Report: Seasonal Demand Management Wreaks Havoc on the Supply Chain

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It’s officially fall, which means we can expect to see the color orange and “pumpkin spiced” everything on grocery store shelves. Starbucks may make a killing with its successful pumpkin spiced seasonal latte each year, but the coffee giant could be the exception. A new retail industry report shows it’s often not profitable for companies to invest in creating new or seasonal products each year. Such products bring new supply chain management challenges to procurement, including the difficulty of predicting what the demand will be for a new item.

The report, published last month by retail forecasting software provider Terra Technology, said that while the number of items in the retail industry has grown 32% in the last 5 years, sales have only increased 4%. Most of these new products fail, too, according to the survey. Eighty-two percent of these new items introduced to the market in the last 5 years have since been discontinued. The problem: Only 1 product in every 1,000 introduced to the market actually succeeds and becomes a top seller.

With every new product a company makes, new packaging and artwork need to be designed, and a process needs to be created to source, make and introduce the item to the market. And, a team needs to be in charge of managing the supply chain logistics for this product, The Wall Street Journal observed.  

Demand forecasting becomes critical when introducing a new or seasonal item to the market, the Terra report stated. It helps “improve return on innovation, supporting sales of ‘winners’ without tying up cash in unproductive inventory for items that fall short of expectations,” the company said in a release.

The Harvard Business Review reported on additional research stating that 75% of consumer packaged goods and retail products do not make even $7.5 million during their first year on the market. Why? Consumers are used to buying the same products over and over and rarely branch out. Companies trying to launch new products also do not conduct enough market research and preparation to sell a new item successfully.

The lesson: Do your homework before launching a new product and prepare your supply chain for the requirements of creating and selling the new item. But how do to this? We reached out to our Spend Matters Analyst Team for advice. Here’s what Thomas Kase, vice president of research, had to say:

Volatility can be a big issue if demand is difficult to determine before a product is introduced. How does an organization address this?

Thomas: Even with the most careful planning, demand volatility can trip up the best of firms. Take Apple, for instance. Even with its many years of awards and accolades for its supply chain sophistication, the company has repeatedly misjudged product demand when launching new devices. If I knew a foolproof way to address this challenge, I’d be a wealthy man indeed.  

Seriously, though, the big data approach applied to procurement and supply chain really helps here – not just understanding the capacity of your suppliers, as sales and operation planning solutions aim to do, but also integrating point-of-sale data into ordering systems to enable nimble reallocations.  

Risk management solutions, such as those from Resilinc and riskmethods, help provide early warnings in case of various physical and political supply base disasters. There is a range of modern approaches implemented on the direct side, such as postponement, to mitigate against long and inflexible supply chains.

Another solution trend is to tie critical suppliers even closer and collaborate extensively – something Apple could probably adopt more of. It might prevent the next GT Advance blowup.  A more closely collaborating supply base also forges the personal ties that can make or break successful responses as demand changes since what is in a contract can easily be too rigid and a personal relationship can help find a workaround.

What happens when demand for a product is out of sync with production? How should an organization respond to this?

Thomas: All surprises are bad surprises regarding demand changes – creating nimble, flexible, highly responsive production and logistics capabilities is a never-ending effort for all manufacturing companies. Whether this leads to inventory build-up in the case of slack demand – take US gasoline production, for example – or by tying up excess capital in a long supply chain – the literal long line of container ships stretching back to Asia – is hard to predict. Both examples show how inflexible production models hamper business performance.  

Global sourcing done wrong can sacrifice flexibility close to end markets just to get a slightly lower purchase price, since procurement isn’t always tasked with bigger picture strategy in this area.

What technology tools are available for procurement organizations to address these challenges?

Thomas: I have pointed out some solutions above – the global supply chain risk management tools from Resilinc and riskmethods, for example – but there are also innovative tools from SAP such as its Supplier InfoNet solution (a HANA product) that can model multi-tier business relationships in certain verticals to uncover hidden bottlenecks.

Similarly, when understanding whom to transact with, sophisticated supplier lifecycle management and master data management solutions from firms like Aravo, Emptoris/IBM, HICX, Hiperos, Oracle and others can deliver unprecedented 360-degree visibility into a company’s supply base. Mapping and modelling capabilities, capacity utilization and other demand sensitive aspects of suppliers can be done in solutions like ASO (SciQuest), Keelvar, and Trade Extensions, in addition to various sophisticated tools primarily used on the sales and operation planning (S&OP) side of an organization.

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