MKT 6313 Logistics Paper Auston Lewter al1542 4/20/2021 The Failure of the PlayStation 5 and Xbox Series X Release Introduction Video game consoles have become a staple product for media consumption in American culture with 51% of households owning a home gaming console. (Statistica) The industry has become larger than the film and sports industries combined with an expected $179.9 billion in revenue in 2020. (MarketWatch) However, unlike film and television which can be seen on any device with a screen and internet connection, video game consumption is limited by platform capabilities and exclusive releases. This has been a marketing strategy going all the way back to the very first home gaming consoles. Pong could only be played on the Magnavox Odyssey, and if a customer wanted to experience Street Racer, they would have to purchase the Atari 2600 console. In recent years, gaming console market has been narrowed down to three companies which compete for market share: Nintendo, Sony, and Microsoft. In November 2020, both Sony and Microsoft released their newest generation of consoles to critical acclaim; however, 5 months after the release of these products, there are still massive shortages and millions of customers are unable to purchase the new Xbox or PlayStation. From pre-order issues to massive production and supply chain issues, the release of these new consoles have been some of the worst of all time. This report will explore the cause of such a disastrous product launch, and how it compares to similar launches in the past. Additionally, potential supply chain and logistical solutions to the shortage will be detailed using successful supply chains as an example. MKT 6313 Logistics Paper Auston Lewter al1542 4/20/2021 Background Nintendo, Sony, Microsoft Even though the global video game revenue is estimated to be $180 billion for the year 2020, 50% of that revenue comes from mobile gaming. Cell phones are in nearly every person’s hands across the globe, making the medium much more accessible. The remaining $90 billion of yearly revenue is split between home consoles and PC gaming. While many companies such as Google and Amazon have tried to break into the console gaming market, there remains three manufacturers which dominate market share. Nintendo, one of these companies, produces a console which is not differentiated by its processing power, but instead by its selection of exclusive games and the console’s ability to double as a portable device. The newest console from Nintendo, the Switch, was released in spring 2017 and has led the market since its launch. The Sony PlayStation series has sold the most total of the consoles since the launch of the PlayStation 4 in 2013. With critically acclaimed exclusive games, excellent processing power, and an overall superior marketing strategy, Sony’s product has soundly been more popular than its Microsoft counterpart. The final manufacturer in the home gaming console market is Microsoft which produces the Xbox. The Xbox differentiates itself similarly to the PlayStation in that it creates exclusive games and promises greater processing power; however, due to a long string of poor performances from exclusive games and confusing marketing campaigns, the brand is squarely behind that of its competitors. Demand Patterns MKT 6313 Logistics Paper Auston Lewter al1542 4/20/2021 Unlike many products which have a consistent demand year-round, video game consoles have an extremely large spike in demand for 2 months of the year, the holidays. Figure 1 below shows the monthly video games industry sales in the United States. (Statista) Figure 1 Monthly Video Game Sales This demand spike creates and enormous amount of pressure on manufacturers and supply chains in the months leading up to November and December to satisfy demand. Shortages every year since the early 2000’s has produced news headlines which highlight the difficulty to acquire video game consoles and where to find them. Both the new Xbox and PlayStation products were released in November of 2020 to take advantage of the increased demand, but shortages still occurred. In addition to demand spiking for the holiday season, history has shown that there is an enormous build-up of demand leading up to a product launch. When the PlayStation 5 console pre-order went live last year, there were over 1 million orders within 12 hours. The final demand MKT 6313 Logistics Paper Auston Lewter al1542 4/20/2021 variable that had a great effect in 2020 was the Covid-19 pandemic. The video game industry boomed during the lockdown with many customers unable to experience the real world and instead turning to a virtual one. All of these factors had a part in the skyrocketing demand for the new consoles and created an overwhelming number of orders for manufacturers to handle. Manufacturing Process The manufacturing process which takes place to produce this technology is one which requires components from many different companies. While the consoles get shipped from their respective manufacturing headquarters, assembly currently takes place in China. Components which are used in the PlayStation 5 and Xbox Series X include: a central processing unit made by AMD, a graphics chip also from AMD, RAM chips sourced from Samsung and Micron, and a memory drive made by Western Digital. Similar to the production of a smart phone which requires often hundreds of suppliers and manufacturers to align in a supply chain, the production of gaming consoles has a complex and vast supply chain requiring coordination. What went wrong with PS5 and Xbox? Sony opened availability of PlayStation 5 pre-orders in September of 2020 and customers were met with error pages and checkout systems going completely offline. Many customers had the product removed from their cart while checking out, or simply had to restart the process multiple times. The date of the pre-order was not clearly conveyed by Sony which led many retailers to allow customers to purchase consoles earlier than intended and sometimes during the earlier hours of the morning when many people were sleeping. Many of those who did secure a pre-order were met with information shortly after that their console would not arrive on the MKT 6313 Logistics Paper Auston Lewter al1542 4/20/2021 promised date “due to high demand”. The consoles were later announced to only be available via online retailers to prevent the spread of Covid-19 putting even more stress on the retailer websites and enabling the use of bots to purchase the products. According to a GameStop director, over 60% of website traffic during the days leading up to the release of the consoles was robots or scalpers. There was a group of scalpers in the United Kingdom which reportedly had over 3500 consoles with plans to sell them at a profit. Finally, many unlucky customers opened their PlayStation 5 box to find bags of cat food or other objects indicating that their product was stolen in transit. The Xbox Series X release held similar issues to that of the PlayStation 5. Pre-orders were completely overwhelmed and within hours almost a million consoles had sold. Microsoft did not, however, delay promised shipping dates and has seen less of an issue with theft and product hoarding by scalpers. The largest issue that both consoles share is that they are nearly unavailable for a consumer to buy. Online stores and brick and mortar locations have both been sold out of these products since launch with a space amount restocks. The CFO of Microsoft commented that supply shortages would continue “as we head into the post-holiday quarter, so Microsoft's Q3, calendar Q1." (Techradar). Many experts predict that supply will not catch up with demand until the end of the 2021 calendar year for either console. Consumers and businesses alike are currently facing a massive shortages and price increases across a great number of products including video game consoles, cars, and computers. This phenomenon is caused in large part to the scarcity of semiconductors in the market today. The problem was initially caused by a temporary shut down on production of these parts due to MKT 6313 Logistics Paper Auston Lewter al1542 4/20/2021 the Covid-19 pandemic, however, there has also been a great increase in demand caused by changing habits and more products needing a central processing unit. Companies like Microsoft and Sony are not alone in their struggles against this shortage. Ford and Nissan have slowed production on their assembly lines to accommodate for the lack of availability of semiconductors. There does not seem to be an end in sight to these issues. A tech and media analyst, Neil Campling, commented “There is no sign of supply catching up, or demand decreasing, while prices are rising across the chain. This will cross over to people in the street.” (Guardian) With such a widespread problem such as the semiconductor shortage, companies which have a flexible and efficient supply and logistics plan are having the most success. What do successful technology supply chains look like? What could Microsoft and Sony have done to predict such a spike in demand and drop in component supply? Donald Waters, author of a book titled “Supply Chain Risk Management”, gives a relevant example when explaining the importance of risk management. Ericsson, a company which produced cell phones in the early 2000’s, had prided itself on an efficient supply chain with single sourcing being a key element in this strategy. One day, a thunderstorm started a small fire in the sole supplier of the company’s radio frequency chips rendering the factory to only a fraction of its former production rate for almost a year. Ericsson did not have a back-up supplier at the time and the shortage of parts cause the mobile phone division to lose $1.7 billion. This example is only a small-scale representation of what has occurred due to the Covid-19 pandemic and the regulations associated with it. Today, not only have the PlayStation 5 and the MKT 6313 Logistics Paper Auston Lewter al1542 4/20/2021 Xbox Series X seen shortages in their key components, but also saw a great jump in their demanded quantity. In order to best reduce the risk, Waters goes on to explain that collaboration is the best course of action. Each member of the supply and logistics chain has a unique position role to play yet risks to any single member can permeate and expand to create a risk to the entire production process. While the companies are not immune to the microprocessor shortage, companies like Apple have not seen nearly as many setbacks as the gaming console manufacturers. Apple delayed the launch of the iPhone 12 by two months and Samsung is rumored to be considering a similar approach to the situation. However, when compared to the estimated 16-month shortage of products of Microsoft and Sony these seem like minor setbacks. Apple has a famously efficient supply chain which has a goal of cutting inventory, reducing warehousing space, and to make fostering competition between suppliers. Apple reached an inventory turnover of 37.2x in September of 2018 meaning that their inventory turned over every 10 days. (Tradegecko) A high turnover rate is made possible by accurate forecasting for short term and long-term demand. Apple has been able to accurate predict which technologies will be in demand 5 years down the road and place an order or find a supplier years in advance. This is the primary reason that Apple has been able to effectively manufacture their product through the semiconductor shortage: they placed the order for the parts years ahead of everyone else, so they stand first in line when suppliers are shipping product. Another important part of the Apple supply chain efficiency is their limited number of SKUs. A smaller diversity of product variations makes a smaller array of unique components needed which is an efficiency in both warehousing and manufacturing. MKT 6313 Logistics Paper Auston Lewter al1542 4/20/2021 Both Sony and Microsoft are aligned with Apple in that they have a very limited number of SKUs to increase manufacturing and warehouse efficiency; however, the demand forecasting from both companies was very poor. The most recent large console release can be referenced when looking for an expected sales value. The PlayStation 4 and Xbox One both released during the holiday season of 2013 and were reported to have sold 2 million units over an 18 day period and 2.1 million units over a 14 day period. Since that year, the gaming industry has more than doubled in total revenue to almost $200 billion. This problem is not unique to 2021 gaming, articles dating back to 2006 write about the shortages of the then newly released Xbox 360. Accurate forecasting of component needs and consumer demand should be formulaic for Microsoft and Sony, as they both have released 5 iterations of consoles experiencing the same issues each time. Conclusions The release of the new home gaming consoles by Microsoft and Sony have created a negative view of the products before they are even in many customers’ hands. In another 5 to 7 years, it can be expected that Nintendo, Sony, and Microsoft will all release new gaming hardware. A smooth product launch by any of these companies would need to have accurate forecasting of demand, a risk adverse supply chain philosophy, and a more effective system for ordering and pre-ordering products. Accurate forecasting of demand is one of the most difficult aspects to running an efficient supply chain. There are many methods to predict consumer demand such as moving average and exponential smoothing, however, when predicting demand of a product in strict competition with MKT 6313 Logistics Paper Auston Lewter al1542 4/20/2021 another similar product these methods tend to be inaccurate. A similar industry which has the potential for volatile demand is tourism. In a journal about a deep learning approach to demand forecasting, Yishuo Zhang explains that a myriad of inputs go into an AI software in order for it to produce a prediction. These factors can include Google search trends, weather data, social media mentions and the historical demand during a similar time of year. Factors like these must be accounted for when releasing any product, especially one which is traditionally of such high demand. A risk adverse supply chain is one which avoids disruption to the supply and is able to maintain a flow of material through difficult circumstances. As mentioned early, both Sony and Microsoft source their graphics processing units and central processing units from AMD. While it could be difficult, looking toward other manufacturers such as Intel and Nvidia as secondary suppliers would allow for a more integrated supply chain for key components to be used in the product. No company is able to predict such a thing as the Covid-19 pandemic, however, steps may be taken in manufacturing in the future to ensure that production levels do not have to drop to zero should workers be in limited supply. The Covid-19 pandemic has not only changed how society works, but how shopping and commerce is done. With the recommendation from the CDC to remain at home, that is how most of the shopping happens today. Many brick and mortar stores had to close due to Covid-19 safety regulations causing even more customers to head online to shop for products. Some of the most frustrating online buying experiences for many consumers are purchases of limited products. Releases of limited sneakers or clothing items are often a topic of outrage for many, as they are rife with scalpers and robots which can overwhelm the entries of just one consumer. A similar problem occurred with the release of the Xbox Series X and the PlayStation 5 with thousands of MKT 6313 Logistics Paper Auston Lewter al1542 4/20/2021 robots and scalpers instantly buying up products when they are restocked. This is why both Sony and Microsoft should require retailers which sell their products online to employ a specialized bot protection software. As quickly as new bots are being developed to behave as a human does, there is technology to counteract malicious purchases. (DataDome) The launch of the next consoles will need to oppose scalpers in force to maintain a stable stock and keep customers satisfied. Customers also experienced great disappointment when promised a day of delivery months in advance and were later told that the promised date would not be kept. Many technology releases will employ a rolling release date to reduce the pressure to deliver on a single day. Setting rounds of pre-orders which would deliver the product a few weeks apart would create a staggered release and reduce the strain on e-commerce sites like Walmart and Target. This release method would also give a better idea of demand quantity as a greater number of customers will be able to submit a payment for the product. The backlash that Microsoft and Sony have received from the release of the Xbox Series X and PlayStation 5 has been of great detriment to the respective companies; however, most of the criticism is about the lack of availability of their products and not the products themselves. This shows the importance of a sound supply chain and logistics strategy. Strategic decisions made about the manufacturing and logistics of the release for these products are cause for a PR disaster. Logistics has always had a hand in business as the transfer of goods and services is equally if not more important than the goods and services themselves. However, due to the Covid-19 pandemic, business is being done over the internet at a rate never before seen making the delivery of business an instrumental part in the growth of industry. MKT 6313 Logistics Paper Auston Lewter al1542 4/20/2021 Works Cited Gaming Industry - Size, Growth, Trends, Forecasts (2021 - 2026). (n.d.). https://www.mordorintelligence.com/industry-reports/global-games-market. Guardian News and Media. (2021, March 21). Global shortage in computer chips 'reaches crisis point'. The Guardian. https://www.theguardian.com/business/2021/mar/21/global-shortagein-computer-chips-reaches-crisis-point. How to stop scalper bots and prevent scalping on your e-commerce site. Data Dome. (n.d.). https://datadome.co/bot-management-protection/how-to-stop-scalper-bots-and-preventscalping/. Leger, H. S. (2020, November 17). Xbox Series X stock issues could continue for months, says Microsoft exec. TechRadar. https://www.techradar.com/news/xbox-series-x-stock-issuescould-continue-for-months-says-microsoft-exec. Richter, F. (2020, November 25). Infographic: Video Game Sales Are Extremely Seasonal. Statista Infographics. https://www.statista.com/chart/16211/monthly-video-game-industrysales/. Vailshery, L. S. (2021, January 22). Home gaming console US household penetration 20122016. Statista. https://www.statista.com/statistics/736125/home-gaming-console-ushouseholdpenetration/#:~:text=Household%20penetration%20of%20home%20gaming%20consoles %20in%20the%20United%20States%202012%2D2016&text=The%20statistic%20shows %20the%20household,owned%20a%20home%20gaming%20console. Video Game News. actaludologica.com. 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