Demand Uncertainty in a Supply Chain

We talk about demand forecasting - a lot. Demand forecasts are always wrong - but any serious effort to carefully forecast demand results in commensurate savings in inventory levels, carrying costs, and customer service performance. The range of demand uncertainty depends on the maturity of the market and the level of competition. We see four typical levels of demand uncertainty:

- Low demand uncertainty - purely functional products: milk, gasoline
- Somewhat certain demand - established goods: Gillette shaving razors, Huggies diapers
- Somewhat uncertain demand - new models of existing goods: colored Razer cell phones
- High demand uncertainty - entirely new products: the Apple iPhone

Of course, forecasting demand is more accurate with mature products with low uncertainty. On the flip side, new products tend to have less competition and higher profit margins. Increased demand uncertainty leads to difficulty matching supply and demand - resulting in stock outs, or oversupply situations forcing price markdowns that can be very unpleasant.

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