Console launch lines and "shortages," explained
by Vladimir Cole 
{ Apr 29th 2006 at 9:55PM }
During a recent class in Operations and Information Management (taught in first year of the Wharton MBA program), professor Senthil Veeraraghavan dove into a mini case study on Sony's PlayStation and PSP products in order to demonstrate best practices in production capacity management around the launch of new products
The fundamental dilemma for companies launching new products is that initial demand for hot new products often exceeds initial capacity to produce that product. Sure, companies could invest heavily in production capacity, but if they overinvest, they'll never make any money with the venture once the spike of launch demand is fulfilled and demand levels off to a more predictable rate. But such heavy investment would saddle companies with high-cost factories that do nothing but sit idle and cost money.
Stockpiling products in preparation for a big launch is also impractical, as this (a) delays launch (and therefore recoupment of development costs), and (b) greatly increases investment in inventory. Storing money in the form of inventory is a very bad idea.
What's the solution? One possible way out of the problem, according to Veeraraghavan: "You are able to underinvest in capacity a bit if you're able to manage customer perceptions." In other words, if you can convince customers that the long launch lines are a result of unforeseen strong demand, you can make sure that they'll keep trying to obtain your product until it's finally on store shelves. To put it another way, long lines at launch are inevitable, especially in the games industry where customers are wont to use the presence (or lack) of a line as a measure of product quality.
[Image credit: PSP launch lineup at the Sony Metreon, from FloatingMonkeys.com]
Reader Comments (Page 1 of 1)
FOX @ Apr 29th 2006 11:19PM
I stood in line for a console once in my life and that was for the PS2. After I finally got my hands on the emotion engine I was pissed. The new games looked and played horrible. There were all kinds of Hardware problems. It took a full year before the games really started to roll onto the shelf.
It was a huge waste of time and effort. Never again!!!
DP @ Apr 29th 2006 11:33PM
My N64 and computer held me out until the launch of the Xbox 360, then I bought an original Xbox.. cheap system, super cheap games... The only only time I'm ever gonna stand in line for anything will be the DS Lite and the Revo.. err I mean the Wii Wii; and even then I'm just gonna pre-order it.
Adam @ Apr 30th 2006 12:06AM
Hmm.. and take into account that the PSP came out in March, when people really are not buying high priced products.
The PS3 will see a shortage just as the 360 did.
K_G @ Apr 30th 2006 1:48AM
"Stockpiling products in preparation for a big launch is also impractical, as this (a) delays launch (and therefore recoup of development costs), and (b) greatly increases investment in inventory. Storing money in the form of inventory is a very bad idea." Hmmmm, it depends if you suspect the product will be in high demand at the beginning or if it will be slower at the start and then build up
a) selling the item recoups the development costs...selling more items early in a product's lifetime when the item can be priced higher recoups development costs faster (assuming all other costs are fixed). b) yes inventory can be costly but less costly than being stuck with the capital costs of second factory. If you can sell 500X of an item in a launch window (at it's maximum lifetime price) and the economics of production say a 300x level factory is optimal, then it likely makes sense to build up an inventory before launch, given that the cost of capital is still pretty low and the amount of time the inventory will need to be financed is not likely to be long.
But this is written by an operations guy and typically they look at all businesses as merely a widget factories...cars, pickles, newspapers they are all the same to them. However in this industry, there are other dynamics that impact it...Hardware guys rather sell 1 million units in 3 months rather than in one year because that signifies to the publishers that this a good platform to develop...slow launch=slow development of games....would publishers rather release a game when there are 300K units out there or when there are 1.3 million units out there to play it. After a certain point, the market is large enough this isn't much of a factor but I suspect this one of the reasons why a fair number of 360 games got pushed back shortly after the launch...sure there were likely other factors, but if there were 1.5 million 360s out there January, the publishers would have been driving their teams to push games out...With alot less units out there than expected, I suspect publishers were more "hey, take your time and do the game right and we'll put it out when the market is hopefully 2x bigger in six months". You also need to factor in buying behavior (people will frequently be much looser with their money in Nov and Dec vs. April) and marketing expensesif youre going to spend a ton of money on marketing, you better have inventory to sell or otherwise its just a complete waste that likely pisses off both the consumer and the retailer.
Curtis Anderson @ Apr 30th 2006 4:03AM
Hey thats the PSP launch at the metreon here in SF. I was about 5 feet back from where this photo was taken. (I reckon)
My site link has some pix I took.
Fun times.
Ian Bowden @ Apr 30th 2006 5:22AM
Yeah the article makes sense. It's all about working capital management and implementing a pull manufacturing system. OH YEH.
Tonku @ Apr 30th 2006 6:24AM
You'd think that purposely holding back production would make people loose interest in the system, especially after a bunch of hype was built up. And the software company would be seeing slow sales, seeing as though not many would own the system to play it on.
Moogle @ Apr 30th 2006 8:12AM
I think the publishers are a lot smarter than the general public and will wait for longer if that's a concern. 1 mill in 3 months is more for the gullible users. But if you're comparing that to "Sold out at launch OMFG!", the latter is just as good and costs less in warehouses. Stockpiling really gives a lesser chance of selling each of those 1 million units, since over a larger time frame more people will probably decide to pick one up.
Like the article says, the rest is just spin to make your users less pissed off. But this has happened so many times, I'm not sure if it'll keep working anymore. People seemed pretty cheesed off about the 360's shortage.
jay @ Apr 30th 2006 9:40AM
Wait, people actually queued up for the PSP launch? Now I've seen it all :)
I've never seen a queue. The whole game culture is just so different in the UK, specifically Manchester and Huddersfield.
JeffL @ Apr 30th 2006 9:45AM
In other words, if you can convince customers that the long launch lines are a result of unforeseen strong demand, you can make sure that they'll keep trying to obtain your product until it's finally on store shelves.
So the best practice is to lie to your customers? Nice. Reminds me why I left marketing.
mirobin @ Apr 30th 2006 2:30PM
Moogle, people will be cheesed off no matter what they do. Imagine the number of whiners that would be posting about how Microsoft kicked their puppy by "slipping" the launch date while stockpiling millions of xbox360's in a warehouse somewhere.
copa @ Apr 30th 2006 3:10PM
Microsoft and Sony both had the ability to greatly reduce shortages and 'manage customer perceptions'. It's called regional launches. As you sell through inventory to each region, then the next region gets a launch.
Microsoft decided they would do a worldwide launch. With all of the factors mentioned in the article above, they knew they couldn't meet demand for all regions at once. So instead of having one region midly pissed off at them (slight shortages), they get the whole world majorly pissed off of them (huge shortages). They created so much bad will that many customers who were interested in buying a 360 before have gotten frustrated and lost interest.
So Sony, in all their infinite wisdom, has also decided to do a worldwide launch for the PS3. Don't listen to of these companies when they start whining about 'unexpected shortages' or 'unforeseen demand'. They all had the ability to manage this problem, and chose not to.
David Reinecke @ Apr 30th 2006 4:53PM
I always knew those wharton kids played video games. What else do they do with the 75 plasma screens in the Huntsman building...
-jealous College kid
timdesuyo @ May 1st 2006 1:37AM
I'm still rocking my 8-bit Nintendo. If the gameplay bites, all the perfume in the world ain't gonna make a pig a princess.
Tim @ May 1st 2006 2:56AM
What is the point of that article?? Everything they said is extremely obvious.
vc @ May 1st 2006 2:59AM
In my efforts to keep this post short, I confused some people. I didn't want to bring Poisson tables or statistical demand analysis into this, nor the order-up-to model or any of that crap... but I see that I should have in order to keep this from appearing "so obvious." It's a fine line between writing for a general audience and removing all complexity. I'll do better next time!
hamish @ May 1st 2006 5:05AM
i dont think anyone is impressed any longer by huge supply shortages at launch. it just seems feeble that global companies cant manage a new product sufficiantly so that it doesnt sell out in a day. to me it seems kind of disrespectfull to the consumer. it is impressive how ever that the ds (old one, not lite) was in short supply over a year after its release in japan.
Don Jose @ May 1st 2006 6:36AM
I still have all my Nintendo systems (NES thru GC), and you know what I play most? My 360! My Little brother likes to play games with square characters, but I don't. Until the ps3 comes out, the 360 is the only game system with the capacity for any true immersion. I love PDZ, PGR, and Oblivion/ Unfortunately, I'm not buying a PS3 (thanx, SONY, for the 2 worst console controllers of the past 2 generations [my opinion: Sorry, but I have very big hands!])The new Nintendo will have an interesting controller , but, sadly, will have little else to offer this generation of gameplay. Personally, I'd prefer a 2-handed approach to Oblivion to a Revmote approach to any XBOX 1 game!
PS- Nintendo fanboys: I am one of you...save your flame for someone more deserving.
PixelSlave @ May 1st 2006 8:11PM
>> In other words, if you can convince customers that the long launch lines are a result of unforeseen strong demand, you can make sure that they'll keep trying to obtain your product until it's finally on store shelves.
Great. The advice is "if you can ... " -- the big IF is what everyone wants to know. Obviously, if you are the guy/gal who can play that "IF" like how you play a game, you wouldn't worry about earning enough money to support your game playing habit for the next 50 years or so.