Console launch lines and "shortages," explained
During a recent class in Operations and Information Management (taught in first year of the Wharton MBA program), professor Senthil Veeraraghavan dove into a mini case study on Sony's PlayStation and PSP products in order to demonstrate best practices in production capacity management around the launch of new products
The fundamental dilemma for companies launching new products is that initial demand for hot new products often exceeds initial capacity to produce that product. Sure, companies could invest heavily in production capacity, but if they overinvest, they'll never make any money with the venture once the spike of launch demand is fulfilled and demand levels off to a more predictable rate. But such heavy investment would saddle companies with high-cost factories that do nothing but sit idle and cost money.
Stockpiling products in preparation for a big launch is also impractical, as this (a) delays launch (and therefore recoupment of development costs), and (b) greatly increases investment in inventory. Storing money in the form of inventory is a very bad idea.
What's the solution? One possible way out of the problem, according to Veeraraghavan: "You are able to underinvest in capacity a bit if you're able to manage customer perceptions." In other words, if you can convince customers that the long launch lines are a result of unforeseen strong demand, you can make sure that they'll keep trying to obtain your product until it's finally on store shelves. To put it another way, long lines at launch are inevitable, especially in the games industry where customers are wont to use the presence (or lack) of a line as a measure of product quality.
[Image credit: PSP launch lineup at the Sony Metreon, from FloatingMonkeys.com]
