The Supply Chain Management

of Nintendo Company, Ltd.

A Focus on the Distribution of the

Console System

By: Tamer A. Sergany/900078784

OPMG-401: Supply Chain Management Dr. Steven Formaneck AUC School of Business

Table of Contents

Executive Summary

Nintendo Company LTD.

The Wii and its Supply Chain Process

Distribution Difficulties

Next Nintendo Steps

Appendix

Works Cited/References

Executive Summary

A primary video game manufacturing company, Nintendo Co. LTD, has always been one of the major competitors in the video gaming hardware and software industry. By understanding the company’s history and development over the years, one can better understand their business strategies and development. In November and December of 2006, Nintendo launched its latest console for the seventh generation of video games globally called the Wii (IGN.com). It was extremely successful in sales and had an enormous demand due to its new technology, its minimal price and uniqueness against the other competing consoles (Sony’s PS3 and Microsoft’s Xbox 360).

However, for some reason the Wii (in its early years of its generation) was always in short supply and as well as continuously out of stock. Some believed that Nintendo was not a company that was capable of efficient distribution, nor had the production capacity or sufficient resources to meet the high demand of its product. Other critics believed the Wii was withheld purposely to continue be highly demanded on the market. In either case, the company’s supply chain needs analysis in order to fully comprehend the difficulties (or dodgy tactics) Nintendo had in terms of its production and distribution of its Wii console. Also, Nintendo plans on launching a new console product in 2012, and thus should look at its past experience in order to improve its supply chain management.

Figure 1- The Nintendo Wii Console and Controller (get-free-wii.com)

Nintendo Company Limited

The video gaming industry has been around for over 50 years, where presently the only surviving three competitors are Nintendo (with the longest experience in its field), Sony, and Microsoft, the newest entrant to the field. By understanding the current aspects of the industry, one can better understand the necessary supply chain strategies just to survive within this volatile and ever changing industry. In order to cover the R&D costs of making a new console as well as software, and just to be considered a profitable player in this industry, the companies all have a global market, split into regions, each with their own supply chain strategies and distribution centers. The lifecycle of each product within the industry is termed a “generation” where each generation usually lasts from 5-7 years. Thus, right off the bat, one knows that on an average every 6 years, a new product must be launched in order to survive and shift to the next generation of the industry. (For Nintendo product history and generation cycle, see exhibit A)

Nintendo started out as a card manufacturing company producing Japanese Hanafuda cards, briefly entered the toy making industry and failed miserably, then decided to enter the video gaming industry around the mid 1970’s, but hit major success a decade later (Nintendo.com). Nintendo’s strict translation from Japanese to English is “leave luck to heaven,” but it seems luck is on earth as well for Nintendo. After discovering their creative and competitive talent in video game manufacturing, the company has since been the third most valuable company in its nation, and has sold 565 million hardware units coupled with 3.4 billion

software units (Nintendolife.com).

On Nintendo of America’s corporate website, it begins its mission statement and philosophy acknowledging and being proud to be the world’s leading company within the industry, where emphasis is placed on the quality of their products and respective services, the assurance of their delivery, and placing great value to the customer. The second part of their mission states that their employees are just as important, where they define and set the standard of quality of their products and

services. From this mission statement and corporate beliefs, Nintendo highly values the quality of products they distribute, the importance of delivering those products, and the satisfaction of the consumer. Therefore, Nintendo places a higher importance on vertical integration of the supply chain as opposed to horizontal.

With this being said, it makes clear sense, and follows with their corporate beliefs to have an extensive and thorough distribution network. Although this multinational company is based in Kyoto, Japan, Nintendo has carved up the globe into 6 regions: North America (which has its own domestic distributor list), Africa & Middle East, Asia, Australia & South Pacific, Europe, and Mexico/South America/ Caribbean as mentioned on their corporate website. Nintendo has a major key distributor for each of its regions, along with certified sub distributors for specific countries within that region. With this distribution layout, Nintendo can easily cover the globe and supply its products to almost any country on all seven continents. With 10 distributors in the US alone, plus an additional 29 distributors to cover the globe, Nintendo was not joking when it emphasized the delivery of their products (Nintendo.com). Also, it is primarily Nintendo and its sub companies (ex: Nintendo Europe, Nintendo Australia) that handles distribution of over half the world. (To see the overall distribution list, see exhibit B)

With so many distributors shipping to retail stores, Nintendo successfully covers shipping to actual stores and wholesalers, but what about online purchasing and retailers you say? Well according to Nintendo’s home site, it has exactly 25 different certified retails from Amazon.com and Gamestop.com to Toys ‘R’ Us and Wal-Mart. These retailers, where most have both a physical store and an online shop, have helped Nintendo efficiently hold its products across the States, and even internationally as well. Retailers replenish their Nintendo product stock via a process of pulling. Each retailer gives their demand of the products they want and Nintendo delivers. In cases of a new launch product or software, Nintendo of America follows a push strategy in terms of delivering the product to different retailers that may be interested in purchasing it. Thus Nintendo pursues a mix when selling its products: that is, they can be found primarily in the mentioned retail stores, or be purchased online. Nintendo neither favors nor disregards its outlet options, and sells both to wholesalers, retailers, and online stores!

In terms of pricing, the industry usually has high prices for each generation due to the heavy costs of R&D, testing and production of each console. Each console, depending on its internal hardware and cost of production (labor, materials, overhead, etc), will be priced differently. However and even more so in the video gaming industry, some companies pursue

Freebie Marketing otherwise known as Razor and Blade Business Model. This model, which is being followed by all 3 major competitors, entails selling the main console at a loss, while the complimentary component (the software) is the profit generator. It is also coined Freebie marketing, because the company sells its product below cost, with hopes that the product will penetrate consumers and increase in popularity, therefore accumulating enough sales to become profitable again.

Another major trend in the video gaming industry that became a norm (at least for Nintendo) was the idea of backwards compatibility. Consumers have long wanted to be able to play older games from the same company, and with the latest-to-date technology and hardware, many consoles now have the ability to play previous system software on that system. However, some versions of the Xbox 360 and PS3 have enabled backwards compatibility at an additional cost, while other versions have not built in that feature at all. Looking at the Wii console in terms of a “worth your money/long lasting” product, it certainly wins. Not only is Wii built in with backwards compatibility in every system, it provides a download service that enables customers to purchase software from any platform of Nintendo as early as 1985! The Wii console, can thus be looked at as a more standardized product, with its functionality, its superior product design (which includes light weight and compact size), as well as its services. By having one product, with a design and system capable of being adjusted to the preference of the customer, it attracts more people to buy it and also helps Nintendo in terms of costs.

We Want More Wii’s

Nintendo, when it came to pricing of its 7th generation console, was extremely clever. The main strategy was to build a much less powerful system (in terms of hardware, graphics, system components, etc) as compared to its competition but can be sold at a much cheaper price than the others. Also, with the Wii’s motion sensing and innovative technology, it was able to attract not only hardcore video gamers, but also casual and infrequent gamers as well. The idea implemented by Nintendo for its Wii that video gaming should not be limited to young adult males, (which is often the main target market for the industry) but also included adults, elderly, women, and families as well. By creating the Wii to suit all these segments, Nintendo geared itself for a much better sales return overall than its competitors. (See Exhibit C for specific amounts shipped to retailers).

Unlike the Xbox360 and PlayStation 3, the Nintendo Wii, whose internal hardware was less powerful, yet much cheaper, was able to bring down the consoles price a few hundred dollars compared to the others. The prices of each console were as follows at launch (and have followed price cuts as the generation continued):

Nintendo Wii, Date Launched: November 19th 2006. Launch Price: 250 USD Sony Playstation 3, Date Launched: November 11th 2006. Launch Price: 600 USD (60

GB)

Microsoft Xbox 360, Date Launched: November 22nd 2005. Launch Price: 400 USD

This not only helped out in terms of number of sales and popularity, but allowed Nintendo to be accumulating profit from the start. Thus although all 3 competitors used a razor and blade marketing strategy, it was solely Nintendo that was in the black from its first sale of its Wii on a per unit basis. Of course, it would take countless of millions of Wii sales to actually start making a profit on the entire consoles launch. However, again due to its cost efficiencies and ability to exploit savings, with every Wii sold, Nintendo made a marginal profit off it, from its original unit cost. (An example to clarify, exact numbers sourced at engadget.com and confirmed by joystiq.com, would be that it cost Nintendo approximately US$ 158 [raw material, technology, manufacturing, labor, overhead] equivalent in Jap ¥, yet sold for an initial price of US$ 250. Thus for each Wii, Nintendo had made a $92 marginal profit).

Not only that, but it was Nintendo that had the least SKU’s in the 7th generation. Both Microsoft and Sony launched around 9 and 10 different versions of their console respectively. This made purchasing f the two consoles a hassle to customers, where they would not find the specific version they wanted or the memory size available, where as Nintendo, only had two different versions of the Wii, the only difference was a single price cut and a sleek black colored system.(For a detailed table of the different console versions and prices, see Exhibit D) Therefore, it was only practical that setup and production costs for the other two competitors were extremely higher than that of Nintendo’s, due to the numerous versions of their consoles, each with different components (7th Generation Consoles).

Kotaku, an online video gaming news site, has reported that in Dec. 2007, only a year later after Wii’s launch, the production run (at that time) was 1.8 million a month and still experiencing shortages within America. Brian Crecente, Editor in Chief of Kotaku explains his talk with Nintendo of America’s (NOA) president and COO, Reggie Fils-Aime who confirmed that the distribution workforce (within America) has tripled to meet demand. Only half a year later in April 2008, Kotaku reported that although the Wii only sits on retail shelves for about an hour, Nintendo was playing it safe with a production run of 2.4 million a month, keeping the downward economical trend of America in mind. With steep demand not letting up, and a high production force in its early years, many criticized Nintendo for withholding its supply, in order to sustain a fabricated popularity and high demand throughout the generation’s years. Whether the Wii system was in short supply and simply could not meet its demand or Nintendo purposefully withheld its supply to counterfeit an extremely high demand, either case led to a negative response from both supply chain and distribution analysts, and Nintendo fans/critics alike.

Figure 2- Inside look at Nintendo factory in North Bend, WA (Kotaku).

Thomas Wailgum, of CIO News looks at both situations and deemed that whatever the case was, Nintendo has given an image to its global market that it either was not prepared for such drastic success of its 7th generation console product and did not have the sufficient resources, or that Nintendo had practiced a “shrewd marketing strategy…to artificially keep demand high,” (Wailgum). However, within the same article Wailgum explains that Nintendo was indeed playing it safe in terms of leaning toward rather succumbing to not meeting demand entirely, aka underestimating demand. It makes logical sense, as Wailgum continues that, demand be met bit by bit not only to stretch out the life cycle of the product at the expense of a slightly lower service level, but also to avoid the dangers of overestimating demand, and having excessive inventory costs as well as unwanted obsolete product that cannot be sold. Thus the withheld supply, and slow steady increase in production of the Wii console was done to counter two negative effects within supply chain management: the build-up of high amounts of inventory, which accumulate to unwanted inventory costs, and avoid the costs of having surplus product, or in this case, the excess cost.

Next Nintendo Steps

Although Nintendo is generally a more efficient company in terms of supply chain strategy, it has portrayed its ability to be slightly more responsive in terms of supply-demand forecasting. After the Wii hype was gone Nintendo started cutting back tremendously on production. This was an example of its responsiveness to the markets demand of the Wii. However, usually in the beginning of each gaming generation, by accurately forecasting its sales, the company can focus primarily on efficiency within production and distribution, due to the fact it has studied the market for quite some time. Although responsiveness is important in the video gaming industry, such as choosing when to launch a product, Nintendo clearly favors its efficiency strategies over having superior responsiveness. Due to the industries nature, and rapid improvement of technology, a new product typically comes out every 5-7 years. In this respect, responsiveness is essential, but over the course of the 4th to 7th year of the same product, it becomes a cash cow on the BCG matrix, where the company milks sales. In order to actually have this cash cow beneficial, it’s essential that the company be efficient in the costs of its production, distribution, advertising, etc. For example, if we look at Nintendo’s next steps, it has moved the Wii into the cash cow section, with its latest price cut dropping the Wii’s cost to $150, trying to squeeze out the last of its sales. If Nintendo was not following an efficient supply chain and favored a responsive one, it would have long launched its next generation product. Instead, due to its practicing an efficient supply chain strategy, which is being cost effective, or production efficient, it has successfully captured the profitability and benefits in the Wii’s current life cycle stage.

Confirmed in 2012, Nintendo will be launching a new console product to begin the 8th generation of video gaming industry. Although the product specs’ are highly speculated, it is said to be even more advanced and tech-creative than the last. This brings new opportunity to Nintendo, as well as another task it must successfully accomplish: producing a high quality product, making sure it is delivered efficiently, where customers are regarded as to priority for the success of its launch. By looking at Nintendo’s past history, especially the slight criticism it had when facing imbalance between the Wii’s demand and supply, it is essential that Nintendo do more accurate forecasting and consumer research so that it can better determine the trend of the new products demand and sales. According to its most recently released financial statements, Nintendo has poured a lot of capital and R&D funds for this progression project and future launch, so let’s see where this investment takes them in the future.

Appendix

Exhibit A- Nintendo Product/Generation Movement

Year System Image1985 Nintendo Entertainment

System (console)

1989 Game Boy (handheld)

1991 Super Nintendo Entertainment System

(console)

1996 Nintendo 64 (console)

Game Boy Pocket (handheld)

2001 Nintendo GameCube (console)

Game Boy Advance (handheld)

2006 Nintendo Wii (console)Nintendo DS lite (handheld)

2012 ??? Confirmed New Console to succeed Wii

???

Exhibit B- Region Distributor Table

Region Major DistributorsUnited States & Canada D&H Distributing, Jack of All Games,

Mecca Electronic IndustriesAfrica & Middle East Active Boeki, Core Gaming Systems Ltd.,

Nintendo EuropeAsia Active Boeki, Mani Ltd., Nintendo Co. Ltd.

Australia & South Pacific Nintendo AustraliaEurope Nintendo U.K, Nintendo Europe,

Stadlbauer MarketingMexico/South America/Caribbean Latamel Inc.

Exhibit C- 7th Generation Product Sales by Region

ConsoleUnits shipped to

retailers (worldwide)

Units sold to customers in Australia

Units sold to customers in

Canada

Units sold to customers in Japan

Units sold to customers in the

US

Units sold to customers in

Europe

Wii 86.01 million[139]

(as of March 31, 2011)2 million[140]

(as of October 2010)2 million[141]

(as of December 16, 2009)11.45 million[139]

(as of December 31, 2010)35+ million[142]

(as of February 28, 2011)24.9 million[143]

(as of December 2010)

Xbox 360 53.6 million[144]

(as of March 31, 2011)

1 million[145]

(as of April 20, 2010 and include sales from New

Zealand)

870,000[146]

(as of July 31, 2008)1,235,049[147]

(as of February 28, 2010)25.4 million[143]

(as of December 2010)13.7 million[143]

(as of December 2010)

PlayStation 3 50 million[148]

(as of March 29, 2011)1.1 million[149]

(as of December 31, 2010)1.5 million[150]

(as of October 6, 2010)5 million[151]

(as of April 11, 2010)15.4 million[143]

(as of December 2010)14.7 million[143]

(as of December 2010)

Exhibit D- Different Console Versions and their Price Cuts

Xbox 360 (9 Versions) Playstation 3 (10 Versions)

US $299.99 (Core) (discontinued)

US$399.99 (Premium - 20 GB)

(discontinued)*US$249.99 (Premium - 60 GB)

(discontinued)

US$479.99 (Elite) (120 GB) (discontinued)

US$299.99 (Arcade - 256 MB internal memory) (discontinued)

US$199.99 (Arcade - 512 MB internal memory) (discontinued)

US$299.99 ("Super Elite") (250 GB) (discontinued)

US$299.99 (Xbox 360 S - 250 GB)

US$199.99 (Xbox 360 S - 4 GB internal memory)

US$499.99 (20 GB)[91]

(discontinued)

US$599.99 (60 GB)[91]

(discontinued)*

US$499.99 (80 GB - old)[92][93]

(discontinued)

US$399.99 (40 GB)[94]

(discontinued)

US$399.99 (80 GB - new) (discontinued)

US$499.99 (160 GB) (discontinued)

US$299.99 (120 GB "Slim") (discontinued)

US$299 (160 GB "Slim")[95]

US$349.99 (250 GB "Slim")[96]

US$399.99 (320 GB "Slim". Only with PlayStation Move)

US$249.99 (white console with Wii Sports included) (discontinued)*

US$199.99 (white console or black console with Wii Sports, Wii Sports Resort and Wii Motion Plus included; red console packaged with Wii Sports and Super

Mario Bros. Wii)[34]

US$149.99 (white or black console with Mariokart Wii) Most recently done price cut as of May 18th, 2011

*Bolded Products are the main selling console version for each system. **Prices in terms of United States Launch Prices

Works Cited/References

Ashcraft, Brian. “Nintendo to Increase Wii Production to 2.4 Million a Month.”Kotaku April, 2008

http://kotaku.com/383472/nintendo-to-increase-wii-production-to-2.4-million-a-month

Crecente, Brian “Nintendo Triples Wii Distribution Workforce, I Talk with Reggie.”Kotaku December, 2007

http://kotaku.com/333945/nintendo-triples-wii-distribution-workforce-i-talk-with-reggie

Hodgdon, Jeff. “State-of-the-Art Direct Distribution at Nintendo of America.” Grainger Center for Supply Chain Management. May 2001

http://wii.ign.com/articles/732/732669p1.html

http://history-of-video-game-consoles-seventh-generation.co.tv/

http://mosaic.cnfolio.com/M528Coursework2009C115

http://online.wsj.com/article/SB10001424052748704132204576284311572084674.html

http://en.wikipedia.org/wiki/Console_manufacturer

http://www.engadget.com/2006/12/15/wii-manufacturing-costs-ring-up-to-just-158/

http://www.joystiq.com/2009/04/08/nintendo-comments-on-wii-manufacturing-costs-not-planning-price-cut/

http://wii.nintendolife.com/companies/nintendo

Nintendo Corporate Website © 2011

http://www.nintendo.com/corp/mission.jsp http://www.nintendo.com/corp/faq.jsp http://www.nintendo.com/corp/distributors.jsp http://www.nintendo.com/consumer/retail/retail_retailers.jsp http://www.nintendo.com/wii/console

Wailgum, Thomas. “Nintendo Wii Repeats Gaming History Again: Defeats Supply Chain Critics.” CIO News.

http://advice.cio.com/thomas_wailgum/nintendo_wii_repeats_gaming_history_again_defeats_supply_chain_critics