Monday, September 1, 2014

Forecasting in a Rental Company Model

The articles that we read for class this week focused on companies that forecast demand for goods that are sold to customers, and use forecasting methods to determine adequate supply to meet the demand.  I found it interesting to a look at a company that does not sell goods, but rather rents them, and see how forecasting changes under these circumstances.

Rent the Runway is an online designer dress and jewelry rental company, somewhat akin to Netflix but with much higher-dollar goods.  I find this model to be interesting in the forecasting discussion because Rent the Runway's forecasting methods are somewhat different and more complex than a company such as Ikea which is concerned only with goods going out the door. In the Rent the Runway model, the company purchases designer goods wholesale, and then rents them to members who join the website for free, for a fraction of the actual price.  For $70, a customer can rent a $2,295 designer dress, and Rent the Runway estimates that each of their dresses, on average, will survive 30 rentals. [1] Additionally, athough the CEO of the company initially intended to outsource dry cleaning and repairs to off-site companies, it quickly became easier and more cost-effective to house the entire operation in one location.  In order to manage supply and demand, Rent the Runway must take into account both the number of dresses that are currently in their warehouse and the number of dresses that are out for rent.

The company uses a complex algorithm to predict forecasts for demand on certain types of dresses that may differ by season, around holidays, and change entirely when the trends change.  Using this algorithm, Rent the Runway then determines how long a customer can rent the dress for, which method of shipping (ground or overnight) must be used for returns of dresses, and how fast their internal turn-around-time must be, with the goal of having the same dress ready to be sent out every weekend. [2]  This model makes the customer a part of the supply chain in a different way than Ikea, where the customer acts as the assembler - the final step in the supply chain.  In the Rent the Runway model, the customer is a step along the way, and the company is forced to rely heavily on customers abiding by the return policies in order to keep the supply chain moving and meet demand.  Although the company provides renters with a pre-paid return shipping package, so all the renter has to do is drop it in a mailbox, it still requires timeliness on the part of the customer. [3]

Finally, with a finite number of each style, a ruined dress can completely dismiss all the logic that the algorithm has provided and cause major customer dissatisfaction. Additionally, since the turn-around-time is expected to be so short, the next renter may not find out until days before her event that her dress has been destroyed.  Although this apparently does not happen often, it can create a major disruption to the company's carefully calculated forecasting. [3] 

With the popularized idea of the sharing economy, including Netflix, Amazon book rentals, Zipcars, and Rent the Runway, the readings this week in addition to the articles below have made me wonder what other industries can benefit from this type of supply chain, and what other complexities exist for these models that a "traditional" supply chain might not experience? For all the complexity of making the customer a vital part of the supply chain, these companies seem to have found a way to make it work.



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