Stock-ing Stuffers

It is the time of year when holiday shoppers rush around to try to get last minute gifts for friends and family.  Nothing is more frustrating than navigating the partking lots and crowds and lines in the malls and grocery stores only to find the item you want - the video game or the roast you planned to cook for dinner - is out of stock.  Remember all the disappointed children when the stores ran out of Cabbage Patch Dolls in the 1980s?  According to Alison Maitlands recent article (subscription) in the Financial Times, this year's hot item is Microsoft's Xbox 360 game - which sold out in November in the US and just after it's December release in the UK.  The game is so popular that it is reportedly getting nearly three times the retail price on ebay.

How can stores and manufactures minimize these shortages?  And are the companies that produce popular products not predicting demand properly or are they creating a shortage themselves in order to increase popularity?  Maitland spoke with Yossi Sheffi, a supply chain expert and author of The Resilient Enterprise: Overcoming Vulnerablity for Competitive Advantage about the shortcomings of supply chain systems:

A company that has concurrent production processes - performing many development tasks in parallel - can react faster to changing demand. "This also means that it can recover faster from a disruption because its business processes are concurrent and the various functions are accustomed to co-operating with each other," he says. A responsive supply chain depends on good communication and co-operation between all its participants. "It is only as strong as the weakest link. That is why it is so difficult."

Companies that do it well have an in-built culture of flexibility, with a free flow of information, says Prof Sheffi. "Toyota displays continuous production reports in its plants. Dell updates managers hourly on production. UPS keeps the vast reaches of its network in constant cellphone communication."

Communication between buyers and sellers can help companies avoid the "bullwhip effect", whereby minor variations in consumer demand create bigger and bigger fluctuations in orders and inventory levels further up the supply chain. This can be caused, say, when a company does not inform a supplier that an order increase is due to temporary disruption at another supplier. The first supplier assumes customer demandis growing and overreactsby increasing capacity or ordering more from its own suppliers in anticipation.

When new products such as the Xbox 360 are in short supply, a different mechanism can start the bullwhip effect. Aware they may be allocated a fraction of what they ask for, retailers double or triple their orders even though they may not need the additional stocks. The manufacturer, apparently facing even greater demand than anticipated, ramps up production for what turn out to be "phantom" orders.

"Unfortunately it is bound to be disappointed when supply catches up with real demand and the phantom orders disappear, leaving the manufacturer with extra product that needs to be sold at lower margins," Prof Sheffi says.

His theory will be tested in the new year. Microsoft, which denies it is rationing the Xbox 360, says its three manufacturing plants in China's Pearl River Delta "are running at full capacity and churning out as many consoles as humanly possible . . . by early next year, supply will catch up with the demand." Meanwhile it is advising customers to check with retailers when the next shipments are due.

Prof Sheffi believes Microsoft will end up with too many consoles. In February, he predicts, they will be selling at a discount in retailers and at half-price on Ebay. But of course, some forecasting is notoriously difficult.

Read the entire article here.