Fulfill Supply Chain Demand

Read the case, “Just in Time for the Holidays”. Santa is in big trouble, he had planned for one big hit toy and it looks like all the kids want something different. At the end of the case, there are recommendations from four experts.

What do you think?
Will their advice help?
What would you tell Santa?
What would you tell the children?

Consider novel and creative solutions that neither Santa, the elves or the experts may have thought about.

Just in Time for the HolidaysPreview the document

This assignment should be between 3 double-spaced body pages (not including ancillary pages)


North Pole Workshops

is skating on thin ice

when demand for one toy

suddenly surges and

another goes from “in” to

“over” in a blink. How can

the team avoid disappointing

customers-without a

crippling increase in costs?

Just in Time for the Holidays by Eric McNulty

A BITING WIND WHIPS AROUND THESprawling manufacturing campus at North Pole Workshops. The streets between the solid brick buildings are covered in fluffy white snow. Flurries swirl against the steely gray sky of a late November morning. But the soft glow of light from the windows and steady hum of machinery hint at the produc- tivity inside.

Buildings 1 and 2 house the com- pany’s massive mail facility, where chil- dren’s letters to Santa are sorted and matched against a database that tracks the writers’ behayior oyer the course of the year. Inside Building 3, gleaming steel equipment moyes board games and Erector sets toward pallets where they are shrink-wrapped and readied for distribution on Christmas Eye. Red garland is draped across the windows that line the outer walls, though none of

the busy elyes seems to notice the fes- tiye touch.

A large man in a red suit walks among the workers. His smiles and waves are returned by the elves bustling on the shop floor. It is just five weeks until Christmas, and the plant is in high gear. The man is startled by the short, sharp hlast of a hom and turns to find a fork- lift stacked high with hoxes pulling up alongside him.

“Sorry for the horn, Santa. Not a minute to waste,” says the elf at the wheel.

“How’s everything going, Smitty?” Santa Claus asks.

“It seems that all the children want Timmy!”The elf pauses to wipe a hand- kerchief across his forehead. “We got the news late last night-put the pedal to the metal on Timmy the Tinsel Town Train. IVe been on this floor for almost

HBR’s cases, which are fictional, present common managerial dilemmas and offer concrete solutions from experts.

DECEMBER 2005 39



H B R C A S E S T U D Y • J u s t i n T i m e f o r t h e H o l i d a y s

75 years, and I’ve never seen it busier. Gotta run!” The elf toots and waves as the forklift scoots around Santa and heads toward the far end of the building.

All I Want for Christmas A few moments later, Santa sits high above the whirring conveyor belts in a glass-walled office that provides a sweeping view of the activity below. Two elves have joined Santa at his bright-green conference table, grin- ning as Santa pores over a hefty com- puter printout.

“Well, this is unexpected,” says Santa. “Look at the spike in demand for the anniversary edition of Timmy the Tinsel Town Train. It’s good to see an old favor- ite doing well,” he says with a surprised chuckle.

“Uh, that’s the CD-ROM for Timmy’s interactive adventure series, Santa,” says Isobel Lee, Director of Wish List Fulfillment and Delight.”The train set is just, well, chugging along.”

“Oh,” he laughs, adjusting his specta- cies.”Well, regardless, it’s nice to see that kids still love Timmy.”

“Maybe too much,” says Dexter Pep- perflepper. Chief Shoprunner. “I don’t know that we can keep up with that demand. We weren’t expecting it, and our duplication facilities are maxed.”

Santa strokes his thick white beard. This is the third time in three years that his elves have been caught off guard by a toy’s sudden surge in popularity. Earlier in the season, even a month ago, it would have been possible to find ca- pacity, but now every line is running full tilt. The elves are on overtime in the sprint toward Christmas.

“How does this keep happening?” Santa asks. “I thought we had all kinds of fancy new planning software.”

“We do,” says Lee. “But it’s not per- fect.” She explains how the list-checking team looks at samples of incoming let- ters and e-mail traffic and extrapolates

Eric McNulty (emcnulty(§hbsp.harvard .edu) is the managing director of the conferences division of Harvard Business School Publishing, which publishes HBR, in Boston.

demand. Those figures are then matched against the naughty and nice database. “But the percentage of children rated ‘very good’ is running 20% ahead of our assumptions. And technology pen- etration in Eastern Europe and the inte- rior of mainland China is greater than projected.”

“We can’t disappoint the children” says Santa. “And we don’t have much time left before Christmas.” He lifts his bulk out of the chair. “I’ll see you two at the operating committee meeting this afternoon. We can’t solve this on an empty stomach.” With that, he heads out of the office into the blustery, cold afternoon toward his house for a much- needed bowl of porridge.

Dashing Through the Snow On his way home, Santa detours to the stables for his daily visit with the rein- deer. A few minutes watching the young reindeer calves playing their rambunc- tious games and feeding them carrots is enough to remind him how much he loves the holidays and making children happy on Christmas morning.

He looks up at the sky and watches the vapor trail of a passenger jet slowly dissolve. Not so many decades ago, he had the airways to himself. So far, he’s been able to avoid a collision, but last year there were three near misses, and air traffic seems to get heavier all the time. The GPS navigation system in- stalled last year saved him more than 50,000 miles and almost 14 minutes on the r u n – b u t the number of deliveries continues to grow. Maybe he should ask Cindy Counterwaite to look into an upgrade that would allow him to adjust the flight plan based on live weather reports. Or perhaps he should invest in nimbler reindeer-or maybe even mo- torize the sleigh. But as his eyes return to the exercise field, Santa knows that he wouldn’t have the heart to say good- bye to Rudolph and the gang.

Santa walks toward his house, a sim- ple peak-roofed structure adorned with gingerbread detail. It looks almost tike a toy itself among the solid manufac- turing buildings. Inside, Santa plays with the steaming porridge in his bowl. Be-

hind him, a fire roars in the oversize fieldstone hearth.

Mrs. Claus comes up behind her hus- band and lovingly pats his shoulders. “It’s always hectic about now,” she says. “And every year, you and the elves make it in the end.”

“But it gets harder every year,” Santa says. “More kids. More toys. Lists that arrive later and later. Oh, it used to be so simple – wooden blocks, a train set, a doll. We made the same toys year after year, and the kids were thrilled to get them. I was able to trust my own intu- ition. Now we have more than a mil- lion SKUs. It’s getting so I have trouble keeping them all straight. Trends jump across the oceans in an instant. I’ve asked the elves in the field to go beyond reporting on kids’ behavior and start trend spotting. I’ve invested in soft- ware. But still I can’t help thinking that one of these days we’re not going to be able to do it.”

“You’re worrying too much about this,” she replies. “You still have good intuition. You know the kids; you know what they like-in fact, you know better than they do. They’re always changing their lists based on the latest television ads. You know what they’ll truly love. That’s the magic of getting a gift from Santa Claus.”

Santa puts his jacket back on and fas- tens the thick black belt. He knows that Mrs. Claus is right, but he also knows that even elfin magic can’t always save the day.

Naughty or Nice? Santa pauses outside the boardroom and nods appreciatively at the activity below. He is startled from his reverie when his executive helper, Stanley Wibersham, rushes up behind him out of breath.

“You have to see this, Santa.” The elf hands him a copy of Teen Scene maga- zine with the headline “Teen Queen Spat: )uicy Details Inside.”

“Page 36,” wheezes Wibersham. Santa flips open the magazine and

reads in disbelief. In an exclusive Teen Scene interview, Rebeccajune hinted that Leslie Line-




J u s t in T i m e f o r t h e H o i iday5 • H B R C A S E S T U D Y

han missed the Teen Scene Awards because she had puton a few pounds (not that we could see them when she was clubbing late into the night in LA), When we caught up with Leslie, she shot back, “Rebecca June is juvenile. How can you take her se- riously when she walks around with a stupid kitty cat on her wrist? That’s so yesterday.”

Santa points at tbe grainy shots in the magazine. “A few extra pounds? Ei- ther one of them could be blown away by a stiff breeze.” He glances down at his own few extra pounds and closes the magazine quickly, resisting the urge to put both girls onto the Naughty list. Rebecca June’s “stupid kitty cat” is the new Meowrrr, a big-eyed, plush kitten cell-phone carrier with eyes that light up

when the phone rings and purrs when stroked, thanks to special sensors em- bedded in the fur. It’s also the product North Pole has planned to be the top choice among girls eight to 15 years old.

When Santa arrives in the board- room, the senior elves on the man- agement team are merrily watching H o l l y – t h e model for the M e o w r r r – chase a candy-cane wrapper across the

DECEMBER 2005 41



H B R C A S E S T U D Y • J u s t i n T i m e f o r t h e H o l i d a y s

floor. Cindy Counterwaite, Chief List Twice Checker, and Dexter Pepperflep- per are standing on their chairs, dangling brightly colored ribbons in an attempt to attract the kitten’s attention.

“OK” says Santa, as he makes his way to the head of the large rectangular table. He holds up the magazine. “In case your copy of the latest Teen Scene

“We are the original just- in-time business…. We have one delivery date: December 25.”

hasn’t arrived yet, the Meowrrr has been called ‘so yesterday’ by the young lady with the number one pop album in the U.S.” He picks up a sample Meowrrr from the table and strokes it gently as it mews at him.”How can you be so yes- terday when you haven’t even had a chance to be so today?”

The room grows quiet as the team realizes that along with the challenge of a spike in demand for Timmy CDs, they are also looking at a likely sharp dip in interest in the Meowrrr. Pepperflepper winces when he checks his units-on- hand report and sees that there are ten million Meowrrrs ready to go. He con- siders the possibility of turning the toy into something else, but very few of the components are reusable.

“I think I may have at least a partial solution,” says Barry Fiddledip, Chief Bedazzler. He flashes the Teen Scene ad sales numbers on the projection screen. Fiddledip explains that Teen Scene’s circulation is mostly in the U.S. and Canada, so distribution plans for Asia and Europe can go ahead as scheduled.

“Cell phone penetration in Africa is up significantly, so we can shift some units there,” he adds. Fiddledip’s bright blue eyes are alive witb tbe eternal op- timism of a marketer and the undying mischief of an elf. “And 1 haven’t given up totally on North America. Rebecca’s fans may want the Meowrrr to show their support.”

“That’s a nice bit of elf marketing magic if it works.” Santa turns to Coun-

terwaite. “I know we can pull our lists based on naughty and nice. Can we seg- ment Rebecca June fans versus Leslie Linehan fans?”

“No, sir,” says Counterwaite. “Celeb- rity preferences among preteen girls change too frequently. I can pull Barbie lovers.”

Santa turns back to Fiddledip.”So net net?” He scoops a handful of red and green butter mints from one of the bowls in the center of tbe table.

Fiddledip clears his throat and squares bis shoulders. “I think we can still move seven to seven and a half million units.” An uncharacteristically somber mood descends as tbe elves contemplate three million Meowrrrs sit- ting in the warehouse, unloved, on December 26. And, worse, millions of disappointed children who migbt not find a Timmy CD under tbe tree.

Making a List- And Checking It Twice Santa stands and paces the room.”Let’s talk about the bigger issue. We are the original just-in-time business. We bave one market: the world’s children. We have one deliverable: the right toys to the rigbt kids. We have one delivery date: December 25. We can’t move extra merchandise tbrough after-Christmas sales. We don’t have outlet stores. We have to get these things right. Cindy, how can we improve our planning?”

Counterwaite shuffles the papers in front of her. “Our ERP system is cer- tainly adequate, Santa. But it isn’t state of the art by any means.” She explains that there is no direct link between tbe letters received from children, which bave to be hand keyed into the system, and the procurement and manufactur- ing systems. Indeed, Jeffrey Peartree, North Pole’s Chief of Children’s Corre- spondence, had repeatedly commented on the fact that incoming mail was sorted so efficiently and yet tbe data didn’t feed into the planning process. Sitting back in his chair now, Peartree simply raises bis pointy eyebrows in resignation.

Counterwaite flashes a new slide onto the screen.”Ifwe invest in upgrades to

the system, we can make our processes leaner and be more responsive with our manufacturing.” She goes on to advo- cate investing in a system that would allow them to get a better sense of real demand, rather than extrapolating from early data. She describes for ber colleagues multilingual scanning capa- bilities, which would get tbe kids’ re- quests into the system more quickly, and a true CRM module that would let them tag gift requests with al! the avail- able data points about eacb child’s be- havior over tbe course of the year-data tbat comes in from a variety of sources sucb as mall Santas and report cards.

“What Cindy says is all true, I’m sure,” interjects Pepperflepper. “But none of that would help us cope witb this situa- tion. All the planning in the world can’t help when there are sudden shifts in demand like we’ve Just seen. We need to be able to turn our manufacturing on a dime.” He puts up a slide that shows the cycle times for the manufacture of various sample product lines. It high- lights the improvements that have come with outsourcing, starting with block cutting ten years earlier, electronic com- ponents five years earlier, and software development for tbe past two years.

Suddenly, Fiddledip leaps onto his chair. “I defy you to find anyone who can matcb an elf’s artistry and craft in toy making!” The room is quiet for a moment until Holly pounces into the bowl of butter mints, sending them fly- ing in all directions. The group bursts into laughter, and the debate continues with urgency but good humor. Santa watches the interaction, weighing the alternatives. Would better software give him an accurate picture of demand? Wouid more market research eliminate some guesswork? Or should he give up on accurate predictions altogether and make manufacturing more flexible? All tbe elves in tbe room, he knew, wanted to make the kids happy. They Just didn’t agree on how to do it.

How can North Pole Workshops better respond to shifts in demand? • Four commentators offer expert advice beginning on page 44-




HBR CASE COMMENTARY • How Can North Pole Workshops Better Respond to Shifts in Demand?

M. Eric Johnson (m.eric .johnson@dartmouth.edu) is a professor of operations management and the director ofthe Glassmeyer/McNamee Center for Digital Strategies at Dartmouth’s Tuck School of Business in Hanover, New Hampshire.

S anta should stop thinking of himself as

a victim of demand uncertainty. He needs

to stop reacting to fads and start creating

them. That’s just the way it works in the toy

business. Yes, toy makers do market research,

but focus groups for kids produce notori-

ously inaccurate results. A child might hon-

estly like a toy when he’s alone in a room, and

he might even ask for it in his letter to Santa,

but his wishes will morph instantly when he

sees what other kids think is cool. Eyen the

best technologies for capturing early de-

mand indicators don’t always work for toys.

Instead, Santa needs to invest more in

helping the children understand what’scool,

making his products cool, and creating an

agile supply chain that can deliver what’s

cool. Old-fashioned advertising works well.

Even better are tie-ins to other fads. The elves

should visit playgrounds to see what kids are

talking about and research potential hit

movies scheduled for release during the hol-

iday season. All the better if they can make

the toy tradable and collectible, like Yu-Ci-

Oh! cards. Linking a toy with a pop culture

icon is a good strategy, too – though it can

be risky, as North Pole Workshops learned.

Movie tie-ins aren’t risk-free either./^ Bug’s

Life sold some toys; Antz, not so many.

Baby anytime, but you can’t necessarily get,

say, the white cat. Many ofthe really hot toys

like Pok^mon cards and Furbys have bene-

fited from this approach. Every year, the

media feed the impression of an overall

shortage for a product, when in fact only one

version is hard to get. Part of this trick, of

course, is to get parents and children to substi-

tute within the category and still be happy.

Mattel has pursued a variety strategy-

a form also called a rolling m i x – f o r its Hot

Wheels line for some time. This month you

might have the green Ferrari. It stays in the

collection for a short time and then disap-

pears. You don’t promise retailers any partic-

ular version. lnstead,you ship a “basic assort-

ment,” a box ofcars or action figures, and you

change the mix every week. Kids love rooting

through the boxes to see what they can find.

The strategy drives traffic and awareness,

and it creates collectors. Variety strategies re-

quire a supply chain that thrives on change,

but surprisingly, such strategies don’t force

retailers to manage an endless number of

SKUs. A car, any version, can be a unit.

Some high-tech companies have begun to

use a kind of rolling mix strategy, and Zara,

the Spanish retailer, does it all the time. It

makes a small weekly shipment to each store.

Santa should stop thinking of himself as a victim of demand uncertainty. He needs to stop reacting to fads and start creating them.

Another tool that toy companies use all

the time to build demand is control led scarcity.

In other industries, a shortage is a bad thing.

In the toy industry,you might find executives

giving each other high fives over a shortage.

!t creates buzz. The trick is to start a fad and

allow some shortage, while avoiding so

much scarcity that you disappoint a lot of

people. One way to do that is to ship a limited

quantity ofthe product to stores in the fall,

making ittough to find, and quickly catch up

around Thanksgiving.

Better yet, combine scarcity with variety.

Look at Beanie Babies. You can get a Beanie

and when the clothes are gone, they’re gone.

Zara has trained consumers to come back

every week to see what’s n e w – a n d created

urgency to buy while the item is available.

One more thing: The elves are understand-

ably resistant to Elf Pepperflepper’s idea of

outsourcing, but it is the norm in the toy in-

dustry. Toy makers have outsourced produc-

tion nearly completely. Well before China

was cool, Mattel was sourcing from China.

The industry is on the leading edge of low-

cost sourcing. And toy companies source

from many different countries to protect

against currency risk and political risk.




HBR CASE COMMENTARY • How Can North Pole Workshops Better Respond to Shifts in Demand?

Horst Brandstdtter is the owner of Ceobra Brandstdtter, a toy manufacturer and maker ofPlaymobil products, located in Zirndorf, Germany.

Santa Claus doesn’t seem to be thinkingvery clearly about the future. He’s been in the business much longer than I, but I can still claim 50 years. I would advise him to keep three things in mind: first, the hazards that short-term strategies conceal; second, the responsibility he has to his customers; and third, the limits of an automated cus- tomer-management system.

Children drive the demand in our industry. Of course, large companies manipulate chil- dren’s desires with clever marketing and gi- gantic budgets. For example, the Star Wars films introduced a whole army of Darth Vaders and Luke Skywalkers to the toy box. The demand these campaigns create is usu- ally short-term, and in no place on earth is short-term demand created better than the United States. There is a major trade fair in the U.S. each February where retailers de- cide what to buy for the next Christmas sea- son. But one cannot help going wrong if one chases the trends.

Our philosophy here at Playmobil might help Santa Claus. We betieve that as a toy manufacturer,wehavea pedagogical respon- sibility to our customers that transcends our profit goals but that also yields lasting suc- cess. We offer products that help children develop motor skills, refine a sense of taste.

If Santa really wants to fulfill children’s wishes, there should not be any talk about outsourcing his production.

and understand the world. We make it more fun for them to play than to sit in front of the television, and we try to guide their ag- gressions into healthy channels. Of course, we pay attention to trends. But we try to ig- nore them as much as we possibly can, even if it hurts our short-term revenues. For ex- ample, we do not purchase licenses for brand names such as Disney, Star Wars, or the Olympic Games. This is connected with a rule that Hans Beck, the inventor of the Playmobil figures, set for us 30 years ago: Never disappoint the customer. If we were

to rely on licensing, disappointment would be inevitable. There is the danger that the children might not get what they want be- cause we made a bad choice. Or parents might have to spend extra money because they are supporting the originator’s licens- ing costs.

I also do not believe that Santa Claus can solve his problems by collecting more data on his customers or by evaluating them bet- ter. Market research is very difficult in the toy industry. One cannot simply interview children and then transferthese data directly into product development. One must con- sider more clever methods to understand children’s desires and fantasies. Just like Santa Claus, we receive many letters-about 150 per month. If we were to merely trans- fer information from these letters into CRM software, everything between the lines would be lost. That is why we look at these letters not as raw data but rather as feed- back from loyal customers who wish to share their experiences with our products. They provide us with precious ideas. For example, we introduced a line of firefighter figures and vehicles to the Playmobil set. Children wrote to us saying that they wanted a fire sta- tion for the figures. Good idea. We developed a very nice fire station. We also try out our toys before we market them by observing children at play with new Playmobil prod- ucts. But a human being must interpret these samplings.

If Santa really wants to fulfill children’s wishes, there should not be any talk about outsourcing his production. We at Playmobil are in the process of retrieving outsourced production back to our main facility. This way, we can closely monitor production to our strict quality-control standards, and we can react to market signals during the Christmas season.

We also believe that outsourcing is the wrong strategy for us from an organizational standpoint. As an enterprise, we bear re- sponsibility not just forthe children but also for our employees, just think how hard it might be for an unemployed elf to find an- otherjob!




H B R CASE C O M M E N T A R Y • How Can North Pole Workshops Better Respond to Shifts in Demand?

Warren H. Hausman (hausman@stanford.edu) is a professor of operations man- agement in the Department of Management Science and Engineering at Stanford Uni- versity in California.

So-called planning methodology is built on the premise that a good point forecast for demand is available and all we need to do is get it and then use it.

Talk aboutfourth quarter pressure! Santadeals with volatile and unpredictable demand in a very sbort selling season. While

focus groups (or a review of children’s corre-

spondence to Santa) and analysis of early-

season demand are beneficial, there is no

foolproof way of obtaining error-free fore-

casts in tbis environment. Unfortunately, a

great deal of so-called planning metbodol-

ogy is built on the premise that a good point

forecast for demand is available and all we

need to do is get it and then use it. Virtually

all MRP systems work that way, and many

managers have apparently been trained to

tbink deterministically rather than in terms

of probabilities.

Once we agree that demand for a specific

toy in December is inherently difficult to

forecast, what can Santa do? The standard ac-

ademic solution is to apply the Newsvendor

model, which involves four steps: Plot a bell-

shaped curve representing demand uncer-

tainty; assess the cost of underage (being

short); assess the cost of overage (excess in-

yentory); and conduct economic balancing to

minimize expected costs.

Santa might argue that he must satisfy

100% of demand, but since the bell curve goes

on indefinitelytcthe right,that’s mathemat-

ically impossible. The Newsvendor model

forces Santa either to make an economic de-

termination ofthe shortage cost or fall back

to a “service level” or fill rate approach and

decide that, say, he wants to fulfill 98% of de-

mand without stockouts. Presumably tbe

other 2% can be explained, and buffered, by

the Naughty List to achieve Santa’s mis-

sion-the right toys to the right kids.

After applying tbe Newsvendor model,

there will still be costs of overage and under-

age; even if they have been minimized,tbey

will not be zero. Now Santa and tbe elves

can start thinking creatively about other

ways of coping with product shortages:

substitution; risk sharing or hedging; and


Product substitution is a tried-and-true

device for coping with stockouts in many

markets. Ifa grocer runs out of ketchup i m o –

ounce bottles, be may substitute i2-ounce

bottles. Of course, as all of Santa’s helpers

know, witb trendier items like toys this strat-

egy will carry you only so far.

Risk sharing, typically applied between a

supplier and an OEM, replaces a price-only

contract for components with a contract

that states, for example, the OEM’s willing-

ness to pay a small price premium per unit;

in return, it would gain volume flexibility

from the supplier. Instead of purchasing

10,000 components for $1 eacb, say, the

OEM might offer to purchase a minimum of

9,000 components for $1.04 each, as long as

the supplier agreed to provide up to an ad-

ditional 3,000 units on short notice.

Yet another strategy might be risk hedging

combined with a standard supply chain con-

cept called postponement; tbat is, shifting

risks to material and capacity management

instead of finished goods, redesigning prod-

ucts so that many SKUs share a common

base. Consider tbe case o f t h e HP Deskjet

printer, which was redesigned so that coun-

try and language localization took place at

a relatively late point in the supply chain. In

Santa’s case, the Meowrrr’s underlying tech-

nology could have been developed early on,

witb the color split and volume postponed

until closer to reindeer liftoff. A combina-

tion of postponement and hedging can help

Santa balance production planning with de-

mand forecasting.

If managers think that ioo% service is at-

tainable, they will be disappointed when it

doesn’t occur, wbereas if Santa’s elves think

probabilistically, they will sleep better at

nigbt when the inevitable glitches do occur.

But probably not until December 26.




How Can North Pole Workshops Better Respond to Shifts in Demand? • H B R CASE C O M M E N T A R Y

I t may sound obvious, but the first thing todo is to stop production on the Meowrrr immediately and try to reschedule tbe dupli-

cation lines to run Timmy CDs. And since

the Timmy train is very stable, North Pole

Workshops should produce the remaining

units as quickly as possible and then shift ca-

pacity dedicated to tbe train to the CD. The

shortfall should tben be outsourced.

Tbese steps may avert a total meltdown

tbis year, but Santa needs to make sure tbis

doesn’t happen again. And the most effective

solutions lie in better planning, not real-time

technology. When it comes to planning,

Santa’s mistake is that he’s treating all items

the same way. A key component to planning

and, as time progresses, execution, is classi-

fying items according to how much value

they bring to the business and the degree to

which you can forecast demand for them.

Business value can be assessed with some-

thing as simple as unit sales or as compli-

cated as a blended measure that takes into

accountorder frequency, inventory costs, and

profit margin. Forecastability depends on

this strategy is that the organization has to be

ready to write off or dispose of extra inven-

tory But using a cost/benefit analysis, it will

be easy to determine the breakeven point be-

tween production and inventory.

Tbe Timmy CD might be an example of

a low-value, low-forecastability item. Tbe

elves sbould develop a base level of inventory

and reserve outsourced duplicating capacity

for scenarios such as tbis, where demand un-

expectedly takes off. This allows Santa to

avoid the cost of full investment in greater ca-

pacity, trading off inventory risk for flexibility

with a defined cost.

The Meowrrr falls in tbe high-value, low-

forecastability quadrant. Santa could follow

one of several strategies, depending on the

toy’s cost structure. One would be to build to

a high level of demand and take the risk of

having to destroy significant amounts of ex-

cess product. Another would be to hold open

internal capacity to maintain flexibility and

postpone production until actual demand

was known. This would be feasible because

North Pole Workshops has already made the

The most effective solutions lie in better planning, not real-time technology.

factors such as how new a product is and

how connected it is to trends in the market-

place. Santa should setup a matrix tbat clas-

sifies toys according to these two dimensions

and plot every toy on the matrix. Then bis

production strategyshould vary by quad rant,

TimmytbeTinsel Town Train,for instance,

falls in tbe low-value, bigh-forecastability

quadrant. It’s low value, relatively speaking,

because while sales chug along.tbetoy is un-

likely to command a premium, Santa should

run tbe trains through the duplication facili-

ties very early in the season to free capacity

for more volatile items closer to Christmas.

He’ll be able to reduce capacity require-

ments in his busiest season witbouta signif-

icant increase in working capital and without

taking a large inventory risk. Tben the elves

can watch for any external events that could

cause a spike in demand and add extra pro-

duction if necessary Tbe key assumption in

low-value Timmy trains earlier in tbe season.

Santa would be able to shield his organiza-

tion from the inventory risk associated with

high-fashion items and still meet demand.

Once again, his elves would bave to conduct

a cost/benefit analysis ofthe strategy.

Eacb of tbese strategies bas both a demand

and a supply component. By planning in ad-

vance bow to address demand variability.

North Pole can monitor its assumptions and

approacb to supply and fine-tune its position

up until the pre<hristmas crunch. Another im-

portant implication: Because this is a process

framework, itwon’t require any significant in-

vestment in newtecbnology that mayor may

not make a real difference in the elves’abil-

ity to meet demand. Next Christmas should

be much merrier in the Nortb Pole, v

Anne Omrod (anne.omrod @johngalt.com) is the CEO of John Gait Solutions, a consult- ing firm based in Chicago.

Reprint RO512A

To order, see page 155.

DECEMBER 2005 49



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