-market compared to that of today, which is a pull-from-market. The industry was in a position to decide how much-, to whom-, where- and at what price ostrich leather should be sold. With a push-to-market-approach, volatility was less of a problem as inventory was used to even out demand. In a pull-scenario, where the market decides where the product will be placed and what it will pay, inventory can be an extreme risk, especially if you consider that the stock turn of ostrich leather is only once a year and there are no suppliers, nor service entities that can share the burden of inventory. The industry must therefore have the capacity to carry inventory; which is basically funded by producers. It is obvious that this can only be done up to a point as there must be cash flow to producers.
Another dilemma is that the supply chain despite being fairly short, the time lapse between the farmer deciding to start producing eggs and the day that a skin is sold can vary from 24 to 30 months. The ability to forecast fashion-market conditions and in particular, for ostrich leather in 30 months’ time is a challenge. Being faced with this situation there are only two decisions that can be taken: Either take the risk and build inventory or; cut production – with the danger that producers may step out of the industry. Normal market demands will tell you to reduce raw material prices which will also have negative results for the producer’s base.
Despite all the aforementioned, longer-term forecasting, of at least 3 years, needs to be done. Sales forecasting using past performance are still the most obvious method to predict future demand. It should be borne in mind though, that forecasting will not take away the volatility and its purpose, at best will be to assist the industry in dealing with this issue. It is generally accepted that a 70% to 80% correct forecast is acceptable. The ostrich industry, being very transparent with a myriad of factors impacting on it, requires at least 90% accuracy. A very quick increase in inventory or reduction in production (when farmers are told to produce less) will have a negative impact on the industry.
The industry must find a way to deal with demand volatility and some positive steps have been taken.
In recent years the ostrich industry made progress to at least have a better forecast on raw material supply. This is the result of avian influenza which forced the industry to record the movement of all ostriches. This information covers all ostriches from breeders; chicks right through to slaughter birds. In recent years, very accurate forecasts were made in terms of slaughter quantities and this information was used to caution producers on what they should realistically produce. This already has made a big impact on the industry allowing those involved to plan how they will deal with different scenarios. At best this information can be used to cover a forecast period of 12 to 18 months.
About 90% of ostriches in South Africa are covered by this information.
The challenge is to refine the demand forecast to cover a 3-year horizon. In this instance the industry is also assisted since 2008 by having its own harmonised tariff codes for the different products derived from ostriches. This information is however limited in its application not taking in consideration changing market dynamics.
The market (pull) will determine what can be produced and this requires a third “knowledge structure” namely the concept of “response management”. Response management is a critical corporate capability and a defining competitive advantage in volatile environments. Response management requires:
-accurate and timely demand sensing to quickly understand demand shifts, collaboration with customers to gain consensus on true demand, and with the respective disciplines within the organization to develop appropriate responses; and -decision support that drives profitable responses in a volatile environment.
Response management solutions combine personal alerting, multi-enterprise visibility, collaborative what-if analysis and rapid decision support. In short the organization must prepare itself for demand volatility. All the information that we gather should be put together and analysed to give us a view on the future. It is matter of listening carefully to what people in the industry are talking about.
An important aspect is that there must be a meticulous observation of information-flow and the way the information is presented for forecasting. It will not be perfect first time but it is a skill that the industry must develop to plan ahead so that it will be able to deal with future demand volatility .