Demand Forecasting Challenges for Packaged Home Entertainment

Today James Cameron’s Avatar launched on DVD and Blu-Ray.  The film was nominated for nine Academy Awards and broke previous box office sales records making Avatar the highest grossing movie of all time.  As a result, retailers and studios are expecting strong consumer demand for the DVD.  Pre-launch indications confirm their assumptions.  Avatar Blu-Ray is was ranked #1 on Amazon.com’s US bestseller list for weeks prior to the launch while the standard definition version has been ranked #1 on the UK site.  Packaged home entertainment products such as DVDs, CDs and video game categories, have a unique set of supply chain challenges unlike any other retail merchandise category.  Continue reading

What is Cap and Trade?

Earth Day is less than one week away so I thought a post about climate change and the environment would be appropriate.  One of the hottest topics in sustainability in 2010 is the proposed Cap and Trade systems that many nations are considering.  Cap and Trade systems are one of the many mechanisms government can utilize to proactively combat the issues of climate change.  Proponents of the system believe that Cap and Trade is a critical step towards helping with the Earth-wide goal of limiting the rise in global temperature to 2.0 degrees Celsius above pre-industrial levels by 2050.  The debate is likely to intensify within the US over the coming months as the Obama administration turns its attention to climate change, having addressed health care and financial system reform.

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The Magical and Revolutionary iPad’s Supply Chain

In just 10 days, Apple has once again managed to capture the attention of the world with it’s recent iPad launch.  And every technology pundit around the world has weighed in with their perspective on the opportunities and challenges the device introduces.  Love it or hate it, one cannot argue with the fact that Apple continues to demonstrate its ability to out-innovate its competitors.  One of the most remarkable aspects of the success of both the iPhone and iPad is that very little of the hardware components or software applications on these devices is actually created by Apple.  While Apple performs the design, much of the content is sourced from third parties.  Hardware suppliers include contract manufacturers and upstream semiconductor fabrication plants.  Software suppliers include the millions of software developers building applications for the devices.  Apple’s supply chain strategy reflects what has become the norm in electronics – a highly-outsourced, globally distributed value chain.  In this post, I take a closer look at the supply chain ecosystem that powers the iPad to provide a case study of today’s high tech supply chain. 


Demand Forecasting   

Apple issued a press release on Monday announcing that 300,000 iPads were sold on launch day.  Many analysts were forecasting much higher first-day sales in the range of 400,000 to 500,000 units.  Some were more bullish, such as Piper Jaffray analyst Gene Munster who issued a pre-launch forecast of 600,000-700,000 units.  After reviewing the results from the opening weekend, Munster revised his first year sales estimates downward on Monday from 5.6M to 4.3M units.  The research firm iSuppli has a more aggressive forecast of 7.1M units in year 1, doubling to over 14M in year 2.  

I have not seen an updated report of sales results, but the ad network Chitika Labs (not to be confused with Chiquita bananas), has a real-time web site upon which it is projecting iPad sales.  The Chitika site also displays sales estimates by state.  Not surprisingly, California, Texas and New York are in the leadership position for device sales.Apple did not comment on whether the 300,000 units were higher or lower than expectations.  However, I suspect Apple had very good insights into true customer demand as it was able to monitor pre-orders through its online store.  Apple began accepting pre-orders on March 12th for launch day home delivery or in store-pickup. Pre-Order functionality in web sites enables manufacturers and retailers to gain unparalleled insights into demand for future product launches, which allows for better alignment of supply chain resources to reduce out-of-stocks or excess inventory. 
 

   

Manufacturing  

 Back in March there was much speculation about whether the iPad launch would be delayed due to manufacturing bottlenecks.   Cannacord Adams analyst Peter Misek stated that “An unspecified production problem at the iPad’s manufacturer, Hon Hai Precision, will likely limit the launch region to the US and the number of units available to roughly 300K in the month of March, far lower than the company’s initial estimate of 1,000K units.”  The manufacturing challenges seemed to be confirmed by Apple’s original decision to limit pre-orders of the devices to two per customer.   

Apple has been praised and scolded for its supply chain prowess over the past 12 months.  The company earned the distinction of being #1 in AMR’s Top 25 Supply Chains for 2009.  However, Apple disclosed in its Supplier Responsibility Progress Report in early February that it had uncovered several infractions by contract manufacturers including the hiring of underage employees; working excessive hours and exposing factory workers to poisonous chemicals.  However, the social responsibility issues did not pose a challenge to the success of iPad’s launch, perhaps because many people praised Apple for proactively identifying the human rights violations and quickly disclosing them to the public.  

 

Sourcing   

Much like the iPhone, iTouch and iPod, Apple’s new iPad contains a significant amount of content from third parties.  Both ChipWorks and iFixIt conducted virtual teardowns of the device based upon photos provided by the US Federal Communications Commission (FCC).     

  • Power Supply by Foxlink Technology
  • WiFi and Bluetooth antenna by Broadcom
  • Flash Memory from Samsung and Toshiba
  • A4 Processor designed by Apple and manufactured by Samsung Electronics
  • Audio processor by Cirrus Logic
  • Touch Screen controller by Broadcom
  • Display by LG Display, Samsung and Seiko Epson

Although many of the components contained in the iPad are sourced from foundries in Asia, the device is not available for sale in countries.  That has not stopped enthusiasts in China from obtaining the device through China’s robust grey market.  Analysis released today by iSuppli suggests that although the iPad is priced at $499, the actual hardware component costs only total $259.60.  Of course, this analysis does not include the R&D investment for the design nor any of the software and applications pre-loaded onto the device.  

Retail 

Perhaps, the most interesting aspect of Apple’s supply chain is the retail end-point which touches the actual consumer.  At this point, Apple has elected to distribute iPads only through its own online and brick-and-mortar stores.  The retailing strategy represents a departure from the iPhone and iPod channel strategy, which enabled a number of consumer electronics retailers, mobile phone carriers and online general merchandisers to resell the products. 

iPad – Only Sold in Apple Stores

Aftermarket  

In addition to the 300,000 iPads sold on the first day there were 1 million applications downloaded from the AppStore and 250,000 titles purchased at the new iBook store.  Apple expects to enjoy significant uplift from the sale of music, movies, books and applications by its iPad user community, which is the genius the behind the business model.  Not everyone buys into Apple’s business model for the iPad.  I did find a number of dissenters amongst the blogs I reviewed.  For example, Cory Doctorow of Boing Boing posted an article entitled “Why I won’t buy an iPad (and you shouldn’t either),” in which he chastises Apple for its Wal-Martization of the software supply chain.  “I don’t want my universe of apps constrained to the stuff that the Cupertino Politburo decides to allow for its platform.”   

In addition to software applications, Apple will also enjoy noteworthy upsell revenue from aftermarket components such as the keyboard dock, camera connection kit and VGA adapter.   

Reverse Logistics   

In today’s socially responsible, “Design for Environment,” supply chain, opinion leaders are just as concerned with how technology devices are manufactured and distributed as they are with how the devices can be recycled and properly disposed of.  Blendtec experimented with one disposal technique by inserting the iPad device into its blender and shattering it into a million pieces.

Avatar DVD Launch – The Supply Chain Challenges

Two weeks from today James Cameron’s Avatar will hit the shelves at retail stores.  The film was nominated for nine Academy Awards and broke previous box office sales records making Avatar the highest grossing movie of all time.  As a result, retailers and studios are expecting strong consumer demand for the DVD on its April 22nd launch date.  Early indications confirm their assumptions.  Avatar Blu-Ray is already ranked #1 on Amazon.com’s US bestseller list while the standard definition version is ranked #1 on the UK siteMuch as with Apple’s iPad launch, there are significant supply chain challenges for retailers to forecast and fulfill the high demand for such major product launches.  But some retailers will enjoy a natural competitive advantage over others due to their ability to better forecast consumer demand for Avatar sales through the use of web 2.0 technology.

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