4Q is time for what’s hot and unavailable

Every 4th quarter there are stories about what is hot and hard to find. This year, it is the e-reader category, specifically Sony’s Daily Edition Reader ($399) and Barnes & Noble’s Nook ($259). (See WSJ 11/18/09 – Sony Says Some E-Reader Orders May Miss Christmas).  Sony is telling customers that they are now shipping orders on Dec 18th – a little tight to ensure being included as a stocking stuffer.

My favorite quote from the article is:

“The possibility that Sony, a huge electronics manufacturer, would be caught off guard by supply-chain issues is surprising, said Mike Serbinis, president of Shortcovers“

The presumption is that an experienced and large manufacturer should not have any trouble matching supply with demand. This simply ignores the fact that size and experience are no match for the uncertainties of the market.

Next, it is interesting that Sony is capable of quoting shipping dates:

“In October, the company told its first wave of customers that the Nook would ship Nov. 30. A second wave of customers was told it would ship Dec. 7; shipping dates of Dec. 11 and Dec. 18 were later given.”

This does demonstrate a sophisticated level of supply chain management, assuming their quotes are reasonably accurate: to be able to do this requires a significant amount of real-time information sharing across the supply chain and the skill to process that information quickly.

Finally, I can’t help but speculate on whether they intentionally kept supplies short. Suppose you think you could sell 100,000 units. If you make 75,000, they you are likely to run short. If demand turns out to be 120,000, you are really short and you get lots of free press about how hot your product is. But to make that strategy work, loosing thousands in sales has to cost you less than the free advertising. Hard to say if it is worth it.  Then again, it is entirely possible that if your new techno gadget isn’t “hot”, then it becomes “stone cold”. For example, if “natural” demand is 100,000 but you make 75,000, then actual demand turns out to be 125,000.  If “natural” demand is 100,000 but you make 100,000, then actual demand turns out to be 60,000 because who wants to buy a product that isn’t popular.

It isn’t your father’s PC industry anymore

My first PC was an IBM PC with an Intel 8088 microprocessor, two floppy disk drives and a whopping 64K of RAM (not 64MB or 64G, the 64,000 variety) – and it cost about $4000 in 1985 (but my father worked for IBM so we got it for the employee discount price of something like $2700). HP is currently selling a laptop through WalMart for $298 (or $148.47 in 1985 dollars, http://data.bls.gov/cgi-bin/cpicalc.pl). 

The PC industry has gone through many stages in which one firm was on top. Apple started it, then IBM took over. IBM tripped in the early 90s and Dell took over. Dell started to stumble about 5 years ago and now HP is on top as we see in the following graph reported in WSJ (HP wields its clout to undercut rivals, 9/24/09):

So how is HP able to do this. First, they are working with small margins, razor thin 4.6% margins. Next, the article gives some other clues to their strategy.

 (1) “Simplifying the specifications of the product”

i.e., reduce product variety so that contract manufacturers can have higher volumes and thereby offer lower prices. This is a standard recommendation in an OPs class.

(2) ”By getting orders in earlier, H-P could save on component and manufacturing costs, which are cheaper if they’re ordered far in advance.”

This line is intriguing. If component prices are falling, then ordering early is a disadvantage, not an advantage. This suggests several possibilities. First, component prices may not be falling rapidly and HP is better off giving suppliers a long lead time to get an advance purchase discount from them. Second, component prices are still falling but it is cheaper for HP to take on that risk than to let the suppliers take on that risk – i.e., if they take on that risk then they have to charge more, which is passed on to HP.

As I said, it isn’t your father’s PC industry anymore. What makes me think it could be entirely different in another 5 years?

Out of stock for Christmas

Believe it or not, there is actually a product out of stock this Holiday season – Amazon’s Kindle. Oprah announced that she loves her Kindle and sales have exceeded Amazon’s expectations. The forecast is that they will not be in stock until February.  The key question is how many unit sales will they lose because they are not available in the peak month of the year? Probably more than they want. Even if those sales are deferred to the next holiday season, it is a costly situation for the company.  Of course, there is no way to know if they are just the victim of bad luck (or too much good luck) or bad planning, but it does illustrate that challenges of meeting highly uncertain demand.

Wall Street Journal Dec 4, 2008 – Better Scratch That Kindle Off Your List

When the chips are down, do not hold too many of them

Micron Technology reported a $344m loss for the fourth quater, in large part due to a $205m write-down of memory chip inventory.  They report that DRAM chips fell 5% in price from the third quarter and NAND chips fell 15% over the same period.  Those price-decline rates translate to about 19% and 48% on an annual basis.  Holding even an extra week of inventory in such a climate is very expensive!

Wall Street Journal, October 1, 2008 – Micron Post $344 Million Loss