Tuesday, January 28, 2014

Inventory strategy for “Microsoft Surface” too hot to handle?

This weeks reading on managing inventory had me revisit the Microsoft Surface fiasco as it had me wondering what strategy did Microsoft adopt for its launch. This scenario is a perfect example of the core inventory strategy metrics gone haywire. Unable to properly synchronize their Operational Performance to minimize variability they fell prey to deteriorating customer service. Microsoft was unable to satiate unhappy customers who had more expectations for the RT tablet. This made their Inventory related costs rise sharply and wreck havoc with the quarterly profits. Taking that further Microsoft again repeated the same mistake with Pro’s launch, this time due to an underage, which threw them into a vicious cycle eventually costing them their current CEO. Let us examine the product launch and how Microsoft did subsequently for its inventory strategy:

Inventory strategy Metrics: Customer Service, Operational Performance & Inventory Related Costs

Microsoft late to jump onto the tablet bandwagon, made its debut in October 2012[1], with the launch of much anticipated Surface RT and Surface Pro tablets. However, things went awry for Microsoft.
Influenced by Apple’s strategy, Microsoft put a lot of focus on selling the RT tablet in their own retail stores. They envisioned fans camped outside retail stores during launch day, which backfired. Unlike Apple, Microsoft just has 32 retail stores[2] in the US, which meant that only a fraction of the population had access to the product during launch.
Source: http://gbr.pepperdine.edu/tag/strategy/

Second, their poor pricing strategy made it hard for them to justify the 43% profit margin. Microsoft did not realize the saturation level of the tablet market where demand had become very elastic with all the lower priced alternatives on the market. Their relatively new overpriced tablet was hardly going to create waves against giants like the weathered Apple iPad. Other factors include abysmal product specifications and high cost of essential accessories like the touch cover.

Source: iSuppli[3]

Microsoft therefore, designed a product that did not meet customer expectations exacerbated by a weak distribution channel. So pitting all hope against their Windows 8 platform Microsoft shipped 1.25 million Surface RT devices in Q4 which not surprisingly, were way off than what they had forecasted. Their actual sale figures came out to be somewhere between 680,000 -750,000[4] which meant that Microsoft had an overage worth of 53,500 devices.
The fiasco did not end there. Surface Pro, was set to launch shortly in Jan 2013 but kept getting pushed back till late February. Microsoft still shaken by the poor performance of RT again made a miscalculation for its premium Pro tablet. To test waters Microsoft only shipped an estimate of 10,000 units on its launch.

250-300 customers eagerly wait for Surface Pro on launch day

In contrast to Surface RT the Pro features a fully functional copy of Windows 8 Professional and instead of running on crippled hardware, it sported Intel’s latest line of chipsets. This device had actually turned quite a few heads and garnered media attention, which meant that demand for Pro was not going to be as bleak as RT. Unfortunately tough, They ran out of devices to sell having a severe underage not to mentioned angry customers.

Microsoft Stores
Best Buy


Plagued with oversupply and undersupply problems, Microsoft, in June 2013 incurred heavy losses due to overestimated demand, forcing them to write off $900 million due to excess Surface RT device inventory[6]. They had overestimated demand by approximately 6 million units. In a desperate attempt to get rid of the excess stock Microsoft slashed prices by roughly 50%. The retail price with the touch cover was about $600 whereas Microsoft slashed the prices to $350.

So what made Microsoft, a company that takes pride in its accurate demand and supply estimation falter in this scenario? 

  1. Did the product require a new inventory strategy than what Microsoft had traditionally been doing for their software division?
  2. Was Microsoft unable to account for demand variability in their inventory strategy?

To me, it seems that the tablet was a fast moving hyped up item which would have sold the most during its launch phase like the Apple devices or like the fashion apparel example we did in class. Once Microsoft got off the wrong foot, they were unable to keep up with the swift changes in demand and customer expectations, creating a lot of variability in their inventory management system.
I think the issue may not have been directly caused by their inventory strategy, rather it could be blamed on lack of cross functional collaboration as suggested by McKinsey in their article (Building a flexible supply chain for uncertain times)

“How should manufacturers respond? First, they must make supply chain decisions more quickly: in the face of unprecedented volatile demand, business-as-usual calendars for forecasting, budgeting, and planning won’t do. Companies that adhere rigidly to unrealistic plans may find themselves sitting on piles of inventory or fighting price wars.” [7]

What if Microsoft was able to respond promptly to customer demand by adjusting their inventory strategy? Lets say that Microsoft was using a multi period model managing Surface’s inventory and reduced the number of orders to suppliers per quarter by a significant number or visa versa. What effect would that had on the suppliers? We know that Microsoft ended up writing down an excess of 6 billion units costing them $900 million what if they had shifted the impact to the suppliers?

This raises another question: Would Microsoft have induced a bullwhip effect on its suppliers had it responded quickly to consumer behavior and would it have tarnished their relationship? What could be other factors that led them to keep mass-producing, could it have been large sums of money spent in research and development?

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