11/28/09

From Wii to Zhu Zhu Pets – A Black Friday Phenomenon

Before this Black Friday, I had no idea about Zhu Zhu Pets. Then over night, I learned about its hot sales situation from all Media outlets. A Google News search yields 2249 results as Zhu Zhu Pets have become this seasons’ most desired products and hottest news topic. This situation reminds me of the Nintendo Wii three years ago. Both Wii and Zhu Zhu Pets created such a unique Black Friday phenomenon: a hot product caused a huge buzz during Black Friday sales and “disappeared” from retailers’ shelves due to a supply shortage. Do you remember that Wii was sold at a premium in the black market three years ago? The same thing is happening to Zhu Zhu Pets, which is now being sold for as much as $50 at eBay, five times more than its original price!

There are a few things in common between Nintendo Wii and Zhu Zhu Pets:

1. Both are great products at a low price, creating great value for budget-cautious consumers.  Wii is less than $200 and it is a game console designed for everyone in the family.  Zhu Zhu Pets, the fuzzy robotic toy hamsters, are less than $10 and targeted at children. Both are well designed products with a great pricing strategy, which made them stand out from all other competing products in their respective categories.

2. Both products experienced surprised high demand exceeding the forecast and supply, and hence results in a shortage. From a supply chain point of view, out-of-stock is never a good thing because it means loss of revenue, especially when consumers can easily switch to competitive products. However, for both cases, because the uniqueness of the products, consumers will patiently wait for the products to be back on the shelf.  We can see Wii as a good example. The market size for Wii did not shrink because of the supply shortage. I don’t like to diminish the importance of supply chain, however, it’s far more important to develop a great product to stimulate the market. The challenge for the supply chain here is how quick the products can be replenished from overseas and available for customers again.

3. Both cases might use a clever ploy to make the item more desirable by having a short supply. There were many speculations that Wii used this marketing scheme three years ago to make Wii such a popular product and continue to be one of the top console systems. (Example: Nintendo’s Wii: Privily, Why So Rare Art Thee?). Today the buzz caused by the shortage is behind us. We can see Wii’s piled up at any electronic store this year. I suspect that Zhu Zhu Pets is using the same ploy to make this inexpensive fuzzy toy the most desired product of this Holiday shopping season. The question is whether this cute robotic hamster can be the toy remaining on the shelf for years to prove its value proposition. Wii did it. I finally own a Wii console three years after its first launch. Now, let’s see if I will able to buy a Zhu Zhu Pets for my child after three years.

07/8/09

Key drivers of profitability and competitiveness in supply chain

Since the recession began, supply chain management has been back on the agenda of companies’ boardroom. There is no doubt that it’s the perfect time for company leaders to exam their supply chain model, supply chain network and identify the hidden costs in the chain. By reshaping the supply chain strategy of companies, the supply chain can become the “cash” chain.
The below chart represents key drivers of profitability and competitiveness in the supply chain. There are three aspects that supply chain can do to drive “cash”: reduce expense, increase revenue, and improve assets liquidity. Companies should look into all aspects, encourage innovation and risk taking. Companies can not only streamline the processes to achieve a lean and efficient organization, but also make their supply chain organization into a revenue stream.

Profibility
Supply chain as cost drivers

This is the first thing that every company will jump into. “Cutting costs” becomes the slogan of the company. Many companies assign certain dollar amount to each individual as performance objectives. There is nothing wrong with that, except company leaders need to be aware of the existence of functional silos, and commit to transparency communication within the organization. As we all know, there are many tradeoff decisions to be made within supply chain, such as the traditional tradeoff between warehouse and transportation. Remember, pressure can increase the political level inside the organization and sometimes force people to make a decision based on making their numbers. High level leaders are responsible for the big picture of the whole supply chain and support the least total cost decisions for the organization. Unreasonable measurements or targets can discourage employee morale, damage organizational heath and sometimes lose supply chain talents for future growth.

Below is analysis for key drivers for supply chain as expenses and opportunities for cost reduction:
a. Transportation
There are many areas to be looked at in transportation to achieve cost savings. It has been discussed in detail in my article “Five Ways to Achieve Cost Savings in Transportation”.

b. Inventory carrying costs
It’s an area that many companies overlook and don’t even calculate and understand their inventory carrying costs. As standard rule of thumb, inventory carrying cost is 25% of inventory value on hand. When high inventory level is unavoidable during a recession, it’s a great opportunity for the company to look into their inventory carrying costs to identify opportunities. Below charts present all components for inventory carrying costs. I will discuss more into details in a separate article.

Inventory carrying cost

c. Variable production and warehousing cost
Variable costs are cost of labor, material or overhead that changes according to the change in the volume of production units. I believe many companies conduct ABC (Activity Based Costing) analysis to find out standard variable cost. Variable cost reduction can be done through process improvements to reduce wastes in production and warehouses, such as waiting time, movements, etc.

d. Raw materials
Raw material is considered as part of inventory. It includes direct and indirect raw materials. Collaboration and partnering with suppliers can lead to total inventory reduction in the chain to achieve a win-win situation, such as VMI or ERP. Scrutinizing suppliers in a difficult time will jeopardize companies in the long term.

Supply chain as revenue driver

Many companies recognize their supply chain as cost driver, but fail to see the prospect of supply chain as a critical role to drive revenue.
a. Supply chain service
Supply chain service level directly impacts customer satisfaction. Order fulfillment and on-time delivery are two major service metrics to measure company supply chain efficiency and effectiveness. Higher service levels bring higher customer satisfaction which prevents loss of revenue and leads to future sales. It’s worth noting that there is an exponential relationship between service level and cost. However, there is normally a predefined service level agreement between companies and their customers or trade partners.

b. Supply chain solutions
When business development is trying to break into a new sales channel, supply chain supporting capacity can often be brought up as a question. Example: A company wants to enter into a new market which can only order small LTL orders, but at much higher frequency. If the company has become accustomed to TL orders all the time, those LTL orders will become a market entry barrier due to increased logistics cost. Under this kind of circumstance, supply chain, as its supporting role to revenue increase, needs to be flexible and innovative to provide a solution as an enabler for market expansion without hurting the company’s bottom line. In this case, working with 3PL for LTL consolidation can often be the solution for the challenge.

c. Recycling or reverse logistics.
It’s one area that is easily neglected by many companies. Recycling, picking up disposed goods from the customers and reselling, can not only improve customer satisfaction and lead to new purchase, but also bring the company a new channel of revenue by reselling disposable goods to a safe recycling channel. It also helps companies to fulfill their social commitment for environment sustainability.

Supply chain as assets management

Asset management can be the most challenging task for supply chain because it would take a much longer time to make changes in company assets, such as leasing contracts for warehouses. Better asset management in supply chain will require will require organization transparency and a communication from upstream to downstream to minimize functional silo.

a. Fixed cost of DCs and docks
For a company with excess inventory, it’s costly to acquire more space for storage. For companies with extra space due to less demand, it won’t be easy to close DC in the short term and there is also a risk for a higher acquiring cost when the market is back. So companies can seek partner opportunities with each other to overcome the difficult time together. A project I worked on in the past is to provide a customer storage solution. With certain incentives, the customers purchase several months of inventory shipped directly from the manufacturer. They utilize their empty spaces to make storage revenue and the products are used for their future demand. While the company with excess can avoid the cost of new warehouse space and one leg of transportation from storage to the customers. Certainly this kind of process needs to be carefully managed to avoid skewing demand and other possible negative impact.

b. Fixed cost of plant
This is the most difficult part of all costs reduction opportunities because it may lead to the close of a factory or downsizing the workforce. It’s the last thing I like to see and propose because I’m also one of the millions who lost their job during the recession. The company should try their best to use other methods such as work sharing or payroll reduction to work with employees to overcome the difficult time together. However, as a business person, I can also understand “competitive advantage”. If closing a plant is the best thing for long term growth and efficiency, we just need to face the reality and move on.

c. Cost of private fleet
It’s very similar to the fixed cost of DCs and docks. When it’s not possible to reduce the size of the private fleet in the short term, partner with suppliers or customers to share the capacity to reduce costs.

d. Inventory management
Inventory is the biggest issue to any company during a recession when consumption drops dramatically. It’s a big topic and there are many things that can be done in inventory management. It not only requires day-to-day tactical inventory management to minimize inventory DOS and maintain a targeted customer service level, but also requires some strategic decisions from higher levels to achieve inventory goals.
I. Use demand driven forecast, instead of sales & marketing driven. Many companies include their marketing goal in their demand forecast which produces an inflated the demand forecast. Inventory overflow is unavoidable when the market is down. Face the reality, and forecast based on customer demand.
II. Centralize inventory management, instead of decentralize. A decentralized ordering or inventory management can normally cause higher inventory in the entire supply chain. Centralized inventory management will lead to better forecasting at an aggregate level and hence result in a lower inventory.
III. Inventory optimization and classification. ABC classification can improve inventory turn while maintaining fulfillment service levels. Optimization will lead to SKU reduction so companies can focus on their critical products for better service and lower cost.

Established metrics leads to total supply chain excellence

Besides all of these actions and factors to enable supply chain to become the “cash” chain, leaders should not forget to establish well-designed metrics for the entire organization to achieve total supply chain profitability and competiveness. Company leaders need to be aware that high costs in some areas are normally the symptoms of root causes, and many times, those problems are caused by the wrong metrics in the organization. Requesting cost savings without removing the root causes and establishing accurate performance metrics, the cost savings initiatives can be a failure. For example, production cost per unit is a great measurement of manufacturing efficiency, but it can result in high inventory when manufacturing ignores other cost components in supply chain and over produces in order to reduce cost per unit to meet their metric. This kind of story actually happens every day, and it’s a daily battle for many supply chain professionals. The right metrics convey the right positive incentives and drive the right decisions. When overhauls in supply chain need to be done at a strategic level to achieve day-to-day tactical operational efficiency, company leaders have the obligation and responsibility to face reality and to make the right strategic decisions for the organization.

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06/26/09

RFID-GPS Hybrid Tag

It was a product development paper when I was at busienss school two years ago, co-writen with my teammates Somnath, Reagan and Brad.  It maybe very immature from eyes of experts since we finished the paper in a very short period of time. Since then I haven’t done much research about RFID-GPS tag market. But I like to post the article here for sharing and for my further research.

Mission Statement

The new RFID-GPS hybrid tag will include both RFID & GPS advantages to apply to or incorporated into a product, animal, or even person for the purpose of tracking and location navigation. It will locate the objective no matter it’s in door or out door. The tag user can log into internet to track the object location, or the tracking information can be fed into customer tracking system. The product cost will be the biggest concern for the customers. The hybrid tag will be priced at the same level of the traditional RFID. Hence the new product provides the customer additional value of GPS tracking by paying the same cost of RFID. It can be considered as 2nd generation of RFID tag.

Key Customer Benefits

It combines the advantage of both RFID and GPS. RFID can be used mainly for indoor tracking. GPS in the tag is used for outdoor movement tracking and short-term storage of recent location history. Through web portal, the customer can track the objects in real time in 24/7. The hybrid tag will improve the customers’ inventory management, asset management and enhance their operational efficiency to achieve cost saving.

1. Key Business Goals

  • Time to Market – One year
  • Desired financial performance – be profitable in 3 years
  • Quality requirements – small size tag but store and transmit reliable data for product tracking

2.  Target Market

  • Retail – it will enhance the supply chain management by providing inventory visibility no matter the products are in door or on the road. It helps retail to improve their customer service by providing accurate product availability information.
  • Tool, container and equipment pooling industry – the hybrid tag can help to track the location and leasing length of the leased products. The information will help them on asset management and also help them charge the customer accurately based on the exact leasing time.
  • Livestock industry and pets owner – track the location of the animals

3. Assumptions and Constraints

The assumption for RFID-GPS hybrid tag development is that we don’t have R&D cost constraint. The major constraint for future development and production is the supplier power because we will rely on our hardware suppliers and software suppliers to achieve our cost objective for this new product.

4. Stakeholders

  • Suppliers – Suppliers of RFID and GPS, and the software developer.
  • Partners – GPS cellular communication service to send tracking information
  • Customers – users of RFID-GPS hybrid tag for their product
  • Customer employees and consumers – concern of personal privacy

Market Analysis

Potential market size

The market size is huge because the tag can be broadly used on merchandise, leasing tooling and equipment, and animals. In 2008, RFID market size will reach $7.26 Billion, which can be translated as future market size of RFID-GPS hybrid tag. Similar to the launch of RFID tag, we can work with the retail, such as Wal-Mart, to launch the hybrid tag.

Currently there are researches for RFID-GPS hybrid tag, but there is no product in the market yet. If we can be the first producer of the tag, we can be the leader in the market. Our goal is to obtain 20% of the $7.26 billion market before other competitors follow up, so time to market is very critical for us to win.

The customer requirements are:

  1. Low cost. Although RFID-GPS hybrid tag can provide the customers tremendous benefits from improved supply chain and asset management, the customers are still concern the cost of implementing new tag.
  2. Small size. The size of the tag is important for merchandise. The smaller, the better is for the customer to replace the tag in the products.
  3. Tag memory capacity. The customer will like comprehensive information to be stored in the tag for intensive movements tracking recording.
  4. GPS navigation accuracy. Only the accurate location information can provide the customer value added information, otherwise, it will mislead the direction and create unnecessary waste.
  5. Easiness for information tracking and data collection. We need not only to provide the hardware quality and price, but also to provide convenience and easiness for the customer to obtain tracking information and data thought web portal. If the customers requires, we can also feed the information directly to their information systems.

Price target

The customer is concerned that additional tagging system will be transfer the cost to the consumers, although they understand the advantage of a fully implemented item-level tagging system to help to increase inventory visibility and reducing shrinkage due to theft, damage, etc and expiry of perishable. The biggest disadvantage of traditional RFID tag is the distance range of the RFID reader, while GPS resolves this problem, especially when the product is on the road. Thus the additional GPS tracking system in the tag will help the customer to achieve deeper cost saving.

Currently traditional RFID tag price is ranged widely based on memory capacity. It can be as low as 5 cents per tag. The low cost will allow the tag to be used at unit level. Since we’re the first one to launch RFID-GPS hybrid tag, the competitive product is the traditional RFID tag. We need to price the hybrid tag comparable and competitive to RFIF tag in order to convert the customers from traditional RFID tag to RFID-GPS hybrid tag. We will price our new product to be as same as the traditional RFID tag but providing additional value of GPS tracking. While a monthly service fee will be applied to the customers for GPS cellular communication service.

Product Definition

Both RFID (Radio Frequency Identification) and GPS (Global Positioning System) are existing technologies. With the price drop in 2006, RFID tag is becoming inexpensive, especially for the merchandise. But RFID has limited tracking range because its position is tied to location of the antenna or reader. GPS, in the other hand, has the advantage to locate and measure the movement of an object by utilizing satellites transmitted signal. The RFID-GPS hybrid tag will combine the advantage of both technologies and allow the user to track an object at real time without geographic barriers.

The bill of material of RFID-GPS hybrid tag will include RFID memory chip, an antenna for receiving and transmitting the signal, GPS reader and GPS logger, which will store movement data. Currently there is a technology called chipless RFID allowing for discrete identification of tags without an integrated circuit, thereby the tags can be printed directly onto assets at lower cost than traditional tags. The biggest challenge will be the power supply for GPS. An alternative solution need to be provided as power supply in order to receive and send GPS signals. At the same time, we need to develop the internet portal to provide customers the tracking information and data, or develop a software program to feed information to the customer’s tracking system.

The compelling value of the RFDI-GPS hybrid tag is the real-time tracking capability for the object in door and out door without geographical barrier. The tag will help the customer to reduce their over all cost by completed inventory pipeline visibility, improved asset management and streamlined operations efficiency.

Product Development Plan

In order to be the winner of the new product, we need to be quick to get into the market. Both RFID and GPS are existing technologies, but it would still be challenging to implant both of them into one single small tag. The target product development lead time is one year through close partnership with our suppliers and partners. Below is the estimate timeline for the development phases:

  1. Portfolio and concept approval: 2 month
  2. Program approval and prototype: 6 month
  3. Pilot and launch – 4 month

The schedule is tight because we also need to source reliable suppliers and contract the partners at the same time. But establishing an aggressive goal of time-to-market will help us to be the leader of 2nd generation of RFID tag.

Currently there are plenty of RFID & GPS receiver suppliers in the market and many of them are located in low cost countries. Since many of merchandises are also produced in low cost countries. The tag, as a component of the finished goods, would be reasonable to be produced in low cost countries, close to our customers’ sourcing locations. For software development, we can utilize current RFID web portal program to include location and movement information through GPS tracking. At the same time, we need to negotiate a partner of cellular communication network to provide GPS tracking service.

In terms of resource required for this new product, other than R&E and development investment, we need engineer talents knowing the technologies of RFID and GPS to design the tag and work with our suppliers to develop the product. The procurement team will help to source reliable manufacturing suppliers. We also need information and communication system engineers to develop the web portable.

Market introduction will target to the retail and tooling leasing companies. Wal-Mart was the first one to adapt RFID technology and we believe they will be interested in the new hybrid tag. Tooling leasing company, such as CHEP, has been applying RFID to monitor their assets utilization. Again, the new tag will enhance their asset management. We can partner with them to launch and test the new products.

Financial Considerations

The estimated market size of traditional RFID tag is going to be $7.26 billion in 2008. When hope to capture 10% of the market, revenue of $1.45 billion for the first year, 20% in the second year and expand to 30% of the market share in the third years to $2.18 billion. Another revenue stream is the monthly fee for GPS cellular communication. We can negotiate with the network partner to share the monthly fee revenue. The monthly service fee can be structured based on the size of GPS data transfer. The customer will pay a fixed monthly fee first to cover a fixed amount of data transfer and then pay addition fee based on actual additional data. The estimated service fee will be $5 million annually.

Since it’s a start-up business, the fix cost to support future business need to be included when we calculate NPV. We estimate $40 million as the initial investment for product development. The variable cost for the future business will be the tag production cost. The SG&A cost will include web supporting, data transfer cost and marketing & administration cost. The estimated net income will be 10% of our revenue. But we might experience a declining gross margin when the competitors follow and will drive our net income margin down to 8% in the third year and remain this rate going forward. With an annual interest rate of 10%, NPV shows positive as 3 million at the end of forth year. At the sixth year, NPV of this business reaches to $22 million. GPS service fee income will be the incremental income for the company.

Regulatory, External Considerations

The major risks of this product development are the competitors’ entry and continuous product improvement because we don’t have our own manufacture and reply on the supplier for manufacturing. We can patent our design but the competitors can develop their own design for the similar product. In order to remain our competitive advantage, we need to differentiate us by providing continuous product development, and the world-class web tracking and data transfer service for our customers.

Another concern is the privacy of the customer employees and consumers. Because of the 24/7 real time tracking, the employees, such as truck drivers who carry the objects, will be monitored all the time. In retail, when the merchandises with tag are sold, the tracking signal needs to be removed from the tag through a signal remover. So the process of signal removal needs to be followed to avoid any consumer concern.

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