All I Wanted for Xmas Was a PS3!

Supply chain and manufacturing problems at Sony caused a nightmare-before-Christmas PlayStation 3 launch in the U.S. Here's how to avoid Sony's mistakes.

It's not quite coal in the stocking, but many kids probably still feel despondent about what happened on Dec. 25. Instead of finding Sony's ultracool PlayStation 3 gaming console wrapped up under the tree, they may have found an IOU that said: "One PlayStation 3 will be given to Billy once Sony is able to manufacture and ship more to the good ole USA. We promise! Love, Mom and Dad."

Sony's shortage of PS3s, due to reported manufacturing and supply chain problems, proved worse than expected. Early analyst estimates predicted that 400,000 PlayStation 3s would be available in North America on the Nov. 17 launch date (which had already been pushed back from early 2006). In fact, American Technology Research estimated that just 125,000 to 175,000 PlayStation 3s made it to North American stores for the now infamous launch (with its tales of shopper fights and store burglaries).

Unless parents camped out in front of Best Buy or paid through the nose on eBay for the console, gamers will have to wait for Sony's Computer Entertainment division to catch up with the demand this year. The problems appear to stem from Sony's insistence on a truly next-generation gaming console that integrates new and expensive components.

The delay has frustrated Sony's rabid consumer base and opened a gaping window of opportunity for its two rivals, Microsoft's Xbox 360 and Nintendo's Wii, which also debuted for the holidays.

Lesson learned: Companies such as Sony must understand that launching a new product should involve decision-makers from marketing, product development and supply chain, and there needs to be a process to ensure that all three groups have an equal seat at the table, says Mark Hillman, a research director with AMR Research. When that's the case, the groups can weigh the additional risks and costs from potential delays when the company has to rely on outside suppliers and unproven technologies. Then, as a unified group, they can make the best decision. Of course, Hillman notes, it all comes down to "who ultimately owns the power in the decisions," and at many product-centric companies like Sony, it's the product development and engineering group.

By all accounts, the PS3 is a slick piece of machinery. It features a first-of-its-kind processor; Blu-ray Disc drive; 60GB hard-disk drive; Wi-Fi adapter; online connectivity; wireless controllers; and more. But that didn't come cheap.

Technology researcher iSuppli estimates that at least for this first batch of products, Sony will lose as much as $240 on each console sold. That's noteworthy because the PS3 is one of most expensive gaming devices ever made, at $600 for the high-end version.

The PS3 delays contributed to an unexpected executive shake-up in Sony's Computer Entertainment division in early December, while the company was still grappling with a recent recall of its notebook PC batteries. Jack Tretton, Sony Computer Entertainment of America's newly installed president, assured gamers that the company is "working around the clock" to satisfy the PS3 demand.

They'd better. According to research from the Georgia Institute of Technology and the University of Western Ontario, supply chain missteps such as product or shipment delays in general can create an immediate 9 percent drop in stock price, and over six months, losses can be as much as 20 percent. And in second-quarter 2006 results, Sony reported an operating loss of $177 million.

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