Recently I decided to purchase a new camera, the Canon 5D Mark II. It has received excellent reviews from just about everyone who’s used it, and seemed like the appropriate upgrade from my Canon 40D. I quickly discovered that even though the camera has been out for over six months, it’s still very hard to find. Most major online sites list it on back-order, and Amazon.com doesn’t even sell it except through third-parties.
When there are shortages of consumer electronics product such as the 5DII or the Nintendo Wii for long periods of time, conspiracy theories are inevitable. Perhaps the manufacterer is deliberately keeping supplies low to maintain an image of popularity or exclusivity? Or perhaps there are quality control issues? While these are all possiblities, they’re not very likely. At Handspring and Palm, I saw first-hand how difficult it is to have the right amount of product available at all times, and some of the reasons why there can be long-lasting shortages of a consumer electronics product.
Before getting into specifics, it’s first important to note one thing: having too few of a product is much preferred over having too much. Of course, having exactly the right amount is ideal, but in the real world forecasts are always going to be slightly off, so it’s better to estimate low. Why? Because inventory is bad, especially in consumer electronics. Having a warehouse full of product that the company has already paid for but hasn’t sold is a drain on operating cash. It also puts pressure on the company to lower prices, reducing profits. Low inventory means stable pricing, solid margins, and strong cash flow. Shortages mean a company is making money, but could be making more. A glut can reduce prices to the point the company isn’t making any money.
So what would prevent a company from building enough of a product to meet demand? The obvious answer is of course shortages of one or more parts. If your product has an LCD screen, and there’s a worldwide shortage of LCD controllers, you probably won’t be able to get enough LCD controllers to build the number of units your customers want. Worse, if you’re a small or medium company, the LCD controller manufacturers are likely going to favor their best (AKA biggest) customers, with any leftovers going to smaller companies. If you’re a big company, while the LCD controller manufacturers may be filling a larger percentage of your requests, because your orders are so big, a small percentage shortfall is still large in absolute numbers.
Some parts also have very long lead times, with six to nine month lead times not unheard of. Since Christmas stock is built in fall, by February or March you need to decide how much your customers will want in December. If you guess wrong, you’re either going to have a shortage or a glut. Manufacturing decisions that look dumb today may have been made 6 months ago, and may have seemed like a good idea at the time. Keep in mind that shortage is preferred over glut.
Even if with enough parts on hand, a manufacturer may be limited by their product assembly line capacity. It’s easy to say, “why don’t they just bring up another assembly line?”, but it’s not that simple. Bringing up an assembly line is a long-term investment that is very time consuming and expensive. If an assembly line is brought up and then idled a short time later, the company will lose a lot of money. Therefore, a company will need to be 100% sure demand will stay high enough to require the additional line. Again, shortage is preferred over glut.
Finally, an international company like Palm needs to decide where to send product after its been built. If every geographical region’s requests can’t be met due to a shortage, HQ needs to decide who gets priority. This decision can be made a variety of ways, including deciding which regions are most strategic, which regions are most profitable, or which retailers are screaming the loudest. In the case of the 5dII, the US dollar is pretty weak right now, leading me to speculate that Canon is allocating fewer units to the US because they are less profitable than units sold in Asia.
So while it’s possible a company is deliberately building too few devices, it’s much more likely that someone, somewhere in the supply chain, made a wrong decision based on available data a few months ago.
