The High-Stakes Search for Supply Chain Excellence During the Holiday Rush

Black Friday and Cyber Monday sound nothing like the joyous season that’s supposed to follow. They’re more ominous and scary. And to many retailers and manufacturers those two pivotal days—and the month or so that follows—are just that.

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Ominous, because the holiday shopping crush that happens just after Thanksgiving is a make-or-break time for retailers and consumer goods companies looking to bolster their fourth-quarter revenues with loads of sales. And scary because what sells and what doesn’t is just so unpredictable.

Nowhere is that uncertainty and accompanying pressure more intense than inside supply chain departments, where seasonal good cheer is replaced with gut-churning anxiety.

“The holiday season is a completely difficult time for manufacturers and retailers,” says Brian Tomlin, an assistant professor of operations, technology and innovation management the University of North Carolina’s Kenan-Flagler Business School. “They’re making educated guesses and bets on what demand is going to be, and they’re not going to get it right every single time.”

Indeed, the period from just before Thanksgiving all the way into the New Year is usually the “moment of truth” for retail and manufacturing supply chain and e-commerce systems. Other contributing factors are the critical supply and demand decisions made by logistics, marketing and financial personnel. And not all of them succeed.

Already this holiday shopping season, the BBC reported that Nintendo warned of global shortages for its hugely popular Wii game console and admitted “that not everyone who wants a Wii is guaranteed to get one this Christmas.” (How’s that for “bah, humbug!”?) Nintendo claimed that it was “doing everything possible” to keep up with surging consumer demand.

Despite an uncertain U.S. economy, with a housing slump, high fuel costs and troubles in the credit markets, the National Retail Federation predicts that the 2007 holiday sales will rise 4 percent from last year to total nearly $475 billion. Which makes how well your company can identify both positive and negative consumer demand trends and how quickly you can react to those signals all the more critical.

Tomlin says that retailers and manufacturers face a delicate balancing act. “If they’re overly optimistic, they can have too much inventory, have to mark down everything and do fire sale prices,” he says. “If they’re overly pessimistic, they’ll have unsatisfied customers and leave a lot of money on table.”

Why Is Predicting Consumer Demand So Hard?

The undeniable truth about supply chain planning for the holiday season is that it is a process that seeks clarity when unpredictability is the only thing companies can count on. There are a number of reasons for this.

First is that consumers’ tastes can change overnight—especially with toys, consumer electronics and apparel. “The product cycles are so short; what’s cool today isn’t what’s going to be cool tomorrow,” says Dave Haskins, CTO of Kinaxis, a vendor that offers on-demand response management for supply chains. As an example, he points out that more and more, the consumer electronics category resembles the capricious fashion industry. Talking about his daughter’s recent cell phone purchase, he notes: “She’s buying a cell phone for reasons of fashion and not function. The consumer today is unbelievably fickle.”

This year, one area analysts will be watching is the high-def showdown between the Blu-ray Disc and HD DVD standards. Sales of players embedded with either standard could determine the eventual winner in the battle for the next DVD format.

Another challenge is that sometimes one Christmas gift grabs more worldwide attention than any marketing or operations manager could have ever predicted in even his wildest dreams. The resulting mass hysteria feeds on itself (remember the late ’90s Furby craze?) and becomes wonderful fodder for holiday news. It also leads the general public to think that “someone made a mistake,” says Tomlin, even though the situation was too difficult to foresee.

Unexpected Demand, Problem Suppliers

While it may seem like a nice problem to have, it’s a frustrating situation for manufacturers trying to keep up inventory and retailers trying to keep their shelves stocked. “In that situation, there’s not an awful lot companies can do,” says Tomlin.

Nintendo estimated that it would need to ship 14 million Wiis in 2007, but due to growing demand, the forecast changed to more than 17 million, the BBC reported, prompting a spokeswoman to declare that global demand spikes were impossible to anticipate. She added: “Nintendo is now in a position in which seasonality demand trends are being broken, therefore the demand for Wii hardware is constant throughout the whole year globally. Due to this phenomenon it is possible that the demand for Wii hardware may outstrip supply.”

That’s the demand side causing a game maker and its retail customers holiday headaches. The supplier side of the equation can also wreak havoc.

Just consider what happens when a supplier discovers lead paint in its products. Tomlin calls this type of event a disturbance, and it can test even the most robust supply chain and partner relationships. “This event introduces another uncertainty,” he says, because if products now need to be inspected, that will elongate the lead time for getting safe products on the shelves and will also hurt a company’s reputation at time when consumers don’t need any doubts.

So while speed and flexibility are paramount to respond to volatile demand, many retailers and suppliers are stuck because of one big self-inflicted wound: “Half of their supply chain is sitting in Asia,” Haskins says. “Now [suppliers] have to deal with the fact that their product has to sit five weeks on a boat because the boardroom said, ‘We want it cheaper.’” The result is that longer travel distances lead to elongated supply chains.

The Supply Chain Trade-Off: Cost Versus Flexibility

That critical cost-versus-flexibility trade-off can rear its ugly head during the holidays, when marketing plans and inventory strategies have to be made far in advance.

“The challenge is that [suppliers] need to make sourcing decisions early, and when they do that, demand uncertainty is high,” Tomlin says. But simply overstocking inventory is a mistake companies are typically not foolish enough to make. “What smart companies do is figure out how best to use information as a substitute for inventory,” he says, “because inventory is an expensive strategy.”

Haskins, whose company sells supply chain demand software, notes that many manufacturers’ supply chain systems work on monthly planning cycles, which don’t give enough information. And there can be a vast gap between the retailers’ systems and the point of sale (POS) data that they can send to their suppliers and what the suppliers can actually do with it. “The distribution signals—meaning what’s actually selling and the actual inventory—need to be coordinated on a continuous basis. Most organizations are still struggling to do that,” he says.

The holiday shopping season will expose any supply chain weaknesses, he adds. “That’s because the window to respond to fluctuations is so much shorter,” Haskins says, adding that companies with better systems typically perform better during the holidays, and do better throughout the year.

Questions to Ask About Your Supply Chain

While it is too late to make any significant change to the 2007 holiday season plans (that ship has sailed), there are a couple of short-term strategies that might help or better prepare you for, say, Valentine’s Day or next year.

Haskins advises retailers and their suppliers to ask themselves these questions right now: How quickly can I respond to something that happens in my supply chain? Am I providing good, actionable information to my suppliers and filling in any gaps in the data? Am I acting on up-to-date point-of-sale data that I’m getting from my retailer? Do I understand exactly what is being sold every day?

The first question—flexible, fast response to supply chain events—is a key tactic that can help both retailers and manufacturers move more product. For example, if demand for a manufacturer’s product is hot in the eastern part of the United States but not the West, companies have to make sure they have the right systems in place to see that detect the trend and share that information, and the right processes and logistics to adjust and remedy the situation.

“Companies have to err on the side of flexibility rather than forcing in rigidity,” Haskins says. Of course, picking up on the supply chain signals, interpreting them and reacting is still a monumental personnel and technical challenge for many manufacturers and retailers. “If you’re waiting for the store to tell you there’s a stock out, you’re way too late,” he says.

Cross-Border Shoppers, the Gift-Card Shopper Delay and Other Trends to Watch

Haskins points to a geographic trend playing out this year in cities along the U.S. and Canadian border. Because of the weak U.S. dollar, many Canadians are likely to cross the border to do their holiday shopping. The challenge for retailers with operations in both countries will be where to place their bets on where the inventory will sell better. Wal-Mart Canada recognized this trend and announced in late October that it would sell books, magazines and gift wrap at U.S. list prices during the holiday season to keep Canadians from heading south.

Another trend that retailers and manufacturers need to be aware of is the exploding financial girth of the “gift-card season,” which has seen multibillion-dollar gains in the last several years. A 2006 report from AMR Research noted the trend and its substantial effect on inventory and staffing decisions for the months of January and February, when many people who received gift cards redeem them. Data from Ellen Davis, a communications director at the National Retail Federation, backs that up: Just 20 percent of all gift cards are redeemed within the week after Christmas; the remaining 80 percent is spread over January and February.

The AMR report (“Retailers: Are Your Operations Ready for Gift Card Season?”) urges merchants and supply chain planners to pay attention to this trend. “Retailers that don’t recognize the shift in their business will find themselves overbought in December and underbought in January and February,” writes analyst Michael Barrett.

Barrett continues: “It’s counterintuitive for most merchants and planners to put up big gains in the month traditionally reserved for inventory reconciliations and cycle counts,” but ignoring that shift means leaving dollars on the table. “The supply chain folks will probably welcome any balancing of product flow between the pre- and post-holiday time, so make sure they are in the loop as well.”

Barrett also implores retailers to keep their stores staffed. “Many stores staff up December 26 to handle the returns processing that has long been the bane of holiday retailing. But don’t neglect the consumers armed with gift cards or otherwise there to browse and purchase; they expect the same customer experience that you would provide on June 26,” he writes.

To match the spirit of the holiday season, Haskins offers a practical piece of advice for retailers and manufacturers that need each other more during the holidays than ever. “Remember,” he says, “you’re only as good as your suppliers’ supply chain and your suppliers’ ability to have a quick, integrated view of total demand and supply.”