#Lessonsfromthebest : Old-fashioned

Author’s Note: Over the last few weeks, I have been using this space to write about the lessons I learn from organizations with respect to their supply chain management, but not limited to it. I have also been attempting to convey my learnings as a narrative, and a story of sorts. So, if you want to learn something informative whilst having some entertainment, go ahead and read away! If you want to read my previous blog posts, click here! 😊

Shanmugeshwari, MBA '21

Amrita School of Business, Coimbatore

Think about an industry which needs to predict demand 15 years before the actual supply . . .

 

Whiskey! 🍸

 

Until the early 2000s, demand grew steadily -- blends dominated 80% of sales and single malts accounted for another 15%. US & EU were the main consumers.

 

Soon, emerging markets (particularly India which guzzles 50% of the world's whiskey by volume) entered big-time & demand soared. Fuelled by artisanal food movements and critical popularity from TV series (like the one featuring Don Draper in it) skyrocketed its demand. Consequently, product mix changed but the need for aging whiskey continued to give a bottleneck to the industry.

 

Maker’s Mark one of America’s premium Bourbon Whiskey Distillers witnessed this surge in demand and shortage in supplies. Essentially, a bourbon takes six years to age. Maker’s Mark had no choice but to water down their proof content, to meet the rising global demand. This in turn increased their supplies by 6% and they communicated this clearly to its loyal consumers.

 

That is when necessity mothered invention.

 

• NAS (No Age Statement) Whiskey was born. Instead of Age, brand managers focused on color, innovative flavors, location, techniques like maturing in three different casks & opaque bottling to pique consumer interest.

 

• Aged versions morphed into Collector editions & became dearer.

 

And then came the innovations!

 

Microbreweries bloomed.

 

Aging techniques were patented, and products were watered down to meet the demand surge.

 

An interesting example of how an entire industry addressed supply chain challenges by leveraging the attributes of pricing, branding & product innovation!

#Lessonsfromthebest : SC Network Optimization

 Author’s Note: Over the last few weeks, I have been using this space to write about the lessons I learn from organizations with respect to their supply chain management, but not limited to it. I have also been attempting to convey my learnings as a narrative, and a story of sorts. So, if you want to learn something informative whilst having some entertainment, go ahead and read away! If you want to read my previous blog posts, click here! 😊

Shanmugeshwari, MBA '21

Amrita School of Business, Coimbatore

When the world just came out of recession in 2010, luxury took a hit. But Michael Kors was an outlier.

Kors modeled itself as an affordable luxury: giving recession-struck, cost-conscious American & European consumers a high style option. This was done by greatly overhauling its Retail distribution strategy & taking advantage of Low-cost manufacturing in China. It opened stores in newer countries, cities, malls & Duty-free zones.

This showed in revenue as $ 38Mn (2011) to $109 (2012) to $221 (2013). Soon becoming the best performing & most searched Luxury brand in the world.

However, three problems soon caught up:

• Overdistribution reduced its aspirational value
• Much of the growth was through markdown in the pricing structure that led to a weak P&L
• And finally, Michael Kors became one of the most counterfeited handbags in the world

Between 2013-14, the Inventory-to-Cash Ratio was around 0.5. This ratio being greater than 0.8 indicates a much higher inventory than what current assets can support. By 2016 this ratio sky-rocketed to 1.65, inventory increased by 37%, but cash reduced by 56%

How did they overcome this?

Kors stayed relevant by realigning its forecast and its distribution plans and giving us a good example of the inter-dependencies among Supply chain, Strategy & Finance.

They performed a supply chain network optimization study when they realized their long-term forecasts caused problems in the distribution centers as they couldn’t handle such large projected growth. By the time, they were moving from a high growth business to a mature business model. They started focusing more on how to utilize their retail assets for omnichannel distribution in order to derive maximum advantage for the lead times.

They reduced the number of touchpoints between the manufacturers and the customers. More goods were directly shipped to customers from the ports. Some orders went directly to the de-consolidators bypassing the distribution centers. Thus, by redesigning the supply chain, soon they developed a competitive advantage which over time became their core capability.

 

Reference for the financials from here.

#Lessonsfromthebest : Speed factory

 

Author’s Note: Over the last few weeks, I have been using this space to write about the lessons I learn from organizations with respect to their supply chain management, but not limited to it. I have also been attempting to convey my learnings as a narrative, and a story of sorts. So, if you want to learn something informative whilst having some entertainment, go ahead and read away! If you want to read my previous blog posts, click here! 😊

Shanmugeshwari, MBA '21

Amrita School of Business, Coimbatore

With more organizations focussing on localization with custom made products, goods are made at “Speed factories”. Though these factories have a quick turnaround to satisfy the demand, often they come with high production costs.

 

Let’s take an example, Adidas.

 

In 2018, Adidas came up with AM4NYC (Adidas Made for New York City). These shoes are made specifically for the runners and athletes at the Big Apple AKA NYC. These shoes were produced in the U.S., unlike most of its footwear which happens overseas.

 

As retail customers expect instant gratification and immediate deliveries, consumer-faced companies are starting to invest in these speed factories. However, these account for only a small percent. At least in the case of Adidas were out of the 300mn athletic shoes the company makes, only 1% of it comes from these speed factories. Adidas has the vast majority of its production in Asia and only two-speed factories in Germany and Atlanta.

 

Now, why is it companies allocate only a tiny amount of its total production to these speed factories, considering their fast turnaround?

 

This lies in the demand forecasting. If the exact long-term demand is known, these products could very well be manufactured overseas, but the nature of the demand for these customized shoes is uncertain. If people see their favorite celebrity sporting a new sneaker and they want to buy it immediately, predicting this kind of demand becomes hard, and producing them fast enough in Asia to meet the demand in the U.S. becomes tedious. Also, such unpredictable demand requires companies to maintain large safety stocks, which may have to be sold off at discounts in case they don’t sell it in the season.

 

This is where the Speed factory comes into play. If companies can get the latest and the best product to market faster, there’s no need for a discount and they can command higher prices.

Having a speed factory may be a worthwhile investment, as long as they have the best product mix to allocate to these factories. The local production via these speed factories can give the business a competitive edge, but over time if the demand becomes stable it only makes sense to have the production offshore.

Here is the making of Futurecraft M.F.G at one of the Adidas' speed factory,

You can read the tech stuff about these shoes here, Adidas AM4NYC Shoes