There were days during the holiday shopping season when Russ Krueger probably felt a lot like Santa Claus. But there were many others when he undoubtedly felt more like the Grinch—particularly when he heard about consumers lining up outside stores in hopes of scoring one of the season's hot-selling videogame consoles. Krueger, whose company was responsible for moving shipments of Wii and Playstation 3 (PS3) game consoles to retail outlets in the weeks before Christmas, knew that most of those hopefuls would go home empty-handed. And there was not a thing he could do.
The 2006 holiday selling season will likely be best remembered for the widespread shortages of Wiis and PS3s, and the legions of disappointed gamers. But that is only part of the story. The other part is a tale of the million or so units that did make it into stores and the behind-the-scenes heroics performed by companies like Agility that made it possible.
Krueger, who is Agility's senior vice president of distribution services, could hardly have known what challenges lay ahead when the third-party service provider contracted to distribute the Nintendo Wii and Sony Playstation 3 consoles. Though the PS3 was widely expected to be this year's Christmas hit, no one could have foreseen the manufacturing problems that later developed (see box), leaving it in short supply. Nor did Agility have any way of predicting the explosion in demand for the Wii or the frenzy that developed around both units.
And frenzy it was. In a scene repeated over and over in the weeks leading up to Christmas, a retailer would announce that it was expecting a limited shipment of gaming units. Consumers would scramble for a place in line outside the store, waiting up to 12 hours in the bone-chilling cold for a chance to grab one of the devices. More often than not, they went home disappointed. But a lucky few left the store with one of the highly sought after units under their arm. For that, they likely had Krueger and his staff to thank. Though Agility did not handle all of the units delivered to retailers before Christmas, it did move about a quarter-million PS3 and Wii consoles to roughly 6,500 retail outlets nationwide in the six weeks leading up to the holiday.
Gaming units continued to fly off the shelves after the holidays, and demand for the units remains high. In mid- January, Sony, which had shipped 1 million PS3s to North America by the end of 2006, was still airlifting more than 100,000 systems a week into the United States. (According to research firm NPD, Sony sold just under 500,000 units in December alone, while Nintendo sold 604,200 Wiis in the United States during that period.) Nintendo, however, has reportedly chosen not to use airlifts, and the Wii shortage is not expected to ease anytime soon.
The craziest year
Summing up the whole experience, Krueger says that trying to keep retailers supplied with consoles this past holiday season was one of the most demanding tasks his firm has ever faced. "I've been doing this for over 10 years and this was the craziest year we've been through," he says. "I do not recall a year when demand for the hardware product was as high as this year. It was just crazy."
As is often the case, the turmoil wasn't caused by any one factor. A perfect storm of conditions conspired to make distribution of the Wii and PS3 the challenge that it was. For starters, the two units were released within two days of each other in mid-November. (When the Sony PS2 and Nintendo GameCube were released several years ago, by contrast, they were unveiled several months apart.)
At the same time, Agility was also handling distribution of Microsoft's Xbox 360, which sold briskly in 2006 (with 1.1 million units sold). On top of that, Agility was distributing game accessories as well as software releases for all three systems.
But perhaps the biggest challenge of all for Krueger and his staff was the manufacturers' inability to forecast deliveries accurately. That left the Agility staff unable to predict when product would be arriving from overseas and, in the case of the PS3, where it would be delivered. With the Nintendo units, Krueger at least knew where the Wii systems (and accompanying software and accessories) would be arriving. All of the shipments came into Nintendo's 380,000-square-foot distribution center in North Bend, Wash., just outside of Seattle—though not always with much in the way of advance notice. Things were far more chaotic with the Sony units, which might arrive at any one of five distribution centers—Los Angeles, Philadelphia, Chicago, Atlanta or Fresno, Calif.
"It was difficult to do a lot of advance planning because we never knew where the product was going to come from and we didn't know how much product would be available, so we had to make lots of decisions on the fly," says Krueger, who notes that he would often get word late in the afternoon that a shipment would be arriving in a few hours. "The retailers needed all the product they could get because it was literally flying off the shelves."
In preparation for what turned out to be a wild ride, Agility had carefully mapped out a plan of action for distributing the merchandise. Once notified of an incoming shipment (and if time permitted), Agility would arrange to have the products picked up from the supplier and moved to its local DC. There, staff members would perform any kitting and re-packaging required by the retailers, which received store allocations from the manufacturer.
Upon arrival, the product was broken down, and master cartons were routed to a pick line, where workers opened them, broke down the cartons and built overpacks. The overpack cartons were then re-sealed, labeled and re-palletized so the carrier could pick them up.
Krueger reports that outbound shipments to retailers varied widely in size. Sometimes, a retailer might receive four dozen units in a shipment. Other times, a retailer (particularly if it was a smaller store) might receive just one or two units.
In cases where Agility was merely re-shipping master cartons, the staff simply took the cartons off the trailer, counted them, removed the shrink wrap, labeled the merchandise while it was still on the pallets, reapplied shrink wrap, and tendered it to the carrier. But things weren't usually so simple. Because the product was in such short supply, most retailers were not getting large allocations. That meant that most of the time, Agility had to break down pallets and ship individual units—a far more complicated process.
The challenge, says Krueger, lay not so much in the tasks that needed to be done, but in the severe time constraints. "We picked up the product, brought it to our facilities, and processed it through our facilities in the quickest possible time," he says. "There is a massive amount of coordination that needs to occur between the retailer, the manufacturer and the courier. What made it more challenging this year is that the hardware cartons are much more bulky than cartons of videogame software—so you've got increased size of cartons, and you've got massive volumes that you are expected to process, secure space with the courier and deliver as quickly as possible."
Because of the merchandise's high value, security was tight throughout the process. The Wii units retail for $250 and the Sony console sells for an average of $500, with the games typically running $50 apiece. To keep close tabs on the units, inventory was counted several times when it was loaded onto trucks at the manufacturer's facility. Product was counted again when it reached Agility's DCs, and again when it was tendered to the courier (DHL).
Any (air)port in a storm
For all Agility's carefully laid plans, there were still times when the company was forced to skip the step of moving products to its own facilities for processing because time was too short. Anticipating just that contingency, Agility had stationed four employees in Seattle for a month before Christmas.
That turned out to be a fortuitous decision. When one large order of Wiis arrived in Seattle, for example, the schedule was so aggressive that Agility's staff actually took the merchandise directly from the vendor to a plane-side location at DHL's facility at Boeing Field (also known as King County International Airport) outside Seattle. Workers processed the shipments at a makeshift location there and moved them right onto the planes.
"You've got to be creative during crunch time," says Krueger."Every 30 minutes to an hour counts when you have five or six trailer- loads of products and not enough time to take it to your facility and work it."
As reports of retailers selling out of Sony's new Playstation 3 (PS3) units mounted in December, rumors persisted that the shortages were part of a publicity stunt. But those rumors don't carry much weight with retail industry analysts.
"If they could have shipped more consoles, they certainly would have, and given its margin contribution to the company, it's too important for them not to hit a home run," says Mark Hillman, supply chain research director at AMR Research. "The indications are that retailers were as surprised as everyone else when volumes didn't turn out to be what was initially expected. With the cost of inventory, it would not have made sense for them to stockpile 3 million units either, but they certainly didn't intend to have the launch go as poorly as it did."
Hillman attributes the shortage not to an elaborate publicity campaign, but to Sony's high-risk decision to incorporate complex components into its game consoles. Only a limited number of suppliers are capable of producing the Blu-ray laser diodes used in the high-definition DVD player within the PS3. So Hillman says it came as little surprise to him when Sony ran into trouble meeting demand for the PS3 because of, yes, a severe shortage of Blu-ray laser diodes.
There's nothing like the launch of a new, untried electronic gadget to create havoc in a distribution center. Whether they underestimate or overestimate demand for the new product, DCs inevitably end up scrambling to adjust their operations as the true picture emerges. And just as inevitably, they end up making those adjustments just when they're at their busiest.
It's not as if they can count on the manufacturers to provide accurate demand projections. "You just cannot forecast accurately with a brand new product that may or may not be a 'wow,'" says Steve Banker, supply chain analyst for ARC Advisory Group. "Obviously, if they were able to forecast better, it would improve distribution, but with these kinds of products it's very difficult to get it right." Kevin Hume, director of consulting services at supply chain consulting firm ESYNC, agrees. "When estimates are made for a new release, you're either right, you overshoot it and demand doesn't meet expectations, or it can far exceed expectations. I've seen all three happen," says Hume.
Though the consequences of underestimating demand are clear enough, overestimating demand has its perils too. Take the case of an online retailer that stocked up on the Zune, Microsoft's answer to Apple's wildly successful iPod. When sales of the Zune lagged behind expectations, the retailer found itself scrambling to re-assign spots in its distribution center to faster-moving products to keep up with peak holiday demands.
Of course, it's that much harder when multiple new products are involved. "When you get a single new release of a very popular product, that's usually pretty manageable because you know when it's coming in and you know the product dimensions," says Hume. "It becomes more challenging if you're making these projections across multiple SKUs, and you have to essentially guess which will perform better than others."