What Went Wrong at Peloton - Supply Chain in Focus
Summary
TLDRPeloton, a home fitness company, soared to success during the pandemic with soaring revenues but later faced a dramatic downfall due to supply chain issues and overestimating demand. The company's stock price plummeted, leading to layoffs and a potential sale. The script explores the bullwhip effect in supply chains, the pitfalls of time series forecasting, and the importance of probabilistic forecasts in operations planning for uncertain times, emphasizing the critical role of supply chain management in a company's success or failure.
Takeaways
- đ Peloton's Revenue Growth: Peloton's revenue saw a dramatic increase from $700 million in 2019 to $4 billion in 2021 due to the pandemic-driven demand for home fitness equipment.
- đ Stock Price Decline: Despite revenue growth, Peloton's stock price dropped significantly from a high of $162 in December 2020 to less than $30, indicating a market perception problem.
- đŒ Layoffs and Potential Sale: The company faced financial difficulties, leading to the layoff of 2,800 employees and consideration of a sale to major corporations like Nike, Amazon, or Apple.
- đ Supply Chain Challenges: The pandemic-induced demand surge led to supply chain issues, with delivery delays causing customer dissatisfaction and impacting the company's reputation.
- đž High Delivery Costs: To address supply chain issues, Peloton invested heavily in air cargo, increasing delivery costs per product by tenfold and burning cash.
- đ Acquisition of Precor: Peloton acquired Precor for $420 million to scale up operations and gain access to 625,000 square feet of U.S. manufacturing space.
- đ Impact of Vaccine News: The announcement of a viable COVID-19 vaccine led to a 25% drop in Peloton's stock value as investors anticipated a return to gym attendance.
- đ Misestimation of Demand: The company underestimated the impact of reopening on demand, leading to overproduction and excess inventory.
- đ The Bullwhip Effect: The script explains the bullwhip effect in supply chains, which Peloton experienced, causing inefficiencies and high costs due to amplified demand fluctuations.
- đ Supply Chain Solutions: The transcript suggests that better tools and practices, such as enhanced visibility, collaboration, and reduced lead times, could help mitigate the bullwhip effect.
- đ Probabilistic Forecasting: The script advocates for probabilistic forecasts over traditional time series forecasts to better account for uncertainty and a range of potential outcomes.
- â±ïž Timing of Internalization: The company's decision to internalize operations may have been premature, and it should have considered the high uncertainty and the need for flexible, reversible strategies.
Q & A
What was the financial situation of Peloton in 2019 and how did it change in the following years?
-In 2019, Peloton's revenue was nearly 700 million dollars. It doubled in 2020 to reach 1.82 billion, and then doubled again in 2021 to reach 4 billion dollars.
How did the COVID-19 pandemic impact Peloton's business?
-The COVID-19 pandemic led to people being stranded at home and gyms closing, which increased the demand for home exercise equipment. Peloton, focusing on motivating people to do sports at home through their classes, seemed destined for meteoric success during this period.
Why did Peloton's stock price decline despite increasing revenues?
-Although revenues were growing, Peloton's stock price reached a high of 162 dollars in December 2020 but has since been declining and now sits at less than 30 dollars, a drop of 80 percent, possibly due to supply chain issues and market concerns about the company's long-term viability.
What supply chain challenges did Peloton face during the pandemic?
-Peloton faced challenges with demand outstripping supply, leading to delivery delays and customer dissatisfaction. The company was also affected by the shipping crisis, which impacted companies importing goods manufactured in Asia.
How did Peloton attempt to address the supply chain issues?
-Peloton invested a hundred million dollars to speed up delivery, including the use of air cargo instead of ocean freight to move products from its Asian manufacturer to the US, which increased the cost of delivery for each product by 10 times.
What was the impact of the vaccine news on Peloton's stock value?
-When the first news of a viable COVID-19 vaccine came out, Peloton's stock value fell by 25 percent as investors feared that gyms would reopen and the demand for digital fitness would decrease.
What is the 'bullwhip effect' mentioned in the script?
-The bullwhip effect is a phenomenon where the fluctuations of the system exceed the magnitude of the fluctuations that are fed into the system, often causing inefficiencies and costs through poor customer satisfaction, loss of revenues, and excess inventory.
How did Peloton's management underestimate the reopening impact on their business?
-Peloton's management planned operations against a version of the future they believed would come to pass, possibly ignoring adverse alternatives that seemed less likely to happen, leading to overestimation of demand and the bullwhip effect.
What steps can be taken to mitigate the bullwhip effect in supply chains?
-Mitigating the bullwhip effect can involve enhancing visibility and collaboration across stakeholders in the supply chain, reducing lead time delays and order sizes, and adopting a more stable form of pricing.
Why did Peloton decide to cancel the construction of their first factory?
-Peloton decided to cancel the construction of their first factory due to a tremendous backlog of inventory and the need to reduce reconstructing capital expenditures, which amounted to 60 million dollars.
What changes did Peloton make to their operations planning in response to the challenges they faced?
-Peloton shifted towards third-party fulfillment vendors for warehousing and delivery operations, and re-evaluated their long-term decisions, possibly considering probabilistic forecasts and a focus on the company's survival rather than maximizing sales and margins.
Outlines
đ Peloton's Supply Chain Struggles and Financial Woes
The video script discusses the dramatic rise and fall of Peloton, a home trainer company that experienced explosive growth during the pandemic, only to face significant supply chain challenges and financial difficulties. In 2019, the company's revenue was nearly $700 million, which doubled to $1.82 billion in 2020 and again to $4 billion in 2021. However, despite the increasing revenue, the stock price plummeted from a peak of $162 in December 2020 to under $30, and the company announced layoffs and considered a potential sale. The script delves into the supply chain issues that arose due to unprecedented demand, leading to delivery delays and customer dissatisfaction. Peloton's response was to invest heavily in air cargo to expedite deliveries, a costly and unsustainable solution. The company also acquired a manufacturing facility to scale operations but faced a decline in demand as the pandemic restrictions eased. The script highlights the 'bullwhip effect' in supply chains and the importance of managing it through better tools and practices.
đ Mitigating the Bullwhip Effect and Rethinking Operations Planning
This paragraph examines the bullwhip effect in supply chains, which Peloton experienced as demand fluctuations were amplified upstream, causing inefficiencies and excess inventory. The script suggests that better tools and practices, such as enhanced visibility and collaboration across the supply chain, could help mitigate this effect. It also discusses the limitations of traditional time series forecasting for demand, which can lead to instability and a narrow focus on a single most likely outcome. The video advocates for probabilistic forecasts that consider a range of possible futures, allowing companies to adapt to changing probabilities and economic consequences. Peloton's response to its inventory backlog included delaying and eventually canceling the construction of a new factory and shifting to third-party fulfillment. The script emphasizes the importance of supply chain management in a company's success and the need for a more flexible approach to operations planning in times of high uncertainty.
Mindmap
Keywords
đĄPeloton
đĄSupply Chain Complexities
đĄRevenue Growth
đĄStock Price
đĄBullwhip Effect
đĄVertical Integration
đĄProbabilistic Forecasts
đĄTime Series Forecast
đĄLead Time Delays
đĄThird-Party Fulfillment
đĄIrreducible Uncertainty
Highlights
Peloton's revenue grew from $700 million in 2019 to $4 billion in 2021 due to the pandemic-driven demand for home fitness equipment.
Despite increasing revenues, Peloton's stock price dropped from a peak of $162 in December 2020 to under $30, reflecting an 80% decline.
Peloton announced the layoff of 2,800 employees and considered potential sales to corporations like Nike, Amazon, or Apple.
The company faced supply chain complexities, with delivery delays causing customer dissatisfaction and resentment.
Peloton's CEO committed to investing $100 million to speed up deliveries using air cargo instead of ocean freight, increasing delivery costs by 10 times.
Peloton acquired Precor, a workout machine provider, for $420 million to scale up operations and gain access to 625,000 square feet of U.S. manufacturing space.
Stock value fell by 25% with the announcement of a viable COVID-19 vaccine, as investors anticipated the reopening of gyms and a decline in digital fitness interest.
Peloton's management underestimated the impact of the reopening on the company and the fitness industry, leading to overestimation of demand.
The 'bullwhip effect' in supply chains was identified as a significant issue for Peloton, causing inefficiencies and excess inventory.
Peloton's warehouses became so full that they resembled jigsaw puzzles, indicating a severe overstock problem.
Supply chain experts suggest enhancing visibility, collaboration, reducing lead times, and stabilizing pricing to mitigate the bullwhip effect.
Peloton decided to delay and eventually cancel the construction of its first factory, resulting in $60 million in reconstructing capital expenditures.
The company shifted from in-house warehousing and delivery operations to third-party fulfillment vendors to adapt to changing demand.
Peloton's management should have considered all possible scenarios and their probabilities instead of committing to irreversible actions in high uncertainty situations.
Supply chain management is crucial for a company's success or failure, and its importance is now widely recognized.
Transcripts
the drama of palatine let's take a deep
dive into the home trainer company and
how its supply chain complexities nearly
bankrupted the company
in 2019 peliton's revenue was pushing
700 million dollars this number doubled
in 2020 reaching 1.82 billion and
doubled again to reach 4 billion dollars
in 2021 with people stranded at home and
gyms closing and exercise equipment
manufactured focus on motivating people
to do sports at home through
exhilarating classes seem destined to
encounter meteoric success in an economy
stricken by a pandemic even joe biden
fought with the security staff to bring
his pellet and bike to the white house
as revenues kept growing one would
assume that the overall company's
valuation would follow the same path
well not exactly at its highest in
december of 2020 paluten's stock price
reached 162 dollars but has since been
declining and now sits at less than 30
dollars a whole 80 percent drop
not only that but peliton has also
recently announced it was firing 2 800
employees and considered a potential
sale to corporations such as nike amazon
or apple it's quite a surprising turn
for a company that was once the top of
the digital fitness food chain so let's
look at three things
first the series of events that put
pelleting in quite a delicate position
second how the supply chain played such
a significant role in the problems they
faced and third in parallel to all of
this we'll explore the lessons that are
learned from this problem so what was
the problem exactly when the pandemic
hit and the lockdown spread around the
world people had no choice but to train
at home
as a result at the end of 2020 1.7
million households were equipped with
peloton products the following year this
number grew by 1 million
however the exercise equipment
manufactured quickly found itself
challenged by demand simply outstripping
the supply even die-hard fans of the
brand grew impatient and resentful as
delivery delays simply got out of hand
palatin suffered the same consequences
as many other companies importing goods
manufactured in asia due to this
horrendous shipping crisis
faced with what appeared to be a broken
supply chain the ceo stated that the
company would now invest a staggering
hundred million dollars in order to
speed up the delivery alone
now this investment would allow the use
of air cargo instead of just ocean
fright to move product from its asian
manufacturer to the us
obviously paying a surplus for air cargo
does not represent an investment in the
supply chain but rather a way to ease
customer dissatisfactions all while
burning cash
this move meant that the cost of
delivery for each product will be
multiplied by 10.
air cargo is certainly not a long-term
solution for transporting bikes and
treadmills but the company's usage
indicated just how big the problem
really was shortly after pelton
announced that it was acquiring pre-core
a major provider of working machines for
420 million dollars in an attempt to
scale up their operations
this was meant to give them access to
625 000 square feet of manufacturing
space in the u.s now there were signs
however the pelican success wouldn't
last forever when the first news of a
viable covert vaccine came out the stock
value fell by a whole 25 percent as
investors feared that gyms would
eventually reopen and the attractions
for digital fitness would slowly fade
away during a period of frantic demand
expediting and in-housing efforts may
have made sense but that demand wasn't
as strong or stable as one would hope
for near the end of 2021 the company's
cfo declared that it is clear that we
underestimated the reopening impact on
our company and the overall industry but
hold on let's pause right there because
there is one key word in this quote
underestimated so it simply means that
the management was planning operations
against the version of the future that
they believed would come to pass and may
have been partly ignoring all the
adverse alternatives that seem to them
as being less likely to happen
now we'll come back to this point in a
second so the vertical integration
control over manufacturing the pelleted
worked so hard in achieving would have
been an outstanding move to keep up with
the growing demand for their products
however going too far not being able to
detect the downwards trends in demand
created a dramatic case of the bullope
effect but what is the bulb effect
exactly i hear you ask
well the bullet effect is when the
fluctuations of the system exceed the
magnitude of the fluctuations that are
fed into the system
now i know this is a lot of words so
let's unpack
fluctuations in the consumer demand is a
typical example
so why does it exactly get amplified
upstream well there are multiple steps
included in the journey of a physical
product from its sourcing to it arriving
in the consumer hands
a typical supply chain setup consists of
manufacturers suppliers wholesalers and
retailers as nobody wants to be out of
stock it is common to slightly
overestimate the actual demand by
placing larger orders to account for
uncertainty
all of this becomes amplified even more
on the trend of the fast growth that the
company and its suppliers are trying to
anticipate this is in essence what
happened to paluten and the results were
devastating
warehouse workers said that palliative
warehouses were so full they resembled
jigsaw puzzles with employees trying to
figure out just where to stuff another
bike the bullet effect is known to cause
great inefficiencies and costs through
poor customer satisfaction loss revenues
and of course excess inventory
while a lot of supply chain experts
would agree that the bloop effect is
inevitable we would argue that a better
class of tools and practices might help
mitigate the bullwhip effect such
practices may include enhancing the
visibility and collaboration across
stakeholders in the supply chain or
efforts to reduce lead time delays and
order sizes on top of a more stable form
of pricing so let's take the angle of
the traditional approach to operations
planning starting with the demand
forecasting an approach that is used
among the vast majority of companies
the classic time series forecast
so without getting too technical time
series forecasts can come in different
flavors with their own pros and cons but
what all models have in common is a
numerical stability problem dependent on
the fact that with a point forecast we
only look at one number a future that is
most likely to happen
so the potential range of outcomes is
mostly ignored in this perspective in
the realm of a more adequate perspective
based on probabilistic forecasts most of
those problems entirely disappear
because in a probabilistic perspective
we have all possible futures in front of
us at old times and instead of picking a
single future of to plan operations
against will look at all possibilities
simultaneously and re-evaluating their
probabilities and economic consequences
as new information comes to the market
so due to this tremendous backlog of
inventory pelton first decided to delay
the constructions of what would have
been their first factory and then they
took the decisions to cancel the project
altogether which resulted in 60 million
dollars in reconstructing capital
expenditures
additionally the fitness brand is
reducing in-house warehousing and
delivery operations and shifting towards
third-party fulfillment vendors however
palestine might have waited for too long
as making such changes while the demand
is still dropping is extremely dangerous
as far as the company is concerned this
might very well be the consequence of
the inadequate perspective to operations
planning using time series forecasts
so when is the right time for a company
to internalize its operations and what
should be considered before doing so as
we previously mentioned with
probabilistic forecasts in a situation
of high growth and high uncertainty a
company should look at all the possible
scenarios and if evaluation of
probabilities changes quickly meaning
that the irreducible uncertainty is high
then a management should not commit
itself to courses of action where it is
hard to undo things instead it should
look for ways to cultivate more options
for the business because in high
uncertainty situations it is never clear
which one of those options will be
needed and those options should be easy
to undo change or switch between in such
situations instead of focusing on
maximizing sales and margins a
management should be focusing itself on
the mere survival of the company and to
not let the irreducible uncertainty
simply kill it
so does this mean that being equipped
with probabilistic forecasts and
changing the way paluten makes long-term
decisions would have saved them from all
this trouble maybe or maybe they would
have endured other harshest for
different reasons
however if there's one thing that we
know for sure is that the supply chain
management can play a huge role in the
success or failure of a company supply
chain is not the poor parent anymore and
it's time we recognize it as such
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