What Went Wrong at Peloton - Supply Chain in Focus

Summary

Peloton, 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

• 🚀 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.
• 📉 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.
• 💼 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.
• 🌐 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.
• 💸 High Delivery Costs: To address supply chain issues, Peloton invested heavily in air cargo, increasing delivery costs per product by tenfold and burning cash.
• 🏭 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.
• 📉 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.
• 📈 Misestimation of Demand: The company underestimated the impact of reopening on demand, leading to overproduction and excess inventory.
• 🔍 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.
• 🛠 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.
• 📊 Probabilistic Forecasting: The script advocates for probabilistic forecasts over traditional time series forecasts to better account for uncertainty and a range of potential outcomes.
• ⏱️ 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

00:00

📈 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.

05:02

📉 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.

Keywords

💡Peloton

Peloton is a home fitness company known for its stationary bikes and treadmills, which gained significant popularity during the COVID-19 pandemic as people sought alternatives to gym workouts. In the video's narrative, Peloton's rapid growth and subsequent challenges with supply chain management are central to the story, illustrating the company's journey from success to facing financial difficulties.

💡Supply Chain Complexities

Supply chain complexities refer to the various challenges that can arise in managing the process of production and distribution of goods. In the context of the video, Peloton faced difficulties in meeting the surge in demand for its products, leading to delivery delays and customer dissatisfaction, which played a significant role in the company's problems.

💡Revenue Growth

Revenue growth is the increase in income that a company generates over time. The video script highlights Peloton's impressive revenue growth from 700 million dollars in 2019 to 4 billion dollars in 2021, showcasing the company's success during the pandemic as home fitness equipment became essential.

💡Stock Price

Stock price is the value of a single share of a company's stock, which can fluctuate based on various factors including company performance and market sentiment. The video discusses how Peloton's stock price reached a peak of 162 dollars in December 2020 but then experienced an 80 percent drop, reflecting investor concerns about the company's future.

💡Bullwhip Effect

The bullwhip effect is a phenomenon in supply chain management where small changes in customer demand at the final customer level are amplified upstream, leading to larger fluctuations in inventory and production. In the video, this concept is used to explain how Peloton overestimated demand and ended up with excess inventory, causing inefficiencies and financial strain.

💡Vertical Integration

Vertical integration is a business strategy where a company owns or controls several stages of the supply chain, from production to distribution. The video mentions that Peloton attempted to scale up operations by acquiring a manufacturer, which is an example of vertical integration, aiming to control more of its supply chain to meet growing demand.

💡Probabilistic Forecasts

Probabilistic forecasts are predictions that consider a range of possible outcomes and their associated probabilities, rather than a single point estimate. The video suggests that using probabilistic forecasts could have helped Peloton better anticipate the uncertainty in demand and avoid the pitfalls of relying solely on time series forecasts.

💡Time Series Forecast

A time series forecast is a method of predicting future values based on previously observed values, often used in operations planning. The video critiques the use of time series forecasts by Peloton, suggesting that this approach led to an underestimation of the impact of the reopening of gyms on demand for home fitness equipment.

💡Lead Time Delays

Lead time delays refer to the time lag between placing an order and receiving the goods. The video discusses how Peloton's reliance on ocean freight from Asia led to significant delays, contributing to the company's supply chain issues and customer dissatisfaction.

💡Third-Party Fulfillment

Third-party fulfillment is when a company outsources its order fulfillment process to an external service provider. The video mentions that Peloton decided to reduce in-house warehousing and delivery operations and shift towards third-party fulfillment vendors as part of its response to the supply chain challenges.

💡Irreducible Uncertainty

Irreducible uncertainty refers to the inherent unpredictability in certain situations that cannot be eliminated by gathering more information or improving forecasts. The video argues that in the face of high growth and uncertainty, companies like Peloton should focus on survival and maintaining flexibility, rather than committing to irreversible actions.

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