Christmas is almost a month away and it’s time now to think about what presents to get to your family and friends. Clearly this is also the busiest period for retailers and I was willing to find out how do they cope with the mass demand from consumers.
The article mentions the accurate response approach which is most commonly used by companies that deal with products that are new or highly seasonal, or have short lifetimes.
First, it takes into account missed sales opportunities. Accurate response measures the costs per unit of stock outs and markdowns, and factors them into the planning process. Second, accurate response differentiates those products for which demand is relatively predictable and for which demand is relatively unpredictable. It does this by using a blend of historical data and expert judgment.
The example used in the article is a ski business called Sport Obermeyer and provides a good demonstration of how the accurate response approach is most effective for their company. In the fashion skiwear business, demand is heavily dependent on a variety of factors that are difficult to predict such as weather and fashion trends. As a result, the peak of the retail selling season is only two months long.
Sport Obermeyer managed to develop a more complex supply chain. To deal with limited supplier capacity and retailers’ demands for early delivery, Sport Obermeyer undertook a variety of initiatives to shorten lead times. First, the company reduced the time it took to process orders and compute raw-material requirements by introducing computerized systems to support those activities. Second, because lead times for obtaining raw materials proved difficult to shorten, the company began to anticipate what materials it would require and store them in a warehouse in the Far East. With materials in hand, Sport Obermeyer was able to begin manufacturing as soon as it received orders. Third, as delivery due dates approached, the company used air transport from the Far East to its Denver distribution center. By changing their supply chain, it had reduced delivery lead times by more than one month.
In addition, Sport Obermeyer succeeded in persuading some of its most important retailer customers to place their orders sooner, thereby providing the company with valuable early information on the likely popularity of individual styles. Unfortunately, those efforts did not solve the problem of growing stock outs and markdowns. The company still had to base about half its production on demand forecasts, which was a big risk in the highly volatile fashion industry.
In addition to making supply chain changes, Sport Obermeyer has merged its design and production departments into one merchandising department and is thus broadening its strategy to encompass more production concerns. Sport Obermeyer has discovered that customers generally don’t notice minute differences in color; they pay much more attention to a garment’s overall appearance, quality of construction, and special features.
An important component of an accurate response program is to streamline the supply chain to reduce production and distribution lead times. Clearly, a reduction in cycle time offers the potential to reduce the cost of stock outs and markdowns by allowing production decisions to be deferred until more information and better forecasts become available. Yet realizing that potential also requires changes in forecasting and production planning.
Accurate response requires two changes in forecasting. The first is to be more resourceful in using demand indicators to improve forecasts. The second is to institute a system for tracking forecasting errors. Companies should use demand indicators to improve forecasts and institute a system for tracking forecasting errors.