I was recently laid off along with some other very talented employees. Like many people in my situation, my departure was not performance based; it was simply an outcome of business results not meeting expectations. My former employer expanded during COVID expecting the prior year’s record growth to continue. I was hired (along with others) as departments were expanded to handle the additional growth during these go-go times only to find that as the fiscal year progressed sales did not materialize, and demand dropped to pre-Covid levels.
After working through the grief associated with a job loss, I began to reflect and notice many headlines and stories of organizations struggling with excess inventory having over projected their demand in reaction to the COVID frenzy for inventory. There are seemingly weekly news stories of one retailer or another offering steep discounts to sell through older excess inventory. I get emails daily from premium clothing companies offering 50-70% discounts on assorted apparel. Recently, Funko, a toy company, decided to landfill $30 million in toys. In mid COVID, we heard stories about Peloton over estimating demand as “work from home” brought on other nesting behavior and a forward buying pattern on their exercise equipment. Nike and Adidas are still struggling with their tremendous accumulation of inventory. It seems like many businesses are struggling with excess finished goods or raw material inventory levels, while sales are falling short of projected demand growth.
I consulted with my friend and mentor Pat Bower to get his thoughts on what was happening. Pat offered the following, “the simplest of inventory equations is on-hand inventory minus demand to arrive at some requirement for purchase or production – unfortunately most organizations expected the COVID spiked demand to be permanent and increased their forecasts, which in turn increased their inventories.
As supply chain issues began to diminish over the last six months, many organizations are now realizing this mistake, and lowering their forecasts. We now are being snapped by the end of the bullwhip where we have diminished demand slowly consuming excess inventory. The sad part of this equation is that organizations hired people, like you, based on the increased forecasts. It is one thing to carry excess inventory, it is completely different to impact people’s lives and professional standing.”
Organizations hired people based on the increased forecasts
Pat’s words made my job loss less painful. It did make me wonder about my own planning behaviors during COVID and what I could have done differently. After chatting with several colleagues and considering my own actions, I came up with a few changes I think might help others when the next disruption happens. I share these below:
Actively Manage Lead Times
During my conversations with Pat Bower he offered that “many planners did not track the ever-changing lead-times so when the transportation times gradually declined on the back end of the COVID disruption, most planners were slow to react. Nearly every disruptive event alters lead times, so it is prudent to constantly monitor this critical supply chain parameter”.
Pat noted that many folks have written or talked about lead-times during COVID to explain what happened, yet few have talked about what should have been done. Best practice suggests that lead-times need to be re-evaluated and updated routinely to maintain proper data integrity in your MRP planning system.
It is very clear to me that during a disruption, lead-times should be tracked and adjusted rigorously. Regularly updating lead-times enhances an MRP’s ability to calculate realistic planning schedules, projected inventory levels, and future delivery requirements to maintain service and inventory balances. As the COVID backlog started to clear at the Port of LA, planners should have correspondingly tapered down lead-times. We all collectively underreacted to these improvements – this was an important learning for me.
Rationalizing Demand Surges
Receiving large orders that exceed projections is exciting; however, it is crucial to consider their impact on future demand. Treating them with optimism is natural but if COVID taught us anything, skepticism is essential. For example, if Peloton’s leadership approached their COVID induced demand surge with skepticism, perhaps they would have considered demand was being “pulled forward” from the future due to the extraordinary circumstances and adjusted their future forecasts accordingly to account for the accelerated demand – but they didn’t. Peloton’s CEO John Foley said during a call with shareholders, “It is clear that we underestimated the reopening impact on our company and the overall industry”. In January Peloton reported pausing production of new bikes as warehouses were filled with excess inventory.
If Peloton approached COVID induced demand with skepticism, they might have known demand was being pulled forward
During post Covid discussions with colleagues it became obvious that we experienced a few different types of demand surges. As an example (unlike Peloton), we experienced some noticeable increases in demand (both quantities and frequency) for some product families that were experiencing raw material shortages and increasing backorders. During our demand and supply review meetings we discussed the likelihood that the demand surge might be caused by the bullwhip effect – but, in the end, we still held our higher, less rational forecast levels. Eventually, many of these bullwhip orders were cancelled, depressing sales, and bloating our inventory. We believed the story we told ourselves of increasing demand. Unfortunately, when demand dropped post COVID, our financial plan took the hit.
In both examples, it was a challenge to fully understand what was driving the surging demand. Was it pent up demand, was it bullwhip, was it changes in the market, was it overall material availability? What impact should the changing demand patterns have on forecasts? Do we forecast the growing trend or account for other variables?
We read the demand signals incorrectly and overestimated future demand and over ordered materials
The demand surges created a lot of changes that we didn’t fully understand. The stepped-up volume was not because we were different, offering a better product, or were more cost competitive. It may have been because we had product on-hand, or that customers were trying to hoard available inventory. In each example we read the demand signals incorrectly and overestimated future demand and over ordered materials. We could have done better at evaluating what was driving the increased demand. We failed to rationalize or contextualize demand surges.
Customer Inventory
One of the most important learnings was something Pat said, “most companies failed to even ask the question about how much inventory a customer was carrying, yet it was the first thing I did. I built models to track customer inventory to see if they were hoarding”.
I realized we didn’t check our top customers’ inventory levels as we should have. COVID changed many demand patterns making it even more important to check customer inventory levels to help explain changing or surging ordering patterns. Pat mentioned that at the start of COVID Amazon began to noticeably increase order sizes, in some cases quadrupling their normal order quantities. He began to question the increased order volume and did an analysis to evaluate Amazon’s likely inventory position.
Amazon began increasing order sizes, in some cases quadrupling their normal quantities
Since they have POS consumption data, they were able to estimate inventory levels. The analysis did not support Amazon’s increased order volume, and to prevent hoarding, his company worked with Amazon to reduce their orders. This simple step maintained the supply and inventory balance, avoided disruptive inventory builds, and protected other customers. Checking customer inventory levels made a difference and was a missing element of my analysis.
Inflection points
Many businesses ignored the early signs of softening demand as sales began to miss inflated forecasts as COVID was winding down, influenced by the positive bias that the strong, year-over-year sales growth would continue without understanding what exactly had inflated them. Businesses were slow to react and even loaded the early misses back into future months believing the record sales growth trends would continue.
Having been a part of many of these conversations in demand review consensus meetings, I can attest to the difficulty they present. Forecast reductions are difficult for business leaders to admit to – no one likes a negative Nelly. Increasing a forecast doesn’t generate the same hard questions and actions like dropping a forecast might Lowering a forecast will meet with far more resistance.
Forecast reductions are difficult for business leaders to admit to
However, to prevent overplanning and excess inventory we need to be intellectually honest and provide equal scrutiny to both raising and lowering of forecasts. Further, and collectively, we could have done a much better job estimating where we were in the disruption cycle; if we knew we were in a recovery phase we would have made decisions to not build inventory, or to lower forecasts earlier. During disruptions, short term information is better than long term information and should be leveraged to make better short-term decisions that would have prevented spreading an increase in volume over a longer horizon. This is the long way to say that a down period should have created a reduction to the forecast. It did not. Lesson learned.
Final Reflection
A few thoughts immediately come to mind. First, not understanding demand surges (during a disruption or otherwise) is just negligent supply chain behavior. Second, having happy ears may be good interpersonally, but not when supply chain planning – it is best to be “Joe Friday” of Dragnet fame and be about just the facts. Third, visibility into a customer’s inventory tells you what they are doing. During disruptive times, your customer may be hoarding and that could be creating a false demand signal. Understanding their inventory may be instructive on managing your supply chain in a more stable fashion.
COVID was disruptive, but the abandonment of best practices was also evident. I am temporarily out of a job as a result. Lesson learned for me – and hopefully my journey has been instructive.