Michael Watson Ph.D
Jan 5th, 2016

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On Dec 15th, Snapfish, a photo services company, found themselves on the front page of the USA Today.

Unfortunately, the reason they made the front page was that they were very late in shipping Christmas cards to customers.  And, customers were upset.

We saw something similar during Christmas 2013 when UPS and FedEx could not deliver all their packages by Christmas Eve.  (In 2014, they seemed to have handled it better, although reports are that FedEx had some trouble in 2015).

With Snapfish, the story seems similar.  Snapfish’s website mentioned that they were getting an “unprecedented” number of orders for holiday cards and shipments were late.  What happened was that demand was very high relative to the production capacity.  Once this happens, orders will be late.  (See this post for the one chart that sums up the issue).

It would be easy to say that Snapfish should have had more capacity.  As a supply chain manager, you are in a tough situation.  Capacity has to be in place long before Christmas—and long before you know what demand will be.  So, how should you think about how much capacity you need?

  1. Buy Enough Capacity to Handle the Peak Volume. This strategy may prevent you from being the top story in a national publication.  However, what is painful about this decision is that in March, executives are going to ask why you have extra capacity sitting around.
  2. Buy Enough Capacity to Handle the Peak Volume and Then Some. This strategy takes the peak volume and increases it to account for “unprecedented” extra demand.   Now, you won’t have any worries about late orders.  However, when you have idle capacity at Christmas time, you may get some tough questions.
  3. Use Temporary Capacity For Peak Volume. This strategy only works if you can outsource capacity requirements.  This usually comes with a high per-unit cost and the risk that your supplier doesn’t have the capacity they promised (maybe their other customers are ordering a lot too).
  4. Turn away demand. Capacity is only a problem as it relates to demand.  You can stop accepting new orders once you hit capacity limits, or set the right expectation with customers.  It hurts to turn down orders, but if you don’t turn them down, you will eventually have to turn some down when you can’t meet orders and others will turn you down by taking their business elsewhere.  com, a new competitor to Amazon, knew they would have trouble keeping up with demand this Christmas season.  So, very early on, they started to send messages to customers on the true (and long) delivery times.  As Christmas got closer, they stopped guaranteeing delivery by Christmas Eve.  This, in effect, turned down demand, but they let customers make the decision.
  5. Use pricing to shape and prioritize demand. In this case, you can think about using pricing to move demand to earlier in the peak season (order before Thanksgiving and get an additional 20% off).  And, more dynamically, you can keep an eye on pricing and raise prices as capacity gets tighter.  The airlines have been doing this for a long time.
  6. Make sure all your capacity is working on current orders. Among other things, Eli Goldratt’s The Goal stresses that you can free up capacity by only working on current orders.  Don’t waste machine capacity working on non-priority jobs.  Related, don’t fill up your warehouse with non-seasonal items and then run out of capacity during peak times.
  7. Build extra inventory. If you are in the business where you can pre-build inventory (Snapfish, UPS, and FedEx are not), then build inventory ahead of the busy season.  Inventory is one of the best buffers for supply chain variability.

Final Thoughts

First, note that I didn’t put “forecast better” as part of the solution.  I think organizations invest a lot in forecasting already.  Thinking that improving the forecasts will help avoid the problems like Snapfish is not a good strategy for dealing with the inevitable variability in demand and missed forecasts.

Second, there is no magic bullet in this list.  All the solutions come with costs.  The best solution is that the organization understands the trade-offs and deliberately picks the best strategy for the business.

 

This article first appeared in SupplyChainDigest