All I Really Need to Know (about Logistics) I Learned From Rudolph: A Holiday Demand Story

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It is both a holiday classic and one of the best depictions of a supply chain solution ever broadcast. The factory floor hums as a shipping deadline approaches, but a logistical disaster looms in the guise of an unexpected storm. The solution turns out to be right at the end of the hero's red nose. Yes, all you really need to know about logistics you could learn from Rudolph the Red-nosed Reindeer.

If only logistics could be that simple. In reality, the year leading into the 2008 holiday season has been anything but glowing for supply chain and logistics managers. Long before this autumn's Wall Street meltdown put a crimp in consumers' psyches and pocketbooks, the backdrop to holiday-related supply chain decisions was a case of one thing after another.

First, the worst winter storm in half a century paralyzed China's manufacturing sector just before the Chinese New Year. Then the country dealt with a major earthquake, the effects of which finally began to diminish just as discussions began on a new labor contract for Los Angeles and Long Beach dockworkers. Next came $150-a-barrel oil and rapidly accelerating transportation costs. Analysts say that the best retailers can hope for from the 2008 holiday is a 2.2-percent increase in sales over last year.

But there is light at the end of the tunnel (or nose). By embracing accurate planning, lean strategies, and transportation efficiency, retailers and suppliers can guide their supply chain sleigh through any storm.

PLANNING MAKES THINGS OH SO BRIGHT

Depending on the product, supply chain decisions related to this year's holiday season were most likely made six to 12 months ago.

"Most major retailers stayed abreast of consumer purchasing trends during the year," says Jonathan Gold, vice president of supply chain management and customs policy for the National Retail Federation, a retailer advocacy association based in Washington, D.C. "They captured the latest consumer data as they made their holiday season decisions, working with their internal buying units and outside consultants."

Ordering seasonal products can be tricky, but some retailers got it right throughout the year. Apple, for example, was able to push the release date of its iPhone3G from September to July because it stocked inventory before Chinese suppliers closed up shop for the Olympics. Apple now has ample product to meet holiday demand.

While Indonesia, the Philippines, and Taiwan were larger players in this year's holiday season planning, China is still the manufacturing giant when it comes to the goods most likely to wind up wrapped in colorful paper and tied with a bow in late December. Work stoppages there can have a marked effect on the supply chain, even months in advance.

For instance, most retailers planned for the Chinese New Year in February, when nearly 178 million people take as long as one month off from work. But a colossal snowstorm in China extended some factory and warehouse closings by up to two weeks.

"Some electronics companies stockpiled inventory in anticipation of the holiday. Epson, for example, prepared early for the New Year, then closely monitored the brewing storm and built up subcomponent inventory beforehand," says Bradley A. Feuling, chief executive officer of Kong and Allan, a supply chain consultancy based in Shanghai, China.

"Most companies, however, sweated it out through the storm and its aftermath," he adds. "In parts of China, material flow completely stopped for an extended, unanticipated period."

Supply chain planning was also affected by the Chinese government's decision last spring to amend the country's holiday schedule, shortening a week-long national holiday in May to three days, and adding single-day holidays to other parts of the year.

"Those changes might not seem significant, but the technology companies employ to manage supply chain and inventory issues doesn't automatically account for changes in a source country's holiday schedule," says Feuling. "If the necessary manual adjustments are not made, inaccurate accounting and inventory problems could occur."

Even the best-laid plans can't guarantee supply chain success. "You can't anticipate an earthquake," Gold says. "But through appropriate day-to-day supply chain planning, most retailers this year reduced their exposure to the risks of unexpected events."

JUST-IN-TIME GUIDES THE SLEIGH TONIGHT

A continuing trend in holiday season supply chain decisions is an emphasis on lean inventories and just-in-time deliveries.

"Retailers don't want inventory on hand that they'll be forced to sell at a significant discount in February," Gold says.

To accommodate just-in-time deliveries, many U.S. retailers source their holiday inventory from countries close to home, particularly Central and Latin America. This strategy has the added benefit of helping them cope with rising fuel costs worldwide and labor cost hikes in China.

The key to lean operations is keeping everyone in the loop. "Communication is critical and has to include all supply chain partners," Gold adds. "Retailers need a strategic plan to make sure they have the appropriate level of product on hand—both in-house and within the corresponding parts of the supply chain."

Technology also helps retailers manage their supply chains as the holidays approach. Best Buy, for example, has made a significant and well-publicized effort in recent years to integrate its transaction-processing system with its demand planning, transportation, and supply chain management software.

"Best Buy runs a sophisticated, full integration model that connects the point of purchase with the warehouse and distribution center," Gold notes.

The retailer keeps very few of any one model of, say, laptops, in its stores, but relies on electronically transmitted sales data to trigger deliveries when needed. This strategy has positioned Best Buy as a leading proponent of the demand-driven supply network philosophy and reduced its inventory while improving its stock positions.

"For many companies, it costs less to keep finished product on a ship than taking up space in a retail store," Feuling says. "This approach helps control inventory costs."

EFFICIENT SHIPPING HAS CUSTOMERS SHOUTING OUT WITH GLEE

There's more to holiday logistics than managing inbound products. Retailers also have to ensure that merchandise gets out the door quickly and efficiently.

That's especially true of online retailers such as Amazon.com, which has been on a fulfillment center hiring binge since early summer, adding thousands of hourly picking, packing, shipping, and receiving employees in Washington, Kentucky, Indiana, and Arizona to ensure merchandise is delivered to gift recipients on time.

The Internet retailing giant relies on a huge network of fulfillment centers located in the United States as well as the United Kingdom, France, Germany, Japan, and China.

"Some of our fulfillment centers are designed to carry virtually every product line, while others handle only large items, such as big-screen TVs and stereo systems," says Amazon.com spokeswoman Stephanie Robinett.

On Amazon's peak day during the 2007 holiday season, these global fulfillment centers shipped more than 3.9 million units.

"Our supply chain is designed to be as efficient as possible so that we can have the widest variety of products available for immediate shipment to customers all over the world," Robinett says. "And technology plays a pivotal role in ensuring a great customer experience, especially during the holiday season when having products arrive on time is critical."

Amazon relies on technology to tie together the front and back ends of the operation, ensuring the right products are in stock and at the right fulfillment centers.

"This approach enables us to offer services such as Amazon Prime, an unlimited express two-day shipping program," Robinett says. "In addition, last year we were able to extend the overnight shipping order cutoff deadline to Dec. 23, for delivery on Dec. 24—offering last-minute shoppers a chance to get their products delivered before Christmas."

Most retailers have not enjoyed a smooth sleigh ride heading toward the holidays. But those that plan ahead, and brace for bumps in the supply chain, can hold on to precious holiday profit and help Santa deliver to his end customers this December.

GETTING COOL ITEMS INTO CUSTOMERS' HOT HANDS

Does your holiday gift list include a giant microbe plush toy, LED shower light, or watch with a hidden USB drive? If so, ThinkGeek.com is your destination. The 10-year-old online retail hub for technology enthusiasts, which reports $35 million in annual revenue, operates as a large company that never lost its start-up mentality.

"Our goal is to sell the newest, coolest stuff," says Ty Liotta, senior merchandiser for ThinkGeek. "We source products both domestically and globally from China, India, the UK, Australia, France, and Germany."

Liotta selects the products, negotiates with vendors, and supervises deliveries to the company's warehouse in Edison, N.J. He also oversees ThinkGeek's custom manufacturing, such as the China-based production of the 2008 holiday season's hottest item: the drum kit t-shirt. The interactive t-shirt, which Liotta developed, allows the wearer to tap out a variety of beats on the printed drums, which emit corresponding sounds through tiny speakers built into the shirt.

"Our holiday supply chain decisions are simple because we only have one large warehouse," Liotta says. "At the same time, we'll source from anyplace that offers a product that will appeal to our audience."

As ThinkGeek has grown, its supply chain planning for the holidays has started progressively earlier. This approach creates its share of challenges.

"No matter how well you plan, or how early you get a jump on the holidays, factors constantly change and problems crop up," Liotta says. "This year, for instance, the U.S. dollar's exchange rate hurt us on pricing and hurt our suppliers in China, some of whom have gone out of business as a result."

Another complication this year has been a tightening of federal regulations pertaining to electronic imports.

"Electronics are under more scrutiny, making it more difficult to clear them through Customs," Liotta says. "The government now requires FCC clearance on items that didn't require it before—even items that don't emit a radio signal."

Consequently, ThinkGeek is increasing back-and-forth communication with vendors, requiring that manufacturers perform FCC testing as products leave the factory, and affix the required ID before shipment.

"We're having more conversations with vendors as to whether they have an FCC ID and, if not, how they are planning to secure one," Liotta says. "That's where potential logistics disasters lurk this year. If goods arrive in the United States without being properly tested and labeled, they'll hang in limbo, and we'll have to pay for their storage."

To manage its supply chain efforts, ThinkGeek employs a staff of programmers who operate a custom-built Web site that tracks sales, reorders merchandise, and makes sure hot items are always in stock on the back end.

Last year, ThinkGeek recorded about 50 percent of its total sales for the year during the holidays, shipping 8,000 orders a day at the season's peak. The company's emphasis on selling new items puts particular stress on ThinkGeek's supply chain model.

"We launched the drum kit t-shirt in early September, so we don't know what the holiday demand will be," Liotta says. "Because the shirts are light and we have a high margin on many of our items, we're able to air freight them cost effectively.

"We air-shipped some drum kit t-shirts from the manufacturer to get an early read as to how they're selling," Liotta adds. "The rest of the inventory will move by ship. It's all about mitigating our risk. We don't want to get stuck with too much or too little of any product."

Despite the company's best efforts, Liotta is sure an emergency will crop up this holiday season. In logistics, he says, something is bound to happen.

"Last-minute shipments will be delivered under the wire, or products will arrived defective," he notes.

Ultimately, Liotta takes a positive view: "Each holiday season provides business experiences that help you grow and better plan for the next one."

CHECKING CONSUMER WISH LISTS

To understand Oprah Winfrey's power over consumers, just look at how she revs supply chains into overdrive after her "Favorite Things" holiday program creates demand surges for the specific products Oprah can't live without.

Richard Howells, senior director of solution marketing for system solutions provider SAP, found out firsthand the effect Oprah's endorsement can have on product demand.

Howells was not worried when his wife asked for a specific electronic facial scrubber last holiday season. True, it was early November, but Howells was sure retailers were past preparing for holiday demand by then, and that securing the item was only a matter of including it on his shopping list.

Then came Oprah's "Favorite Things" show, where the exact facial scrubber his wife had requested was featured. What followed next were some anxious moments.

PERFECT WORLD VS. REAL WORLD

"Most retailers base their purchasing on a forecast, and manufacturers produce accordingly," Howells explains. "But during the holidays, they tend to plan in the perfect world and react in the real world."

In the real world, for instance, where holiday season shipping decisions are made six to 12 months prior to the first autumnal chill in the air, no one plans for the Oprah-related surge in demand for certain items. The show is notorious for making last-minute decisions on inclusions, and nearly legendary for its ability to keep its decisions secret until airtime.

"It's critical to be able to quickly respond to changes in demand and supply during this time of year, and to rethink strategies and readjust supply chains accordingly," Howells says.

Over the years, that has resulted in greater demand for technology that's more responsive to the kind of market earthquakes an Oprah Winfrey—or a Wall Street bailout—can cause.

"But it's not just about software," Howells says. "Retailers also need the appropriate business processes in place."

If retailers have not set up their supply chains to be responsive to the marketplace, no software in the world will help them.

"And there's nothing worse than a child—or a wife—not getting the gift they want," Howells notes.

Traditional supply chain management is all about getting the right products to the right place at the right time. The next step is creating a foundation for critical responsiveness by building visibility into the supply chain.

"It's about capturing point-of-sale information in real time and being able to track shipments via GPS," Howells says. "It's about having a sense of events as they are happening, and redirecting goods to where a surge in demand is unfolding and away from areas where demand is dropping."

In that respect, the holidays are much like hurricane season, where the ultimate path of a storm is largely unknown until it actually comes ashore. Companies want to redirect shipments of ice cream from a city that will be without electricity for an extended period, just as they'd direct greater shipments of batteries and propane stoves to the area.

"The financial crisis will probably turn out to have a similar effect," says Howells. "In the wake of uncertainty and in light of consumers' fears, retailers are unlikely to stock as many $5,000 flat-screen TVs as they have in the past, choosing instead to bring in a supply of $3,000 sets."

LET'S GET FLEXIBLE

Another important factor in building flexibility into retail supply chains during the holidays is managing and maintaining good relationships with outsourced manufacturers year round.

"Once a plan is in place, there's no greater aid to bolstering flexibility than being on the same page as supply chain partners, both at the outset of the plan and when changes need to be made quickly," he says.

As for the question that's surely on your mind? Yes, Howells did manage to get that face scrubber last year. No word yet on what his wife wants this year.

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