Holiday EDInomics Part 2

There is a great article in the current issue of Business Week on the supply chain challenges Nintendo is experiencing with availability of its Wii console this holiday season.  This is an intriguing subject to me because it seems like every year there is one hot product that everyone wants, but no one can find.  Back in the 1980s we had “must have” gifts like the ColecoVision and Cabbage Patch Kids.  A few years ago the Sony Playstation 2 was the killer gift and then Apple’s iPod Nano. 

A few interesting insights on Nintendo’s Wii from the Business Week article:·        

• “Over Thanksgiving weekend, online retailer Amazon.com reported that its British site sold out its entire stock of Wii consoles in just 10 minutes.”·          
• “A search of eBay’s U.S. site pulls up thousands of listings for new Wii consoles, with bidding well above the suggested retail price.”  “Some…are going for triple the suggested retail price online.”

I’ve always wondered whether the hardware OEMs who manufacture these products intentionally short supply during the holiday season just to create a buzz.  Certainly, the hype around these “hard to find” products is successful in creating even greater demand.  One could argue that the hardware manufacturer enjoys higher margins from such an approach as they can sell the product at full list price.  Additionally, the OEM stabilizes sales across a broader time horizon throughout the year, rather than peaking around the holidays and experiencing lower sales in the subsequent quarter.  And with under-supply, there is no risk of excess inventory to manage.  All of these factors make an argument for intentionally limiting supply.  Or could it be that OEMs struggle to accurately forecast sales for these items, or for that matter, to manufacture in sufficient quantities to meet consumer demand.

The video game sector presents an interesting case study to examine this issue of supply and demand.  The industry economics are such that the video game consoles are typically positioned as loss leader products.  Higher margins are generated from sales of the actual games to the captive install base of owners.  Royalties from the game sales are shared by the publisher with the console manufacturer.  From a supply chain perspective, if the consoles are not in stock then game sales will suffer as the install base will be smaller.  Given this, it seems unlikely that any OEM would deliberately short supply.  Furthermore, with the fierce competition that exists between Nintendo, Microsoft and Sony, it seems unlikely that any OEM would risk losing market share during the key selling period by limiting supply.

So how does EDInomics fit into all of this?  B2B integration technologies are the key enabler that allows manufacturers to obtain demand data from their downstream channel partners, the retailers.  But that begs a larger question - What types of data can high tech OEMs use to better forecast demand for holiday season sales of hot products such as HDTVs, video game consoles and digital music players?  To build an accurate forecast will necessitate gauging consumer demand months in advance.  Demand signals such point-of-sale, loyalty or market basket data would probably less useful in this scenario.  It’s unlikely that console purchases in September or October would provide meaningful insights into demand in November and December.  In fact, an inverse correlation may exist as those in the market for a game console will probably defer their purchase until the holiday season.  More accurate sources of demand data might be the frequency of page clicks on popular on-line retail sites such as bestbuy.com;  links to the product on personalized “Wish Lists” such as amazon.com; or the number of bids on auction sites such as eBay.  Or if one could somehow eavesdrop on the holiday wishes children are telling Santa at local malls…  There are obvious privacy challenges with all of the above, but there are perhaps ways that data could be aggregated to prevent identification of individual consumers.

Once demand data is aggregated, a critical factor in supply chain success will be the ability of the OEM to propagate this demand data to multiple tiers of the value chain.  Regular updates of forecasts and inventory need to be shared with the contract manufacturers who produce the consoles; their suppliers who fabricate the semiconductors and components; and, of course, game publishers who distribute the software.  Access to electronic information whether it is via direct integration of ERP systems or using web portals will be a necessity to respond quickly to new demand signals.

With regard to Nintendo, I think the real story is not so much the supply chain challenges it has experienced in the past month, but rather the phenomenal sales success the Wii product continues to enjoy.  One year after the product introduction, Nintendo’s Wii is still experiencing amazing success in the marketplace.  Sales growth continues even with the recent introduction of Sony’s Playstation 3.  Nintendo’s quarterly earnings reflect the results.  On October 26^th the Wall Street Journal reported “Nintendo’s group net profit rose to 132.42 billion yen ($1.16 billion) for the half ended Sept. 30 from 54.35 billion yen a year earlier. Sales for the Kyoto-based company more than doubled, to 694.8 billion yen from 298.82 billion yen.”  Wii can only be envious of such strong results…Here are the links to the Business Week and Wall Street articles I referenced above: Business Week - A Long, Long Wait for a Wii, -http://www.businessweek.com/magazine/content/07_51/b4063030297026.htm?chan=magazine+channel_newsWall Street Journal – Nintendo Plays it a Wii Bit Cautious http://online.wsj.com/article/SB119697501146616201.html

Steve Keifer 

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