One of the things that I have noticed as I look out at the world is – things change.
The weather changes, the tides change, and customer demand changes.
Of these three, variation in customer demand is perhaps of the most interest to lean practitioners, because, after all, if customer demand were constant, the challenge of designing and managing the value stream would be much simpler.
So accepting that in most cases customer demand does change, a sensible follow up questions are: By how much? And is the demand at least stable?
The answer to these questions is important because it often determines the strategy that we use to deal with that variation.
Fortunately, lean math, offers some guidance. If we take the standard deviation of the customer demand and divide it by the average customer demand, the resulting dimensionless number is called the coefficient of variation (Cv). Low values (i.e. less than 0.2) are associated with stable customer demand, and higher values (i.e. greater than 1.0) are associated with unstable customer demand.
Knowing the coefficient of variation for your products can be useful, especially in conjunction with the product's demand volume because it will help determine the fulfillment or inventory replenishment strategy. For example, finished good strategies may generically go as follows:
- high volume, low Cv - rate based production
- moderate volume and moderate Cv - kanban (a.k.a. supermarket pull)
- low volume, high Cv - make-to-order
We will be addressing this subject in greater detail in a future post about demand segmentation.
Furthermore the coefficient of variation is necessary, depending upon the formula(s) used, for sizing kanban. Kanban sizing will be addressed in future Lean MathTM posts.