Verical Communications

So the results are in, but who are the “real” winners and losers? I propose we change the way we measure success. We need to look deeply across the end-to-end supply chain to determine which supply chain is the strongest performer, rather than look at single entities. Sure, the retailers’ results indicate who is performing best in that sector, but how are their respective supply chains performing to allow them to deliver those results?

Black Friday 2009 results ranged from disappointing to slightly higher than last year for traditional retailers, depending to whom you listen. In contrast, on-line sales soared on both Black Friday and Cyber Monday. Over the holiday, weekend consumers spent $5.2 billion on-line (Source: Retail Decisions), and there were a whopping 4.3 million shoppers per minute throughout the day in North America (Source: Akamai). Cyber Monday beat all forecasts with a 13.7 percent increase in total sales, and buyers bought 30 percent more items per transaction than in 2008 (Source: Coremetrics). On-line buyers also spent on average $50 more at $180 per transaction, compared to a decrease of $30 to $343 for retail store sales (Source: The National Retail Federation).

The perceived on-line winners were Amazon.com, Wal-Mart and Target. The Kindle e-reader was “the best selling item across all of Amazon.com’s product categories on Monday,” according to spokesman Craig Bermen. Consumer electronics were far and away the biggest winners across product categories; the most popular items being flat screen TVs, cameras and GPS navigation devices.

So who are the “real” winners and losers? Well, the bottom line is that we won’t really know until these companies report their earnings.

Despite the hype associated with the number of people lining up outside of Best Buy stores, weekend revenue estimates, website traffic and transactions, average order sizes, etc., we just are not seeing the whole picture. Now don’t get me wrong; all of the data we have at our fingertips is fantastic, but it doesn’t mean that much on its own. In fact, I’d propose that retail results, while being a terrific indicator of the economy, are far too narrow a segment to look at in determining success for the consumer electronics industry. To determine real success, we need to look right across the electronics supply chain — from the component manufacturers to the EMS companies, OEMS, distributors and retailers to determine how well each party worked together and, in total, how the end-to-end supply chain performed.

According to Goldman Sachs Analyst Adrianne Shapira, Wal-Mart’s average prices were 3.5 percent below Amazon.com, 4.2 percent below Target and even lower (in the double digits) compared to Kmart and Toys “R” Us. Could it be that the efficiencies that Wal-Mart and Amazon.com are able to generate through their purchasing leverage and supply chain are so significant that they can afford to discount prices so deeply? Or, are these deep discounts used to drive traffic, or is it a combination of both? Given the narrow margins retailers operate, these price differentials are pretty significant and warrant a closer look.

I would argue though that the winners and losers in the consumer electronics industry will be defined by how efficiently they operate their supply chains. A key component is how accurately they are able to predict demand.

Forecasting demand in consumer electronics is notoriously difficult to do. The consequences of poor forecasting are serious. Forecast too much and end up with too much product, and suffer write-downs and price-erosion. Forecast too little and run the risk of lost sales!

The Risk of Underestimating Demand

The implications of getting demand wrong on the downside is significant, as any lost sale is perishable, and the opportunity cost is felt at the gross margin level and right at the bottom line. For retailers, lost sales go to the competition and have a big impact. Best Buy, for example, has a profit margin of 1.97 percent and a gross margin of 23 percent (Source: Yahoo Finance). So, for every $100 product sold, they make $1.97, but for every one lost to a competitor, they miss out on an opportunity to make $23. It doesn’t cost Best Buy any more to sell one more product than its Cost of Goods Sold for that particular product. It doesn’t require more stores, marketing or staff. For the manufacturers of the product (the OEM), the impact of a lost sale is significant as their gross margins are higher, so by default, any lost sale has a bigger opportunity cost to the OEM, such as Apple at 36 percent (Source Yahoo Finance).

What I’ve seen so far, despite a better-than-forecasted Cyber Monday, is that there haven’t been too many high profile examples of lost sales. Amazon.com’s deal of the day on Cyber Monday did sell out (8GB iPod Touch for $158), which like many other heavily promoted items over the holiday weekend is undoubtedly a loss-leader to get customers into the real or virtual store. Kaufman Bros. issued a new advisory on Monday that reported low inventory and out-of-stock Macs at many resellers. Neither of these specifically means Apple or their resellers have lost sales, but risk increases if out-of-stock conditions continue.

The Risk of Overestimating Demand

When demand is forecast incorrectly on the upside, the resulting slow-moving and excess inventory gets stuck in the supply chain. For some retailers, having slow-moving inventory will create price erosion. In some cases, the retailer is protected by the manufacturer through returns and price protection programs. In all cases, the remaining supply chain partners are left sharing the price erosion and write-downs in some form depending on contractual agreements.

Manufacturing companies typically write down 0.5 to 1.5 percent of their product revenue, predominantly due to demand and supply imbalances. For retailers, it’s harder to determine the amount of waste associated with price erosion; however, there’s no reason to assume it’s any different.

So what should we do? Rather than looking at individual performers, let’s take a look at end-to-end supply chains for different product categories and identify the best overall performers in each sector: manufacturing, retail, etc. Once we’ve identified the best overall performers we can begin to dig into what it is that makes them special. What are they doing differently? How do the parts work together, up and down the supply chain? What are the best practices, and what can we learn from them? In particular, how can we optimize supply and demand? What mechanisms exist to enable us to smooth out the inevitable imbalances that will remain? We can take this knowledge and apply it to supply chains in other categories and industries.

So who are the “real” winners and losers? Let’s wait to see and look beyond the retailers at how the product manufacturers and their supply chain partners fare as part of the overall ecosystem. After all, it is the best supply chain that wins!