We trust that our Supply Chain Matters readers have been adsorbing our unveiling of our 2021 Predictions this week. We know that supply chain management professionals remain quite busy, but if you do gain some time this weekend, please have a look.

Our first prediction was that: Enhanced End-to-End Visibility and Continuous Supply Network Risk Mitigation Becomes Essential for today’s business table stakes.

Those reading this blog who recently ordered or attempted to order a new Peloton Interactive exercise bike or have not been keeping up to date with what’s trending in social media, likely know of what lack of supply chain visibility can amount to in overall business impact.

Peloton Exercise Bike

Source: Peloton web site

Peloton equipment is not your average offering of in-home fitness. The company’s bikes are connected virtually, come with an onboard camera, microphone, and electronic screen.  At a cost that can approach $2500 plus, the company has created an upscale and hip image that includes well recognized customers including a former and now newly elected President of the United States.

However, a flurry of continuous reports of customer frustrations in delivery of orders and with customer support experiences has reached the attention of the company’s most senior management, as well as its investors. While some companies found themselves in a position to be able to quickly pivot their supply chain capabilities to respond to added COVID-19 market demand, that was not the apparent case for this company.

As a recent New York Times report noted in its opening sentence:Peloton’s relentlessly positive Instagram posts usually attract enthusiastic responses from its 1.2 million followers, who love the company’s charismatic instructor’s and it’s $1,900 plus bikes and treadmills.

But of late, the company has been forced to deal with what is described as growing customer outrage about delayed deliveries of ordered new equipment that began during the past holiday season and is still playing out.

Upon reading the Times report, this Editor shares our perspective from the interrelationships of supply chain sourcing, end-to-end visibility, and corporate customer engagement policies perspectives.

 

Business Model

Peloton’s business model is one of delivering a differentiated customer experience in providing consumer fitness and health. With so many having to work from home during the ongoing COVID-19 pandemic, consumers increasingly have initiated purchases of in-home fitness equipment. Customers both acquire upscale fitness equipment for personal at-home use as well as the services of this company’s unique online interactive instructors to deliver actual fitness training classes via video screens attached to such equipment.

Similar to the Apple iPhone experience, the consumer is attracted to the quality and features of the hardware, and to the various subsequent added services and experiences that the hardware can provide via add-on subscriptions. This is the enviable business model of today’s business world; sell the hardware and leverage the services on a longer-term recurring basis. The supply chain serves as the enabler of the services experience.

The company’s business practice is that after a consumer elects to purchase specific fitness bike, such as the new Peloton Bike+, most buyers are required to begin making immediate payments on their purchase.

Reportedly, customers were provided a delivery estimate that ranged anywhere from three to ten weeks from actual order date. Thus, the anticipation and the expectations often accelerate, and so does the interest level in expected delivery of the individual bike, especially during the holiday period. That differs from usual practices where payments are not exercised until the goods have been received. Where payments involve services, subscriptions enabled by purchased equipment, the anxiety levels increase even more.

 

Supply Network Sourcing, Visibility and Last Mile Delivery Challenges

Like many other businesses, the company has a global supply network for manufacturing, production, and delivery of its fitness equipment, and it was not immune to the various global wide disruptions that occurred in 2020, especially during the Q4 holiday fulfillment period. Even as delivery times elongated during last summer, the company continued active marketing and new order intake. The company’s fitness classes surged in the first half of the year, and by June there was a reported 94 percent increase in fitness class subscriptions. However, customer complaints regarding late delivery were surging as well and in a May 2020 letter to shareholders, the company acknowledged supply challenges and high levels of customer complaints.

In September, the new more expensive Bike+ model was introduced, and demand accelerated even further. The supply network that extended to Asia and Taiwan strained even more with added disruptions related to ocean container sailings, US. West coast port congestion and the raging wildfires in California.

The Times report indicates that by the Thanksgiving holiday, persistent long wait times and delivery time re-schedules required the company’s CEO to publicly apologize to customers. In November, a Wall Street Journal report was headlined: Peloton Buyers Are Sick of Waiting. A Facebook group dedicated to exchanging delivery issues involving the company reportedly garnered in excess of 8,000 members. There were reports that consumers who were actually alerted to an upcoming delivery appointment only to be suddenly re-scheduled by customer support representatives. The same representatives reportedly could offer little clarity and had to rely on information provided by contracted third-party logistics providers, who incurred the finger of blame.

These times where social media channels readily facilitate information sharing reportedly caused the company’s customers to read that others who ordered equipment in December, received their orders that month, while some that ordered earlier were still waiting.

There is one example in the report indicating a consumer who placed an order in mid-October, and provided an early December delivery estimate, which was then pushed to December 31, actually called by the driver indicating the goods were on the way, only to be later contacted that the bike was not available.  The saga continued from there, and after the consumer was subsequently notified of a late February expected delivery. She subsequently canceled the order all together.

Today we conducted a Google search on the terms: “Peloton customer complaints”, which indexed over 22 million web listings.

Our supply chain operations, logistics and customer fulfillment readers have likely already cut to chase as to what the problems likely were. They are symptoms of a breakdown of information and control processes. This occurs especially in times of high product demand and supply imbalance. Customer anxiety and frustration tends to accelerate and multiple demands and complaints force decisions to reallocate product fulfillment inventory, with or without knowledge of the implications of that decision. That would include how many additional customer delivery orders would have been likely impacted by such decisions, or which group was best able to make informed allocation decisions. The other symptom is one of consistent and timely sharing of customer order actual information among a third-party services provider and Peloton supply chain management teams.

There are now indications that Peloton is now forced to transport its bikes by more expensive air freight to avoid congested U.S. port backups. In late December, the company acquired U.S, based fitness equipment provider Precor for $420 million reportedly to develop a domestic source of manufacturing capability. Precor provides upwards of 625,000 square feet of manufacturing capability in Washington state and North Carolina.

Newly sworn-in President Joe Biden, who reportedly purchased his Peloton bike during the pandemic, reportedly cannot yet move this device into the White House until U.S. Secret Service and Cybersecurity experts determine if the device does not pose a cyber security threat without further safeguards,

 

Added Thoughts and Reader Takeaway

In our prediction we pointed to new thinking that views visibility in the broader context of supply risk identification and mitigation from an overall line-of-business as well as supply network strategy perspective.

Risks should be identified from various business perspectives. In the case of Peloton, the business model of initializing payments at time of initial order may have weighted the supply strategy to be one of less dependence on a global-wide product value-chain.  Selling a premium product with healthy margins is a different model of a product strategy that may not necessarily require global based sourcing if such component design and production capabilities are available in a nearshored strategy. A further consideration could have been locating product final assembly in a facility able to leverage shorter transportation response. The Precor acquisition is likely the response.

A further takeaway reminder relates to eliminating supply chain islands of information, particularly those that span he movement from the manufacturing facility, among various transportation and logistics handoffs to the actual last mile of delivery. Too often, while financial considerations are weighted toward outsourcing of these capabilities to third-party logistics and services providers, there is often less consideration of insuring that further islands of critical information are not duplicated, and that consistent collaboration, control and decision-making process are integrated across the entire network.

Peloton will likely learn its own important supply network and customer fulfillment takeaways from these past months, especially since it has reached the attention of the highest levels of the company.

Negative customer perceptions take a long time to mend and reacquire. While the fitness services delivered may be exemplar, the customer order and delivery experience are one that causes perspective customers to have doubts. Hopefully, the company has the voice of supply chain management now sitting at the table of business strategy direction and development.

 

Bob Ferrari

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