Supply Chain Matters updates readers on yet another turnabout in supply chain and customer service direction for a once high flyer in premium interactive fitness equipment and services.
The saga of fitness hardware and services provider Peloton Interactive took yet another turn last week with an announcement of the pending closing of the company’s owned North American warehouses and the shedding of field customer support teams, along with other moves.
In a reported effort to cut additional costs and increase needed cash flows, the provider announced intentions to cut upwards of 800 jobs within its North America support teams and eliminate its company operated warehouses.
According to published reports from both Bloomberg and The Wall Street Journal, the company will now source its hardware customer fulfillment needs to third-party logistics providers in an effort to reduce product delivery costs by up to half. Further announced was an assessment of owned retail operations in the U.S. over the coming months.
In February of this year, the company’s Founder, John Foley, was replaced by media executive Barry McCarthy whose background includes roles as CFO for Netflix and Spotify. Reportedly McCarthy’s goal is to transform the company “primarily into a subscription-based company rather than an equipment manufacturer.” That charge has now resulted in an $800 million restructuring plan.
In last week’s announcement, McCarthy acknowledged the impact to employee livelihoods, but at the same time stressed that the company- “must become self-sustaining on a cash flow basis.” Further announced were additional price hikes including a $500 increase for the Peloton Bike+, to now list at $2,495, and a hefty $800 price increase affixed to the providers treadmill model which will now list at $3,495.
In our last Supply Chain Matters update related to Peloton in mid-July, we highlighted the announced reversal of a U.S. based manufacturing strategy, with a decision to source manufacturing at a CMS provider located in Taiwan. That reversed a prior evolving strategy for more reliance on domestic production of equipment as a means to better control and synchronization of the delivery of equipment and services and be more responsive to changing customer preferences.
Inventory Glut of Bicycles
Also last week, The Wall Street Journal reported (Paid subscription or metered view) that some U.S. bicycle manufacturers and dealers, responding to the extraordinary demand for new cycling equipment during the pandemic, assumed that demand would be continuous. In retrospect, they collectively ordered too much finished goods inventory from offshore supply sources. Cited are interviews with dealers who indicated multiple lost sales during the initial lockdown periods, because of not having any new bikes in inventory. Consumers reportedly were seeking high end bicycles with performance features.
Now that inventory has finally arrived, demand has tapered off, and there are too many performance bicycles that are now unsold. Cited data from market research group NPD indicates that U.S. bicycle demand in the period of January thru June of this year declined 7 percent. Bicycle demand levels reportedly soared 46 percent in 2020, and 4 percent during the same period of 2021.
Fitness and exercise is not the only category of products that reflected explosive product demand during the pandemic, without the ability to fulfill that demand to customer expectations. Such demand data reflects the conundrum of challenges that business sales and operations planning teams faced during the production and global transportation disruptions that occurred these past two plus years. At one point in 2021, containers transiting from East Asia to the U.S. West Coast were in excess of 200 days. This is obviously inventory and working capital not available for use or sale.
There is further the need for candor in that during this period, there was a tendency to buy inventory in excess of demand needs with the hope that some orders would arrive earlier than others. That was the classic inventory bullwhip effect, alive and well. However, it was not a demonstration of data-driven planning or decision-making.
The lessons brought forward from the ongoing saga of Peloton, of the exercise and fitness industry and other select industries as well are many.
One that we have already indicated in prior commentary is the critical need to have the voice and input of the supply chain in formulating or modifying business or product strategies. the need for advanced planning capabilities that can align with product demand sensing As an example, Peloton’s decision to initiate customer monthly invoicing for products and interactive instructor training at the time of order placement had rather significant supply network and logistics implications. By our lens, the unfortunate circumstance is that the awareness came much later in the business cycle, and in the environment of disruption. Market dynamics quickly changed all of that.
Data driven is the notion of not only determining time-phased product demand or multi-tiered inventory management strategies for individual products but correlating that demand to as much available industry wide demand projections as available. That is one advantage of leveraging today’s machine-learning technologies in the ability to flag such conditions. There comes a point when aggregate supply exceeds demand, and business leaders need to be aware as to when that condition exists, and what actions can be taken.
A further consideration is that business strategy be aligned with regional supply network strategies in the ability to control lead times or inventory replenishment times more directly. Case study is likely to point out that this was one flawed shortcoming of Peloton, as well as others that were so dependent on a complex global wide supply chain of partners, struggling to meet customer needs and expectations because of external developments.
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