Sporadic demand: Common reasons and disadvantages
Everyone involved in forecasting knows the problem: Intermittent demand is very difficult to predict and leads to smaller sparks which can end up causing a major fire.
Vague forecasts of intermittent demand patterns lead to a handful of problems, such as excessive inventories, which can cause high capital lockups and block strategically important investments. As a result, planning of such demand patterns often turns out to be suboptimal and leads to unsatisfactory results.
This post provides a brief introduction to the world of sporadic demand. More specifically, the following questions are answered:
What is intermittent demand? Where does intermittent demand occur? What are the top 4 reasons for intermittent demand? What are the biggest drawbacks caused by intermittent demand?
Ready? Let's dive in.
What exactly is intermittent demand?
Demand for a product is referred to sporadic or intermittent demand when the quantity demanded is zero for several periods. Intermittent demand occurs especially at low levels of aggregation, such as the SKU (Stock Keeping Unit) level and for products with a slow sales frequency. This includes, for example, spare parts, heavy production machines or generally expensive as well as irregularly demanded products. Planning of such products is challenging due to the lack of regularity, which plays an important role in planning.
"Intermittent demand occurs when the quantity demanded is zero for multiple periods."
Which industries are particularly affected by sporadic demand?
Intermittent demanded products are very often seen in the FMCG industry. These are products that have a slow sales frequency, e.g. where demand is weaker than for new products.
Intermittent demand products can represent up to 80% of the product range which is a major problem as it leads to insufficient storage and floor space usage.
Intermittent demand patterns are also a major challenge in the manufacturing sector. Sectors with short product life cycles in general, such as the apparel and food industry, are particularly affected. This problem is also prevalent for luxury goods and expensive products. Especially here a lot of money is wasted every year. This has a significant impact on sales and leads to waste of resources.
Now that it is somewhat clearer where intermittent demand appears. The question is what causes intermittent demand.
What are the top 4 reasons for intermittent demand?
The reasons for intermittent demand differ depending on the industry and the respective area. Looking at the problem in the B2B and B2C area, these 4 reasons can be identified:
In supply chain management, intermittent demand quantities are strongly driven by the creation of batch sizes in B2B sales. It often happens that purchase quantities are increased due to price advantages. As a result, the demand curve flattens out steeply in periods following a price reduction, which is why, depending on the quantity purchased and the type of product, it can take time before corresponding products are needed again.
Product range expansions
Different customer requirements and growth targets force many companies to expand their assortment. The consequences are an increase in the number of products and the number of product variants and as a result an increasing complexity in planning. Assortment expansions also mean that for many companies, the number of product variants is growing faster than the percentage increase in sales.
Short product life cycles
Competition has increased sharply in recent years. In order to maintain business growth, companies are forced to launch new products, even though the existing assortment is filling the warehouses as well as the sales floors.
Particularly in the consumer goods sector, this leads to cannibalization effects, which cause demand for existing products to decline resulting in intermittent demand patterns at the end of product life cycles.
To keep inventories at optimal levels, most companies focus on shorter replenishment intervals. This requires accurate forecasting at lower product, location and time levels.
The problem here is that individual SKUs at monthly levels may have high demand frequency, while demand at the daily level accommodates intermittent demand patterns.
There are many reasons for intermittent demand, but what are the downsides when forecasts become too inaccurate?
Disadvantages of inaccurate forecasting of intermittent demand
If we look at the disadvantages caused by inaccurate forecasts of intermittent demand, it becomes clear that these can affect the competitiveness and profitability of a company. The following disadvantages are extremely significant:
High inventory levels
Since intermittent demand does not follow regular patterns, inventories are often built up to meet established service level targets. This often results in excessive inventory levels, leading to inefficient use of resources.
Building safety stock for products that are demanded intermittently results in capital lockups, which leads to fewer investments in other business areas and therefore limited decision options.
Inadequate forecasting techniques for sporadic demand patterns lead to significant gaps between planned and actual demand quantities, causing bottlenecks that have a negative impact on service levels as well as customer satisfaction.
Product shortages caused by inaccurate forecasting solutions often result in suboptimal manual reordering caused by an overreaction to corresponding shortages. Overstocks and inefficient use of resources are the consequences.
Exploit potentials and improve your forecasting
Products which follow an intermittent demand pattern have a lot of disadvantages. The reasons for demand irregularities of such products are diverse and vary from company to company. However, there is one common denominator, namely that great potentials are left by the wayside, although they can be exploited with the right expertise.