North Pole -- After spending a few days here at the heart of the world's largest toy distributor, it is impossible not to walk away tremendously impressed.

The sprawling manufacturing and fulfillment operations are a model of efficiency, collaboration and integration, offering lessons for companies across the globe.

Cleary, the supply chain effectiveness here starts at the top, where North Pole Inc.'s first and only CEO, Santa, clearly understands the role of SCM in overall corporate  success.

"We do a great job of branding, and we don't have to worry much about creating demand, though the low rates of child birth in Europe are a concern," Santa told SCDigest in an exclusive interview. "In the end, we have to have a supply chain that can seamlessly support our overall strategy, and do so at an affordable cost."

While trying to do everything well, the North Pole has really picked "customer intimacy" as its most important value driver. But achieving that objective would simply be cost prohibitive without what appears to be the world's most efficient supply chain.

It all starts with a strategic supply chain master plan, which stretches out for a rolling five year horizon, with annual reviews and updates.

The key is consistency, says Chief Supply Chain Elf Elessar Calmcacil.

"While our supply chain has to be flexible, we've learned that core principles need to be developed and consistently affirmed to the whole organization even as we change supply chain executives," Calmcacil says. "The SCM fad of the moment approach never ultimately delivers," he adds.

Supply chain network optimization is a core competency here, with North Pole long ago having acquired a network planning tool and maintaining a small full time staff to constantly evaluate network improvements and provide insight into the real benefits of proposed changes.

"It's hard sometimes to completely connect the savings to the cost of the effort, but we know it's there even if the ROI is sometimes difficult to show on paper," Calmacil says. The team uses the tool, for example,  to evaluate global sourcing strategies for raw materials and where and when to utilize outsourced production, which is still small as a percent of the total but growing in recent years, with a lot of business now going to Eastern Europe.  

Within the giant manufacturing and fulfillment operations here, the network team is also used to support constant flow path optimization and to determine which products are best made on which elf line.

Insight from the network optimization tool is also extensively employed in North Pole's robust List and Elf Operations Planning (L&EP) process, which actually now more explicitly includes toy inventory as part of that discipline (LTEP).

"We get a constant stream of companies that come here to see how we do this," says Ireth Helyanwë, director of LTEP at North pole. "Santa has made it clear this is a board level issue, not just a supply chain thing," she adds, noting the bearded CEO with the portly belly purposely selected her for this role from out of the Toy Marketing department to send a message about how critical the process was for the entire enterprise.

Of course, a high performance forecasting program is a critical element of LTEP, since despite a highly efficient and flexible manufacturing operation, much inventory must be made in advance to support the once per year fulfillment surge.

"We are highly seasonal," notes Calmcacil.

Demand planners are highly respected here, and that is one of the key pieces of advice they offer to visiting benchmarkers.

"Demand planners can impact hundreds of millions of dollars of inventory and sales, yet they are often relatively low level staffers at many companies," Helyanwë notes. "That is looking at things Reindeer backa**wards," she adds.

North Pole is also very advanced in new techniques such as Predictive Demand Planning and Demand Sensing. This is critical, as toy demand is very unpredictable, especially with the growing preference on Christmas lists for electronic toys.

"Our staple SKUs - you know the Barbies, the GI Joes, the basketballs - we just let the software system run with those," Helyanwë says. "But what will ultimately be the most in demand gaming system come December, that is a much different ball game." She adds that demand volatility is higher than ever. "Through August, you are sure you have a winner, then suddenly demand switches dramatically to some product Justin Bieber starts pitching."

Finrod Ancalimë , North Pole CIO, has led the development of a system that constantly monitors social network sites for clues as to where demand is headed throughout the year. The earliest Santa letters received here from children are quickly encoded and posted to a data igloo to give early intelligence as to where final demand is really headed. While "demand shaping" in the Dell sense is not really possible - the toys are free, after all - the North Pole does subsidize some television advertising for certain products if it believes it will not be able to meet demand in other areas given the way list trends are headed.

Deciding on whether to use push, pull or push-pull strategies for each SKU is also a core competence here. While North Pole tries to be pull based where it can, with substantial make-to-order operations,  extreme seasonality means make-to stock is also heavily utilized.

Calmcacil notes that in the relatively few times North Pole greatly overestimates demand for a given toy, a hard push strategy is often used.

"Every child is used to getting a toy or two they weren't expecting, right? We add in a few of our forecasting mistakes to each pick list, but that's OK." Calmcacil says. North Pole uses that technique to draw down inventories of slow movers, then later partners with Overstock.com and similar retail channels to quickly get rid of excess inventories after the peak season. "We used to hold the inventory to avoid the write-down, but have learned that is just a bad strategy in the end," he added.

Flexible manufacturing and postponement strategies are the real keys to meeting these demand dynamics.

Elves on production lines are cross trained in numerous tasks, and investments have been made to enable each elf line to be capable of making multiple product categories. But you can go too far, Calmcacil says they have learned.

'You want flexibility, but only to a point," Calmcacil observes, lest you add too much cost. "Years of modeling have showed us that what you might call "medium flexibility" usually has the lowest total supply chain cost."

Postponement is a common practice. Board games, for example, generally use standard boards and boxes, which are then digitally printed at the last moment based on list demand to create the specific games needed to fulfill kid customer requests.

The actual fulfillment operations here are simply astonishing. Most of the DCs could operate almost "lights out" given the level of automation, though a few have  been kept more manual to test Lean versus highly automated models.

In the most highly automated DCs, new to the world robotic systems have been deployed to enable high volume, child-specific order picking.

"We've had Wal-Mart, LL Bean, Cardinal Health,  and several others up here to see how we are doing this," says Alatáriël Inglorion, Sr. VP of List Fulfillment.

The Elf Management System (EMS), based on discrete standards,  was somewhat controversial when it was implemented about 20 years ago, but in the end it has both reduced costs and improved morale and retention in the DC.

"I mean, they can't really quit, but nevertheless our internal surveys show a very positive reaction of elves in the distribution centers to the EMS," says Inglorion. "Elves like feedback on how they are performing just like the next bloke."

While everything seems to run here like a high end Swiss watch, North Pole is not without its supply chain concerns.

"Fuel costs are skyrocketing," says Calmcacil, noting that the grain products used to feed the reindeer are up some 50% in 2010.

An aging work force is also a concern, with many elves more than 1000 years old. A decent percent of recent capital investment has been to reduce the stress on the elf bodies working the production lines, spend which has shown a huge ROI.

With the elf population largely static and increasing global demand, everyone at the North Pole is overtaxed, sometimes not leaving enough time for keeping up with the latest SCM development and trends.

One answer: "We read SCDigest," says Calmcacil.

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Hope yolu enjoyed that.

Thanks for another great year. We continue to grow, and have many exciting things planned for the near future.

We won't publish this newsletter for the next two weeks, but will be back full steam of course the first week of January. However, we will be tracking key news on the scdigest.com web site until then. Take a look while sipping a [hard] eggnog.

Thanks to Jason Stegent, Joan Nystrom, Cliff Holste, Mark Fralick, Zubair Bokhari, Lori Hamilton and Julie Nau from me for making this all possible.

Have a great next two weeks!

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