North Pole Supply Chain and Risk Management Strategies

Stephen DeAngelis

December 24, 2012

“Gartner likes to publish the Top 25 Supply Chains every year,” writes SAP’s Richard Howells. “Unfortunately, there’s one supply chain the esteemed analyst firm continues to overlook. And it just so happens to be the greatest supply chain success story of all time. I’m talking about The Santa Claus Supply Chain.” [“Santa’s Supply Chain: Best in the World?Forbes, 28 November 2011] Douglas Kent, Chairman of the European Supply Chain Council’s Leadership team, agrees that the greatest demonstration of supply chain execution happens every Christmas Eve. Each and every year, Kent notes, implementation of Santa Claus’ “seasonal supply chain requires perfect execution.” [“Why Santa is the Leader in Supply Chain Management,” Process Excellence Network, 21 December 2011] Kent asserts that this mastery of “the art of Just-In-Time” logistics is all the more impressive considering it involves a “family-run operation headquartered [at] the North Pole.” Kent continues:

“Only an elusive professional known by his various regional identities such as St. Nicholas, Father Christmas, Kris Kringle or simply ‘Santa Claus’ could possibly manage the adversity and diversity that the Christmas supply chain demands of him. His reputation speaks for itself. He has been in business for as long as I can remember and yet his business remains headquartered in the far north, in a land of perpetual snow. Here [at the] North Pole – an unusual mix of staff resides that includes his wife, the lovely Mrs. Claus, nine reindeer and countless magical elves, who assist him in this global operation. Mrs. Claus clearly runs the show, while the elves make all the toys in the workshop and the reindeer provide the transport for the sleigh, all those presents and the plump and jolly CEO himself! This seasonal supply chain requires perfect execution. The difference between ‘just-in-time’ and ‘just-too-late’ may result in a flood of tears from a deserving child who was sure that when the letter was sent to Santa – his/her request would arrive on Christmas Eve in a neatly wrapped package with a special note written personally by Old St. Nick himself. How does Santa manage such a complex supply chain? We have a few theories although the details will forever remain a mystery or at least a secret!”

Kent believes the real secret behind Santa’s success is his laser-like focus on customer satisfaction. “Santa is intently focused on ensuring that his deliveries are exactly what the customer wants and meets their needs,” he writes. As a result, Santa’s supply chain is demand driven. In fact, Kent insists, “[A] demand-driven supply network (DDSN) is the only method of supply chain management he can possibly employ.” Kent also emphasizes that Santa makes good use of economies of scale as well as his location (i.e., “a single workshop located in a land free from bureaucracy”).

The administrative staff at SciQuest isn’t so sure that Santa uses a single workshop. The job just seems too big. [“What if Santa Had a Supply Chain Problem?” 7 December 2011] The staff lays out the magnitude of the challenge this way:

“Think about it: there are 1.9 billion children in the world. … Let’s say that the average toy delivery metric is one toy per child. Actually, let’s make that an average of two, taking into account the unfortunate millions who will not get any toys at all, balanced by the children of the New York, Chicago and Los Angeles suburbs. So, two toys per child: 3.8 billion toys. Let’s assume that these 3.8 billion toys — accounting for multiples of the very popular ones — represent 19 million types of toys. Let’s speculate that these toys are produced by 1.9 million vendors, each in several varieties to satisfy different national or local regulations, power supply requirements and cultural variations. So Santa has a supplier network of 1.9 million vendors, providing 19 million item types in an average of six varieties, totaling 3.8 billion units. Gee, how many Procurement Elves are in his department anyway?”

Although it seems like Santa has everything under control, even Santa must face occasional supply chain disruptions created by natural disasters. Tanita Sharma writes, “Natural disasters negatively impact on businesses, especially on supply chains, on the short as well as on the long run. The storm Sandy, which hit northeastern United States, is an example. It has caused delays in shipments of retail stores, since all the communications routes were stopped because for days during and after the storm.” [“Sandy causing delays in Santa Claus’ supply chain,” Tanita Sharma’s Blog, 18 November 2012] So how does Santa deal with Supply Chain (or Enterprise) Risk Management? John Bugalla, managing principal at ermINSIGHTS, offers a few thoughts on that subject. [“ERM at S. Claus, Inc.,” Risk Management Monitor, 6 December 2012] He writes:

“During the summer months, the North Pole’s post office (Zip Code 00000) is usually a placid place. But when the calendar turns to October 1, the pace of activity quickens. Letters from boys and girls around the world start arriving in droves signifying the building excitement of the young customer base of the largest employer in the company town, S. Claus, Inc. Hundreds of letters a day arrive in October, thousands in November and millions during the second and third weeks in December and each one must be carefully sorted and checked twice by the audit and compliance department as part of an automatic appeal process. Each letter contains lists chock full of special requests for the person who made the North Pole so famous: a certain Mr. S. Claus, chairman and CEO of S. Claus, Inc. Mr. Claus expects perfection so everyone working at the company is focused on the mission-critical fourth-quarter deadline. There can be no identification and delivery mistakes and no disappointed customers.”

Bugalla agrees with Sharma that supply chain disruptions represent an ever-present threat to perfect supply chain execution and, in order to achieve perfection, Santa must “adopt and implement [an] enterprise risk management (ERM) process.” Bugalla explains:

“Mr. Claus assumed the duties of chief risk officer and an ERM charter was drafted that set the tone at the top: there is no tolerance for risk. The S. Claus board-level risk committee, executive risk committee and internal audit group work together. S. Claus with the understanding that success results from embedding the ERM process into a carefully crafted strategic plan. Both the unacceptable downside of failure and the upside gain resulting from efforts to increase their customer base have been analyzed and incorporated into actionable items.”

In addition to natural disasters, like Superstorm Sandy, Bugalla identifies other possible risks, like “rumors of a possible shut down of hundreds of local post offices around the United States.” The greatest risk, Bugalla insists is supply chain complexity associated with rapid product release. He explains:

“One item on the risk map is of deepening concern, however, because it has been migrating from green to yellow to red far more frequently than ever before. It is a unique supply chain risk – the growing popularity of smartphones and tablets. Every time a new model is announced, usually in the third quarter, holiday demand escalates rapidly. The concern is that these high-tech gadgets are among the few items that are outsourced because the workforce of elves is busy making more traditional items (hula hoops are still big in some corners of the world). Nevertheless, quality must be maintained. The S. Claus brand name is considered priceless and cannot be put in jeopardy. So procedures have been put in place to ensure that these products meet the same standards as anything else that S. Claus, Inc. produces.”

Santa also faces labor- and monetary-related challenges that most people don’t usually think about during the holidays. Bugalla explains that there “is the curious relationship between S. Claus, Inc. and the temporary ‘helpers’ located around the world.” While any job is good to have around this time of year, permanent employment is better, even if the temporary employer is Old St. Nick. Concerning monetary challenges, Bugalla writes, “The foreign exchange exposures are enormous. There has been a great deal of volatility this year, especially in Europe, and Mr. Claus has had to employ a hedging strategy to take advantage of any upside gain while also protecting the downside risk, since that is, in essence, risk management.”

This Christmas Eve, however, we shouldn’t worry about how Santa does it, we should just be grateful that he does perform perfectly year after year. As Santa exclaims at the end of each successful year, “Merry Christmas to all and to all a good night!”