Three factors are putting manufacturers on notice this holiday season. First, warehouse space utilization has climbed to 86.3% (Prologis Research), coincidentally above the 85% benchmark experts say will tip warehouse operations from effective space utilization into congestion risk territory.
Second, the 2023 Holiday Retail Survey shows that 33% of total holiday spending will occur in the last two weeks of November, with 66% of all consumers planning to shop during Thanksgiving week, taking advantage of Black Friday and Cyber Monday. While taking advantage of holiday promotions is by no means a recent phenomenon, inflation will drive earlier spending through the 2023 holiday season when compared to previous years.
Finally, the same 2023 Holiday Retail Survey predicts spending to reach $1,652 per consumer, up 14% from 2022 and exceeding pre-pandemic holiday spending (2019 and before) for the first time.
Considering these three factors, manufacturers (particularly in the nondurable sector) should prepare for increased volumes within a shorter window, accentuating the effect of peak demand season. The following steps are intended to help you maximize sales without sacrificing supply chain efficiencies and customer service levels.
Don’t Overlook the Fundamentals
Before looking at specific strategies, make sure your warehouses have the fundamentals in place. There are three to evaluate:
1. Performance Management: A formalized list of KPIs supported and tracked by management routines and meetings.
2. Standardized Processes: Standards give direction to what, how, when, and who performs each task, and are especially valuable when hiring seasonal workers to accelerate onboarding and maintain quality standards.
3. Workforce: Understand how workforce size and productivity correlates to warehouse throughput and adjust accordingly.
Having ensured the fundamentals are present, move through the following steps while keeping this objective in mind: Warehouse operations must be sized and designed to maintain the speed, service and quality levels customers expect.
Step 1. Cross-functional Coordination and Communication: You can’t do it alone
Effective alignment and communication between commercial, planning, procurement, manufacturing and logistics teams makes a big difference. Start by asking your commercial and planning teams about their level of confidence (typically measured with the Mean Average Percentage Error KPI, or MAPE) to precisely forecast demand down to the SKU level. Generally, higher accuracy means you can plan less of a buffer (in the form of space and inventory) in your warehouse, while the opposite is true for a less accurate forecast process.
Timeliness is also critical. Ask yourself: How far in advance do I need demand information to put the necessary adjustments in place? Establish a service level agreement (SLA) among internal colleagues to ensure information arrives within an actionable timeframe.
Warehouse Capacity & Operating Models
Not long ago, warehouses were used as a buffer, holding excess inventory indefinitely until sold, mostly eliminating concerns about product stockouts. This strategy creates its own set of issues. For starters, excessive inventory levels require significant working capital investment—not a cheap proposition in today’s interest rate environment. Next, high customer delivery time expectations brought on by e-commerce players require speed and accuracy, not commensurate with high inventory levels and congested warehouses. Finally, what happens to excess inventory after the holidays? In most cases, companies are forced to sell the inventory at a heavy discount, or completely write off perishable inventory.
Step 2. Warehouse Capacity: Cost-effective solutions do exist
Following the product journey, the main capacity components to evaluate are: raw materials, warehouse space utilization, and freight suppliers.
Demand for certain products can increase more than 600% during the holidays. Are you confident that your packaging supplier can support this level of increased volume in an adequate lead time? This goes for all suppliers. Work with them to avoid unwanted surprises.
How much space do you need to accommodate expected volumes?
If the answer is “more space,” look to better utilize vertical warehouse space, and optimize racking configurations to eliminate waste. Most warehouses can accommodate at least 5-10% additional inventory with these two simple actions. If this doesn’t suffice, evaluate renting additional temporary warehouse space, or utilizing third-party logistics providers (3PLs), which may even be the cheapest option.
Have you secured dedicated freight routes at pre-negotiated rates? In peak demand scenarios, will you have enough docking space for your freight suppliers to adhere to planned delivery times and volumes? If possible, avoid paying expensive spot market freight prices from untested providers by aligning your warehouse throughput with freight needs. Moving from less-than-truckload to full truckload arrangements is another simple option.
Step 3. Warehouse Operating Model: How to sustain high performance levels
Several operating model improvements can benefit warehouse operations. A few common, non-exhaustive examples are:
Made-to-Stock vs Made-to-Order:
For products with high demand predictability, you may anticipate increased demand through a made-to-stock (MTS) strategy. For those less predictable products, a made-to-order strategy may be more suitable.
Decide which products deserve priority (high volume, high margin, for example) and prioritize prime warehouse locations, slotting and picking processes for them. This may require difficult tradeoffs but makes a huge difference. Consider strategically shifting warehouse capacity for slow-moving items to other locations, or to 3PLs.
Warehouse Layout and Fulfillment Models:
For fast-moving items, you may consider a cross-docking system. In this scenario, inventory is never put away, but quickly transferred to a truck or van for delivery to points of sale, or the end consumer.
Step 4. Technology: Short-term options
Artificial Intelligence and Machine Learning
If you have accurate commercial and logistics data covering the past 12-24 months, machine learning algorithms can help you set the appropriate inventory levels and policies (safety stock, re-order points) relatively inexpensively and within a matter of weeks.
Equipment and Robots
Robots used for picking have come a long way in recent years and many can efficiently perform a variety of repetitive tasks to augment the capacity of your workforce. Some suppliers even allow weekly or monthly rental agreements, reducing the complex and time-consuming process of sourcing, hiring and training temporary workers.
Step 4. Technology: Medium/Long-term options
Yes, these options are more expensive; however, top-performing companies are betting big in these areas.
Digital representations of the physical world which allow you to run infinite simulations before rolling them out in real life. For example, how would your supply chain perform with one additional, seasonal warehouse?
Provides an end-to-end, real-time view of your supply chain’s performance. A good example is your warehouse management system (WMS) recognizing critically low inventory levels and automatically triggering an order (or submitting recommended actions to managers for their approval) for the necessary raw materials needed to begin producing more of that product. Manufacturing managers would also receive a recommendation to adjust their production schedule to accommodate the replenishment of the product.
As demonstrated, simple, cost-effective steps can prepare your warehouse for peak demand periods. Too late to start this year? Pilot this diagnosis for your most important warehouse or get started planning for 2024 to ensure a cheerful and profitable holiday season. Happy planning!
Matt McCabe is a principal at Falconi, a global business and people management consulting firm. He regularly advises manufacturers on strategic and operational improvements, including management models, supply chain optimization and digitization.