Shortages and Gluts: Till Dearth Do Us Part
A reseller?s approach to product shortages or glutscan make the difference between winning and losingcustomer loyalty. Guy Clapperton reports
About 18 years ago, a friend of mine wanted to buy a computer for his home. His name will remain confidential, but he was colloquially known around the neighbourhood as Local Smart-Arse. Anyone who demanded a home system in 1978 or 1979, at the age of 14, would have been called that ? we?re not talking PCs or anything useful here.
So we went to a dealership he knew in London, and from the look on the faces of the owners ? that?s right, beards and beer guts (and the men weren?t too appealing either) ? he?d been there before. That was where I learned my first piece of computer manipulation. There were loads of boxes on display by a company called Tuscan. Half had what looked like amazing graphics on them ? green lettering on a black background saying ?Tuscans are magic? or some such deep phrase ? and the rest had those letter-drawings of Snoopy that everyone found totally thrilling for reasons that nobody can quite remember now.
Anyway, Local Smart-Arse didn?t find the system he wanted. Quite unaccountably, nobody had invented Windows yet so it all looked a bit complicated, but we did make a little contribution. By the time we left the shop, all the ?Tuscans are magic? slogans had been replaced by the more accurate ?Go home, it?s out of stock?. The indulgent smile on the face of the proprietor turned into a sort of manic rictus, and I?ve been known affectionately as You Little Shit by dealers around the country ever since.
These days, of course, if I were to commit a similar act of sabotage, it would be a different story. First, I am 32 as opposed to a precocious 14, so it would be prattish rather than clever. But more importantly, perhaps, shortages are now a serious business ? they hold up your cash flow and damage your chances of controlling business. Gluts do the same thing, only from the other angle. It is important to understand the causes of both, and how to insulate a business against them.
One relatively easy means of protecting yourself is to persuade customers to be flexible about exactly what they want on a system, so if supplier A, for example, runs out of memory, supplier B can be substituted painlessly. Granted, the Intel Inside strategy ensured that customers became more interested in what?s under the bonnet, but for most, if a computer is going to work OK, then that?s pretty much sufficient.
Depending on who they are, customers have no reason to insist on a particular supplier for a particular component. That said, it can be a mistake to put just anything in a machine to get it out of the door. Malcolm Jamieson, MD of mail-order firm Crown Computer, suggests this is a business hazard to be avoided. ?It is critical that you end up with a good quality product. I like to think our Vtech range has a brand image of its own, so we would never put just anything in because we can get it as a matter of strategy.?
There can be many explanations for an uneven supply of product, but if it looks as though it?s going to happen to your business, the first thing to do is to call the customer. ?We are normally frank with them,? says John Chadwick, MD of accounts specialist Minerva Computing. ?We don?t carry stock because we?re almost entirely software-based, so if we can?t get something, we say so.?
After this, there are a few options. Number one, the big no-no at first glance, is to lose the business by admitting you can?t supply a product ? for example a CD-Rom drive. Number two, the bigger no-no in real life, is to find a cheap drive that will under-perform (or ?break down? in English) and lose you the rest of your customers as word spreads.
Because it would be libellous, it is not possible to name the former PC vendor that once overtook IBM in its home market, bought in a load of cheap hard disk drives to make up the volume and saw the bottom fall totally out of the market ? to the extent that it had to withdraw a few short years later. At least one former employee still feels bruised by it. ?If we?d gone for limited amounts and quality we?d still be there,? he says.
The remaining options are to shop around in the legitimate channel, where everyone else will be on allocation just like you, or to look towards the grey market. In the latter case, the arguments about product support and the customer?s warranty have been rehearsed well enough elsewhere so as not to need repeating here.
Jamieson makes no attempt to hide the fact that having been around is a help when there is a supply-side squeeze. ?You have to play on all of your contacts, wherever they may be in the world, and it helps to be in a position to call on old friends. You?ll end up paying a high price, which you have to take on the chin.?
Other manufacturers adopt different strategies, the most common of which is not to make an issue of the components in the first place. Con Mallon, marketing director of recently acquired AST, confirms that the company would try to avoid getting tied to a single source of components as a matter of policy, even though AST is itself now part of component supplier Samsung.
As part of a large company, Mallon is unable to be as flexible as Jamieson ? buying for a larger manufacturer is likely to be a matter of corporate policy rather than ringing around contacts. There are arguments for and against both of these approaches, usually to do with the size of a manufacturer.
The root of the problem can be raw materials or skewed predictions of demand. Bad forecasting and supplier delays are recurrent nightmares for resellers. Mallon has a number of strategies to get the product availability right and on time, only one of which is getting yourself acquired by a major component supplier. ?Working out of Samsung, we see one of our strengths as the ability to source components downstream quickly. We certainly believe that we should be a great deal less exposed than most manufacturers, with the exception of the very large ones.?
Ironically, five years ago AST looked like one of the large ones itself, trailing Compaq only narrowly in the US.
James Blackledge, Mitsubishi European marketing director, agrees with Mallon, but stresses the difficulty of making a correct forecast. ?You need realistic delivery dates ? we?d never quote less than five days if we were not delivering a stock model, and if we were looking at a high-end model we?d quote 20 days.? Communicating this to the dealer and ensuring that no one thinks 20 days constitutes a shortage is key.
The other extreme occurs when there is a glut of product. The channel has been quiet enough recently to get distinct jitters about the amount of state-of-the-art kit that might be sitting on the shelves at the moment, but the level may have fallen to average by the time demand picks up again. The temptation is to get rid of it pretty damn quick, and never mind that the value of everyone else?s stock will fall as well. Disk drives are prone to this because the internet and multimedia have fuelled the demand for more capacity ? ask anyone who has taken on a consignment of eight-speed CD-Roms lately.
Jamieson remains reasonably optimistic about the glut situation. He believes the IT sector is sufficiently professional not to allow it to happen. ?It still exists, but my guess is that people?s logistics are smooth enough so inventory isn?t such an issue anymore.?
He hints that larger firms won?t be afraid to send their components back, at which point companies like PST can make a killing by taking them for peanuts and selling them overseas at a hefty profit. The alternative is to watch kit emerge in low-cost outlets on Tottenham Court Road, undercutting your more up-to-date stuff and damaging your price policy and therefore your profits.
Mallon believes a lot of product supply problems can be offset, as long as expectations are realistic at the time of the launch. At the beginning, this means a launch date that will allow for an adequate amount of product to be available as of day one ? there is nothing worse than launching what amounts to a set of vapourware.
?The next problem you can get is in the middle of the life-cycle of a product,? says Mallon. At this stage the manufacturer is probably winding a line down in order to start selling its replacement, but customer demand can be as strong as ever.
?It comes down to the mechanics of keeping the channel in touch, whether by fax, email or, more recently, the Web site,? says Mallon. And, he adds, as part of a component manufacturer, the company can keep up with the demand better than anyone else.
Optimism aside, Blackledge admits there is plenty of luck involved in the process. ?When you?re starting on which configurations of product to stock, you have to second-guess the user. You can only do that by experience, ploughing your past back into the business.?
The economics are simple: too little of a product and people go on allocation, which means you never have enough of something that might be vital to a system?s performance. This leads to hold-ups in delivery, and it is invariably the reseller that gets held accountable by the user. A number of strategies can be used to try to limit the damage, but the overall impression is going to be a bad one.
The thing to do is head the difficulty off at the pass, pardner, through a bit of old-fashioned consultancy. First, advise your customer, for all you?re worth, that they don?t need a specific vendor?s component. If there?s a shortage of drives from firm A, the ones from firm B ? no matter what suppliers say ? are probably going to be equally good as long as they work.
Second, as soon as you realise there is going to be a problem ? maybe the industry is about to do something that will require excessive amounts of a particular component (see box) ? keep customers posted. As a courtesy, leave them with the impression that you realise this is your problem, not theirs, but make sure they appreciate the difficulty it puts you in. Communication with suppliers will keep you informed as to whether there will be a shortage or not, as long as you?re dealing with professional people.
Oh, and one more thing. Any snotty kids found around the showroom writing html notes that say ?Go home it?s out of stock? should be ejected firmly, but non-violently. After all, you never know what they?re going to turn into later on.
Caught on the hop
Often, the shortages and gluts that crop up in the channel are a simple case of poor management by a company that has overestimated or underestimated the likely demand. On other occasions there are good manufacturing reasons for a shortage to have happened ? it is important to remember that no raw material resource is ever infinite.
But other shortages could be avoided if only people understood the nature of the goods they were selling, and stopped believing half the hype surrounding a product?s launch. Two cases in point come from two of the leading software vendors on the planet, Microsoft and IBM.
In 1995, both companies released major new iterations of their operating systems. IBM said it would take over the world with OS/2 Warp ? yeah, well, it?s realigned its aims a bit since then ? and Microsoft said it would do the same with Windows 95. Both systems, said both companies, would run comfortably with 8Mb of Ram. No, really, they did.
Anyone who has used either system, and in the case of W95 that must account for most people, will know that technically there is nothing wrong with either claim. But for either system to fly as God, or Bill, intended, they have to have at least 16Mb to exploit their multi-tasking potential. And more than that becomes desirable if perchance you want tailor-written applications to fly alongside them.
A number of resellers that swallowed the initial puff were bitten badly. They allowed for only eight megs of Ram for a basic machine in the same way that they had sold ?true multimedia? with four megs. It didn?t mean there were no products available, but to the customer it didn?t half look like it.