The Beer Game Again?

Panel pricing and the supply/demand balance are constant topics of conversation at the Meko offices, as they have such an impact on our clients.

I said in an editorial in June (Display Monitor Vol 17 No 24) that inventory levels in monitors were rising to such a point that we should expect that panel prices would fall. I said that I hoped that demand for TV panels especially in China would mean that there wasn’t too much oversupply and that it might prevent a significant price drop. However, the demand in China was not strong enough to compensate and European TV inventories continued to climb throughout the summer, reaching a peak in August. The US market is also sluggish. That has meant significant oversupply and the panel pricing reductions of the last quarter. LCD makers have adjusted their loading levels to try to compensate.

However, what worries me is the potential ‘backlash’. All through the supply chain, inventory is now being cleared. At the same time we are coming to the holiday season. Consumers in Europe (excluding Germany, Poland and a couple of other countries) are feeling negative, especially in the UK, France and the countries that hovered close to default positions earlier in the year. That means that they will be holding onto their money. Retail analysts have also pointed out that more and more retailers are trying to ensure minimum inventory at their year ends and that means that they may delay.

So we have consumers and retailers holding back on their purchases, so will brands or their suppliers stock up to build some inventory? I don’t think so.

As a result, by the end of the year, we could have a position where there is very little inventory of products, whether TVs or monitors, anywhere in the supply chain. That could be a problem as, unless there is a massive and sudden descent into financial chaos again, for example with some kind of sovereign default, I think that consumers will come late to the market around Christmas and start to buy. I’ve seen that behaviour described as consumers ‘rewarding themselves’ for getting through the year. However, it may well be that, at that point, there is not much inventory available for them. That would cause the prices of panels to rise again.

At that point, brands and suppliers will be very frustrated that they will not be able to take advantage of the demand.

Back in 2002, I wrote an editorial about a business education game called the ‘Beer Game’. This is what I wrote then:

There’s a famous ‘flight simulator for business’ that was developed many years ago by MIT in the US to simulate multi-layer business activity. Players take the role of manufacturer, distributor, regional distributor and retailer. Players try to optimise their own part of the operation by buying and stocking ‘beer’, but are not allowed to communicate with other teams, except by placing orders.

The result of the game is usually dramatic swings in inventory, costs and profits, even though demand for ‘beer’ throughout the game is close to constant. The dramatic swings lead to problems, quoted on an MIT website as follows:

“During the game emotions run high. Many players report feelings of frustration and helplessness. Many blame their team-mates for their problems; occasionally heated arguments break out”. (Is this beginning to sound like an LCD/panel monitor or panel sales or purchasing office near you yet?)

The analysis continues:

“…most people forget they are part of a larger whole. Under pressure, we focus on managing our own piece of the system, trying to keep our own costs low. And when the long-term effects of our short-sighted actions hit home, we blame our customer for ordering erratically, and our supplier for delivering late. Understanding how well intentioned, intelligent people can create an outcome no one expected and no one wants is one of the profound lessons of the game”.

It looks to me as though the second half of 2010 will be another learning lesson for the industry, but, sadly, it may be just the same lesson again!

(One of the things that we did to try to reduce this problem by helping everybody to understand ‘the big picture’ was to track monthly sales and inventory levels in Europe and that really helps you to understand what is going on. If you are a brand that doesn’t contribute to our monitor or TV inventory or sales surveys, and doesn’t see the output – contact me) .