Nintendo’s Switch Outlook is Sign of a Bottleneck

After the failure that was the Wii U, Nintendo has been experiencing increasing demand off of their new product, Nintendo Switch, which came out in March 2017. They have been able to net $144.8 million in operating profit in the April-June quarter, a huge improvement from last year when they lost $47 million in that same quarter. While this may seem like excellent news, Nintendo has had a difficult time matching the demand of the product, especially with new titles coming out during the past holiday season.

All of this has been due to the aforementioned demand and the supply shortages of multiple components that make the Nintendo Switch – creating an unfortunate production bottleneck. The bottleneck has become such an issue that many people have paid a premium for the item, often paying 1.5 to 2 times the original price through lotteries or auction sites.

As an operating manager, it is important to figure out where the bottleneck is directly to solve the problem, and increase the flow rate of the system in place to match demand. Certain problems in the supply chain, such as receiving the raw materials and putting the components together in the factories, may take more time than Nintendo wants and they should figure out a way to appropriately solve it. As mentioned in class, an hour lost on one part of the bottleneck is an hour lost on the entire system of operations. If Nintendo is losing considerable time receiving components from suppliers, they may not be able to produce enough units for retail.

The articles mentioned their sales units in the April-June quarter were around two million, and the managers at Nintendo think they can sell ten million units during the fiscal year itself. This would put them below the expected financial prediction many analysts had them at (around 15 million), and would be a disappointment for such a high demand product.

The question really is whether or not Nintendo should slow their rollout of the Nintendo Switch to match the bottleneck instead of the demand itself, or continue their process as is. There are concerns on both sides. A slower rollout could mean less sales at first, but a solid understanding of the production line and bottleneck problem. Continuing their current method, in hopes they can meet demand somehow, would guarantee them solid sales and lower inventory costs, but they would not be able to realize their full potential long term. There are pros and cons to each side of the decision.

Nintendo’s financial statement for the fiscal year comes out this March. Hopefully they meet the 10 million unit expectations held by stockholders to meet demand and earnings. Sure, they have netted quite a bit in profit so far, but problems can arise if the bottleneck is not solved fully.

So put yourself in the shoes of the Nintendo operations manager. What do you do in this situation if revenue potential is not realized? Do you slow rollout? Do you continue the current process? Or is there another recommendation that can solve this issue fully?

https://www.wsj.com/articles/nintendo-sticks-to-its-switch-sales-forecast-1501054000

https://www.ft.com/content/7bafad44-95cd-11e7-a652-cde3f882dd7b

10 thoughts on “Nintendo’s Switch Outlook is Sign of a Bottleneck

  • February 27, 2018 at 4:25 pm
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    Nintendo is facing a long term bottleneck cause by the fact that their suppliers are uncapable of meeting Nintendo´s demand. Not only the suppliers, the whole production system is uncapable of meeting the demand. There is also a short term bottleneck because the incresing in the demand is caused by a puntual event; the failure of Wii.
    So, in order to deal with this bottleneck Nintendo needs to think about the long term, because this increase in the demand has shown them that their systme is uncapable of meeting that amount of demand, so they need to improve it and make it capable.
    So, I do not believe that a solution is just going on with the current process because, even though these demand is termporary, in the future they could face another incremental demand and they need to be ready for that.
    In this case we are talking about a bottleneck caused by long wait times; they are waiting too much for the suppliers, so they need to increase the efficiency of the bottleneck step, and a way to do it is either changing the supplier, negotiate with them or negotiate with different suppliers.
    https://gravityflow.io/the-most-common-workflow-bottlenecks-and-how-to-fix-them/

    • February 27, 2018 at 11:20 pm
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      Carmen, you make solid points about needing to correct the current process. I don’t know too much about the supplier relationship or manufacturing process that Nintendo employs, but I do believe that your tactics about changing its current supplier relationship is crucial to changing the bottleneck step. I’m wondering, however, if the bottleneck is not necessarily with raw materials, but rather with assembly or quality control? Today in class with the Lean System, we saw that often, if products were not assembled right, quality control had to take apart the defected ones and those were wasted. This meant that they could not be released and the time spent making them had been wasted. I’m hoping to see that the company can identity errors in the process and use some of the techniques in your article that alleviates tension from bottlenecks.

  • February 27, 2018 at 11:12 pm
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    I was really excited to read the articles about the Nintendo Switch, because I, myself, grew up with my beloved Gameboy, DS, and Wii products. And for many children and young adults, these products are a fond memory that also are cultural icons, probably also similar to game culture in many other countries too. It was sad to see the decline of Nintendo after the Wii and Wii U. But with their past failures, they were able to combine some of the best aspects such as multiplayer ability, portable game play, and release of original games such as a new Legend of Zelda and Mario game (with amazing graphics might I add!). The innovative release has certainly hyped up gamers and past Nintendo-lovers, but now the company has trouble keeping up with the demand which Brandon articulated. I definitely agree that there are concerns in both slowing rollout of the Switch to match bottleneck or continuing the process as it is. I believe, however, that if production continued as is for too prolong a period, customer satisfaction will wane considerably. Many customers now are willing to pay the higher price point on auction or resales sources and overlook glitches, but if the demand continues the scarcity, customers will make it very clear that the Switch is not worth all that. As suggested in class, Kaizen could be made more central in order to improve efficiency and reduce waste. I’m sure Nintendo, a Japanese company, values Kaizen and continually strives to reduce muda. It should continue to go forward with production, however, it should take a serious look at process mapping or cutting down on inefficiencies to match demand.

    Interestingly, Hiroshi Yamauchi, a past CEO of Nintendo, was not a fan of Kaizen. It was said he did not have the patience, and instead, welcomed originality and surprise. He took bold risks that led to many innovations and management decisions that build the Nintendo empire to what it is.
    https://www.ft.com/content/2129dd92-2207-11e3-9b55-00144feab7de

  • February 28, 2018 at 4:20 pm
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    I think a slower rollout could be the answer here. An element of exclusivity or a waiting list (but called something more desirable) could even increase social media chatter about the product as people are released from the list and get the first few batches of the product. This could definitely decrease sales or interest as well, but it would heavily rely on how the product would be marketed with this exclusivity factor folded in and the language around the product.

  • February 28, 2018 at 5:50 pm
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    When it comes to demand for a company like Nintendo it’s extremely important that demand is met quickly. Customers who buy gaming products often are very interested in getting the newest most advanced products and all complementary products that go with it. If demand is not met at the beginning then it is not likely that expected demand will recover as customers will turn to competition. A potential factor to consider with when it comes to continued or slower rollout is where Sony and Microsoft stand with their developments of PlayStation and Xbox respectively. If they plan to release a new product soon it’s important that Nintendo push as many Switches through as possible before the demand sharply drops. If there is not a future prediction of a sharp increase in competition then they can afford to slow rollout to match the bottleneck and work to resolve the bottleneck issues. In this case monitoring the industry should be a crucial factor in Nintendo’s decision.

  • February 28, 2018 at 5:50 pm
    Permalink

    When it comes to demand for a company like Nintendo it’s extremely important that demand is met quickly. Customers who buy gaming products often are very interested in getting the newest most advanced products and all complementary products that go with it. If demand is not met at the beginning then it is not likely that expected demand will recover as customers will turn to competition. A potential factor to consider with when it comes to continued or slower rollout is where Sony and Microsoft stand with their developments of PlayStation and Xbox respectively. If they plan to release a new product soon it’s important that Nintendo push as many Switches through as possible before the demand sharply drops. If there is not a future prediction of a sharp increase in competition then they can afford to slow rollout to match the bottleneck and work to resolve the bottleneck issues. In this case monitoring the industry should be a crucial factor in Nintendo’s decision.

  • February 28, 2018 at 9:42 pm
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    In is interesting that the high demand for the product does not match the supply of the product which is making people pay a higher price to obtain the product than the retail price. Nintendo can take advantage of the highly negative demand curve by essentially fixing the price on the Switch. Nintendo can limit the supply because customers are still willing to pay the additional premium to ensure they receive the device. These customers sit high on the demand curve and would pay more than the current price to buy the Switch. This is why I suggest they use a slower rollout strategy to to satisfy the high demand customers that are willing to pay the additional premium for the Switch. They can capitalize on the high sales while analyzing and solving their bottleneck issues, so that they can eventually meet the entire demand for the Switch by the end of the year, rather than stay at their current production rate and not be able to realize their full potential long term. This is a scenario where the product is hot and so additional investment in the production process and fixing kinks in the supply chain will exponentially increase profits in the long run even if they suffer small hits to the bottom line in the short run.

  • February 28, 2018 at 10:37 pm
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    Brandon I loved reading your article, great work. It is actually really funny you wrote about production constraints because I just wrote about similar issues Apple is experiencing with their operation bottlenecks as well. You mentioned slowing down rollout or continued process but both of these options had downsides. Maybe they should take a page from Apple’s book and follow their lead by creating two almost identical versions of the product, one being much easier to make, that way the two versions slow down the consumption. Now, Nintendo has more time to produce the Nintendo Switch while still profiting from a cheaper, more efficiently made version of the product. Another idea may be to slow production of games while they focus on making the Switch. http://comicbook.com/gaming/2017/11/19/nintendo-switch-improvements-in-2018-online-third-party/
    I read an article that actually states this fault in Nintendo’s supply chain isn’t a new occurrence, it’s actually been happening for years. It has become a regular event for disappointment among consumers, happening several times with their Amiibos and with the Wii U. The NES classic also should’ve sold millions but again, it fell short of even a few hundred thousand. So why can’t they find the bottleneck? Upper management could be to blame for setting unreasonable deadlines that product development struggles to meet. Revamping their process design may be the next step for Nintendo. It may be difficult at first, but it could provide numerous benefits in the long run. https://www.linkedin.com/pulse/nintendos-latest-supply-chain-disaster-what-can-we-learn-nick-milani/

  • March 1, 2018 at 8:14 am
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    Nintendo is facing a difficult supply chain bottleneck which has limited their production to far less than demand. Since it is impossible to feasibly crash the time it takes to produce a single switch, I recommend that Nintendo take on a pricing strategy similar to Apple’s in order to maximize profits. Nintendo has long been one of the largest names in the video game market, being one of the first to break into the industry in the 1970s. This has given it a massive cult following and has released some of the most popular and highest ranked games ever. Due to their supply issues, fans have been going out of their way with time and money in order to acquire the Switch at vast expense and effort. Nintendo should begin to implement a premium pricing model on their product. Most game developers will typically sell game consoles at breakeven or even a loss so that they will then make up their money on the games they can sell, however the Switch’s demand does not seem to have this problem. Apple adopts a premium pricing model on almost all of their products to reflect their quality and show to their customers that they are the best in the market, or at least give off this appearance. Nintendo should do this, so that they not only begin to take home larger margins, but also solve their supply issues, because as raising the price will drive demand for the product down so that they are able to meet all of their orders. Then as time goes on you can slowly lower the price so that everyone who desires a switch can then buy it at their preferred price point, allowing Nintendo to take full advantage of those willing to pay more for their product. Apple has done this consistently with their products, most notably with the iPhone X, with a initial price tag of $1,000. However of the course of the next few months this price will be cut to $900 and eventually to $800 as newer models release allowing those who couldn’t afford it previously to enter the market and eventually purchase the product. This would not only solve Nintendo’s supply issues but also pad its bottom line and seems to be the perfect solution.

    https://www.billboard.com/articles/business/7964782/iphone-x-apple-pricing-strategy-analysis

  • March 1, 2018 at 8:29 am
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    As Isabella stated, I feel like this is not a new issue for video game systems. When the Wii was first released, it was sold out at virtually every single store. With so much hype behind them when they are released, along with the added connectivity factor of being able to play with all your friends online, this problem with fulfilling demand is prevalent for not just Nintendo, but Microsoft and Sony as well. These three companies have always struggled with projecting demand, not to mention the incredibly stiff competition between them. It is certainly no easy task, like I said previously, when choosing what system I had wanted when I was younger, my order winner was what system my friends had so I could play online with them. Nevertheless, I like Brandon’s idea of analyzing what Sony and Microsoft’s plans are, as if they don’t consider the releases of new a new Xbox or PlayStation and simply vamp up the production process, they could be left with a significant amount of excess inventory.

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