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Managing Demand Spikes: Supply Chain Logistics Advice For Meeting The Challenge

Tue, 12/02/2008 - 10:45am
John Baushka, Business Director, ATC Logistics & Electronics

Spikes in demand, both anticipated and unforeseen, can be a supply chain nightmare for manufacturers.  Effectively managing these spikes can be a “make or break” in terms of profitability and the long-term viability of products.  Heightened demand can occur for a variety of reasons, from holiday season surges or inventory shortages, to recalls.  Advance planning is essential to meet the need for additional volume, while also remaining flexible enough to manage the unexpected.

Some manufacturers are so focused on getting their products to market that there can be tunnel vision from a supply chain and logistics standpoint.  As a result, these spikes can put undue strain on their resources, producing undesirable results and reduced profitability.  To combat this, working with a third party logistics (3PL) provider can be a logical and financially beneficial decision providing access to a sophisticated knowledge base of supply chain strategies, and an established infrastructure.

Further, manufacturers usually don’t have experience with the latest best practices to forecast and compensate for spikes effectively and consistently.  This can result in opportunities lost for initial distribution, compounded by loss of revenue in the returns process, which decreases overall profitability.

Forward thinking companies with a desire to innovate are increasingly partnering with 3PLs to stay ahead of competition, and maximize profits when demand surges.  Working with a 3PL also provides a fresh perspective that can identify new efficiencies and streamline processes that are often difficult to execute from an internal point of view.

Typical Scenario

Obviously, the holiday season demand, particularly for consumer electronics, can be anticipated like clockwork.  In fact, up to 60 percent of total volume can occur during this period for consumer electronics products.  However, this can still lead to a mad scramble for manufacturers that don’t adequately anticipate the increased volume that retailers, and ultimately, consumers demand.  This is where a 3PL partnership can be incredibly effective.

A 3PL provider working in close coordination with their customer can be extremely valuable in the advanced planning and forecasting process.  3PLs have honed highly advanced best practices that manufacturers can leverage to their advantage.  In the case of the holidays, the July/mid-summer timeframe is when it all begins.  This is a critical period for the development of fourth quarter forecasts, which will determine the amount of raw materials and additional resources necessary to meet the looming demand spike.

The actual ordering process should occur from mid- to late-summer to ensure there is time for the acquisition of raw materials to facilitate the manufacturing process.  Since most of this is shipped from abroad, this is an essential step.  There must be a delicate balance, however.  It is essential to not overextend the ordering process to ensure that there is no surplus, in the event that fulfillment demand slows.  It is extremely counterproductive and costly to have excess in this situation.  It is best to stagger raw material orders, even on a monthly basis, to keep pace.  Forecasts must be flexible enough to be adjusted “on the fly,” and regularly updated to be as strategic as possible. 

The need for collaboration with end-user customers to have a consistent gauge on the pulse of demand is essential to monitor this process and stay on target.  It is critical that the physical constraints of retailers be considered as well.  For instance, typical big box outlets have limited shelf space and cannot manage all of their holiday orders at once, so incremental delivery of inventory is paramount.

Making the most of returns

If all goes well with the delivery of products to retailers for the height of the holiday season, the job is only half done.  January means the beginning of the inevitable returns of the products that were sold during that timeframe.  This spike typically spans 60 to 90 days.  Consumer electronics manufacturers face an additional challenge in working with major retailers, because they must adhere to, and be prepared for, a liberal return policy.  Most products can be returned for virtually any reason within 30 days.

As a result, there must be enough capacity to manage this additional spike.  A 3PL with not only reverse logistics expertise, but also experience in testing, repair and refurbishment can help original equipment manufacturers (OEMs) anticipate returns to manage this situation.  At the core, this means being prepared with adequate raw material for spare parts to facilitate necessary repair or refurbishment to keep products in the supply chain. 

Consumer electronic returns can occur for a variety of reasons.  A staggering average of 80 percent can be diagnosed as a “no fault” found.  This is likely due to buyer’s remorse, which translates to undesirable functionality, unmet expectations, or simply the fact that it wasn’t to the consumers liking.  At the minimum, most returns will require basic cosmetic repairs in order to remain viable in the marketplace. 

Quality refurbishment can give these products new life and produce a close approximation of a brand new version that can generate cash flow.  It starts with cosmetic repairs, which can make a significant difference towards creating a desirable offering.  Once these repairs are made, they can then be sold on the secondary market to specialty retailers, or online auction sites.

Return Rates

The rate of returns won’t be the same for every product.  For instance, first generation products will have a higher rate of return as the “bugs” and various other shortcomings will most certainly occur.  The return volume for new products usually ranges from 12 to 15 percent, so OEMs, as well as their 3PL partners, need to make sure they have the resources on hand to manage this reality.

Mature products that have been available for a longer time span usually have a reduced return rate.  However, OEMs still need a contingency plan for the return of these second or third generation versions, although the return percentage tends to drop between 8 and 10 percent. 

The drop can be attributed to the fact that, in the case of consumer electronics, the software is superior and there is a higher level of customer experience.  Plus, there is generally more awareness about the product and its capabilities based on product reviews and other consumer information.  Regardless, spare part resources for testing and refurbishment must be in place to keep products in the hands of consumers.

Conclusion

High demand spikes can be both a blessing and a curse for manufacturers.  If a company is ready, it can mean an economic boom.  If not, the results can be detrimental, with disappointed retailers and consumers, which can result in lost market share that can’t easily be recovered.  Strategic planning and thoughtful analysis can produce a favorable outcome that leads to increased profitability and long-term consumer loyalty that can take a manufacturer to another level of success.

It’s not easy to anticipate or execute the slew of variables that can impact even the most careful planning and forecasting.  To combat this, working with a 3PL with the capability to provide advance logistics planning and execution, along with value-added repair, refurbishment and repackaging can be an attractive option to meet business objectives.  In the end, this will also provide manufacturers the bandwidth to focus on their core competencies of research and development.

ATC Logistics & Electronics (ATCLE) is a provider of third party logistics (3PL) and supply chain services. For more information, visit  www.atcle.com

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