Technology

Apple Watch shortages and the art of inventory management: Control Shift

Andrew Sadauskas /

Late last week, Apple began taking orders for the Apple Watch, a product I previously described as a make-or-break device for the smartwatch market.

Figures suggest 957,000 people in the US pre-ordered an Apple Watch on Friday, with the first units set to ship on April 24. Unfortunately, some people have already written to tech sites to complain that their order won’t ship until June, July, or even August.

While the long waits might provoke complaints from some users, from a business perspective there are good reasons why it’s an incredibly sensible way to handle a product launch – especially when that product is the first in a new category.

 

When inventory gets fiddly

 

Consider this: According to IDC figures, Apple shipped a total of 192 million smartphones worldwide in 2014, out of a total worldwide market of 1.3 billion smartphones.

If even 5% of those iPhone customers pick up an Apple Watch, that’s 9.6 million units. If it’s 10% of iPhone owners, that’s 19.2 million units, and if 20% pick one up, that’s 38.4 million units.

The problem is that ahead of the launch, Apple had no way of knowing for certain whether it would need to manufacture 9.6 million, 19.2 million or 28.4 million units this year. And the demand could turn out to be far more – or perhaps far less.

The issue is further complicated by the fact that there are three basic models Apple is selling, and beyond an educated guess, it has no way of knowing what the sales breakdown will be between the three models.

The tricky thing with inventory management, especially at this sort of scale, is that getting it wrong can turn an otherwise successful product launch into a business disaster.

 

Pac-Man fever

 

A good example of how an otherwise successful launch can go wrong as a result of bad inventory planning happened at Steve Jobs’ first employer, Atari.

In 1982, Atari created what was (at the time of its release) the most successful home video game ever: Pac-Man. This is a game that flew off the shelves, with 7 million copies sold worldwide. Unfortunately, Atari manufactured 12 million copies – 5 million more than it needed.

Despite having already sold an exceptional number of copies (for the era), retailers were eventually forced to deeply discount the product to try to clear their inventory of the game. By 1983, the 5 million unsold copies of the game were dumped in a landfill in Alamogordo, New Mexico and covered with cement.

And that happened in the days before social media. Just imagine what the reaction would be today on Facebook or Twitter if Apple attempted to dump an oversupply of products in a similar fashion!

It’s a prospect that has no doubt caused some at Apple to have a few sleepless nights as the launch day approached.

However, Apple has taken a number of crucial steps to make sure they don’t turn their own successful launch into a repeat of the Pac-Man fiasco.

 

Dodging the ghosts of bad inventory management

 

The first step Apple has taken is to make sure that the watches are only demonstrated through its own stores, and are only available to be ordered through its website.

Aside from its own salespeople giving customers the best possible impression, it also means that there is no large number of units being shipped to third-party retailers. And, if Apple does manage an oversupply, this means there won’t be any deep discounts being offered to clear unwanted inventory.

The second step is to begin taking pre-orders months ahead of when it expects those units to ship, and then scaling up its production to meet demand. On the downside, customers will have to wait a couple of months or more before their watches arrive. But at the same time, Apple won’t be stuck with a large number of units it can’t sell.

 

Lessons for the rest of us

 

So that’s well and fine for Apple, but what are the lessons for those of us who don’t have the sort of brand loyalty that allows us to fret about how many how many blocks the masses will queue on launch day?

A growing number of small businesses have turned to crowdfunding websites such as Kickstarter, Indigogo and Pozible in order to take pre-orders for upcoming products to take pre-orders in a manner similar (but on a much smaller scale) to what Apple is doing with the Apple Watch.

An example of an Australian company that has taken such a path is Microbric, which used a Kickstarter campaign to take pre-orders for Edison, an educational toy robot that’s compatible with Lego bricks. It ended up raising $104,958 from 1153 customers placing their pre-orders ahead of their devices shipping.

Of course, even with the pre-order path, there are still headaches and ways the whole process can go horribly awry. But even so, having the certainty of customer orders ahead of when you go into production is in many cases a better option than finding out you’ve overestimated how many watches you’re going to sell – or that Pac-Man is hot on your tail.

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Andrew Sadauskas

Andrew Sadauskas is a former journalist at SmartCompany and a former editor of TechCompany.

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