Luxury Products Manufacturers Face Challenging Supply Chains

Luxury Challenges Blog

Supply and demand.  The two drivers of almost all businesses.  Manufacturers produce products (the supply) and consumers purchase those products (the demand).  When you analyze a manufacturers business from top to bottom, one of the first things to study are the drivers of the business.  One of the primary business drivers is demand. What drives the demand for the products your company makes? There are many factors to this and it depends on a number of factors. It first depends on the finished products.  If the products you produce are necessity items essential to consumers’ daily lives such as basic food, beverage, household or personal items, typically demand is consistent with minimal fluctuations. However, if it is a product that is considered a luxury item, or a nice to have item such as fine jewelry, high end electronics, fashion items, or gourmet food and beverage and has specific demographic properties, then demand predictability gets more complicated.  

One of the primary drivers of demand is the economy.  In good economic times demand for luxury items are high.  In bad economic times, demand is lower. This is called “Behavioral Economics” and this significantly impacts manufacturers of luxury items.  When we say “Economy” it really isn’t as simple as it sounds. This depends on whether the manufacturer services a global or regional economy.  It also depends on sources of materials and ingredients and the economies of the regions that provide the materials. Economies don’t always operate and perform equally.  For example, the European economy might be experiencing growth but North America might be struggling. These factors seriously impact demand and can make for an inconsistent and even unstable business environment. The area most impacted by this is the supply chain.

Managing a luxury company’s supply chain activities is daunting. In thriving economic times when business is booming, orders are plentiful.  Plant capacities are maximized and companies can’t ship product fast enough.  Companies are always looking for tools and methods to improve processes so no opportunity falls through the cracks.  Challenging economic times causes companies to scramble. Each department, function and business process is dissected. The goal is to determine where improvements can be made and where costs can be cut quickly.  The operations group tries to forecast better and utilize plant resources more efficiently. The logistics team looks to improve inventory management and minimize transportation costs. Often, this can lead to even more chaos and disruption. The one thing to remember is that in most cases, a business can be profitable regardless of the economic conditions if managed properly.

In businesses that are unpredictable or easily affected by economic drivers such as those that produce items considered luxury or high end, the key is to have the correct processes in place that allows for economic fluctuations.  Synchronization of all business processes, beginning with the supply chain is critical. Focus on processes that can address multiple functions at the same time. Make sure that these exercises are coordinated between departments to minimize duplication of efforts and to avoid conflicting objectives.  As they say, “make sure the right hand knows what the left hand is doing.”

Manufacturers who produce luxury or high end items in a variety of categories face many challenges.  Raw materials can be expensive and have specialty geographic sources. Production can be a combination of discrete, process and mix-mode.  Distribution is complicated due to many factors from special transportation needs, critical inventory management (bonding) and tax and customs regulations.  All these factors necessitate a connected, flexible and efficient supply chain to enable the effective enterprise.

Second part available here.


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