In class we have recently been studying how to properly forecast the future demand a company will have based on their sales from previous months. In our previous homework we were able to predict the mean absolute deviation, the mean absolute percent error, and the mean squared error by using the 3 month weighted moving average and exponential smoothing that both used sales to determine the health of the companies future. Unfortunately for many companies in today’s fast moving market, the amount of debt a company has can outweigh any sales forecast, and lead the company into bankruptcy. I wanted to focus on this point as to give an example of when supply chain forecasting based off demand fails to predict correctly.
In a rapidly evolving market lead by Amazons ability to meet demand, Toys “R” Us has struggled for many years and will now complete shut down all of their stores in the United States. This news comes after the company filed for bankruptcy in September of 2017 but vowed that it was not the end for their company. This statement would prove to be false as the $5 billion of debt that had plagued the company for over a decade was too much for any bankruptcy restructuring to handle. Today it is common for private equity companies to take over the operation of a struggling company with ideas of changing strategies that may have worked in the past but is now old, cutting costs, and creating a 3 to 5 year plan for the company to again find success. The debt that Toys “R” Us has and that many other companies such as IHeartMedia and Winn-Dixie have cripples the companies future by preventing them for making the necessary investments in their own stores. In the case of Toys “R” Us this dept problem caused the company to close it doors 70 years after its creation.
Now the company perception for the reason that companies like Toys “R” Us to go out of business is the explosion of online shopping that Amazon has mastered and made other companies demand plummet. However, it is clear that the self inflicted problem of how a company structures its dept can be even more crippling then demand. In 2005, Toys “R” Us’s debt was downgraded from investment grade to junk bond status. This occurred when Amazon’s sales were only 4% of their current level proving that demand for their products due to competition wasn’t the main problem. A Year later after being privatized by KKR, Bain Capital and Vornado in a $6.6 billion deal left the company with the $5.3 billion in debt that they never recovered from. Then when it came to focusing on their competitors and structuring their company to compete, much of the stores resources were devoted to paying off the massive loans instead of the growth of their company.
In conclusion, the relevance of the debt structure of a company compared to supply chain forecasting is that in a modern economy where growth is key, and innovation is the only way to stay ahead, the companies that struggle with debt will not be able to reinvest their earning and will fall behind to competitors.