Here's a pretty good article from the WSJ about this subject:
http://online.wsj.com/article/SB119697501146616201.html?mod=googlenews_wsj
Why the Wii
Is Still Hot Item
In Short Supply
December 6, 2007 5:04 p.m.
Even a year after making its holiday season debut, Ian Arcuri is discovering that buying Nintendo Co.'s Wii isn't as easy as playing the popular videogame console.
"I still don't understand how something out that long, which should have a supply chain so mature, could be so hard to find," says Mr. Arcuri, a program manager at a technology company in Cary, North Carolina, who has been unable to find a Wii for his two children. He has been searching for more than a month.
For many U.S. consumers, it was understandable last season when the Wii was tough to find in stores: the game console had just hit the market. But it is perplexing why, a whole year later, the Wii is again nearly impossible to find on store shelves.
Nintendo's problem illustrates how tough it is for companies to try to predict demand for a product, even in the second year. But it also may reveal a cautious approach by the Japanese company, given its super-conservative stance in general. In the past two years, Nintendo has set earnings forecasts so conservative that it achieved them in just nine months.
Nintendo started out as a small family business more than a century ago making traditional Japanese playing cards, and has undergone difficult transitions in its business to survive. Since it started making videogame consoles, the company has seen its fortunes rise with its Nintendo Entertainment System in the 1980s, and then fall in the 1990s as it lost share to rivals Sony Corp. and Microsoft Corp.
Since Nintendo puts a great deal of focus on cash flow, it tries to keep its inventory as low as possible. Such a strategy is rare among Japanese companies, which have tended to focus on revenue growth and market share.
Nintendo said earlier this year that it is making its best efforts to ramp up manufacturing. Still, this holiday season is seeing a repeat of last year's Wii frenzy, including lines of shoppers forming outside stores and bidding battles for the consoles on eBay.
The frustration of U.S. shoppers could become a problem for Nintendo as it seeks to keep up the momentum of a business that so far has surpassed expectations. Nintendo has twice revised its forecast for the number of Wii consoles it expects to sell in its fiscal year that ends in March, now predicting sales of 17.5 million units, compared with a forecast of 14 million at the beginning of the year. On a global basis, the Wii, which lets users play games such as tennis and bowling intuitively by swinging a controller, has outsold its two direct rivals, Microsoft's Xbox 360 and Sony's PlayStation 3.
The persistent shortages have led to speculation by angry consumers that Nintendo is deliberately keeping supplies short to create more hype for the product. Reggie Fils-Aime, president of Nintendo's U.S. division, denies this, saying Nintendo simply didn't anticipate this level of demand for the Wii this holiday season.
"It really is a missed opportunity if we're not able to satisfy that demand, which is why we're working so hard with retailers," he says.
Supply-chain management experts say, however, that missed opportunity may still be better than being stuck with excessive supply because it creates a negative impression that consumers don't want the product, and the consequences are so painful that many companies end up erring on the side of a shortage.
Excess supply also angers retailers, which must work harder and offer discounts to get rid of the product. The manufacturer's financial results also suffer because they are forced to lower prices or take back the products retailers can't sell.
In the late 1990s, Japanese toy maker Bandai Co. had a huge success with its Tamagotchi virtual pets, but unanticipated demand led to shortages in stores world-wide. Then, when the company focused too much on meeting demand in Japan, consumers overseas were frustrated. By the time Bandai was able to step up production and make more Tamagotchis available overseas, knock-offs flooded the markets and few people wanted the real thing. Bandai ended up cutting its pretax-profit forecast by 95% in 1998.
"If you flood the market, it will come back to haunt you," says Christopher Tang, a professor of supply-chain management at the University of California at Los Angeles Anderson School of Management. Nintendo may be missing opportunities by allowing other people to profit from the shortage by charging premiums, but Mr. Tang says that isn't entirely a bad thing because it creates hype. "Psychologically, it's better if the customer is begging for the product," he says.
But even when it plans to step up capacity, Nintendo's job is all the more difficult because it outsources all production, compared with other companies, which make their own products. The Wii contains dozens of parts, which means "one manufacturer can hold the whole darn thing up," says David Cole, an analyst with industry-research firm DFC Intelligence, based in San Diego.
Nintendo also must balance demand in the U.S. with other markets. The Wii craze has calmed down somewhat in Japan, for example, but Nintendo still needs to make enough consoles available to support the debut earlier this month of its highly anticipated videogame Wii Fit, which lets users play exercise games by standing on a board that can sense shifts in weight.
But analysts believe it will get easier for consumers to find a Wii next year as Nintendo increases production. This holiday season, though, people who want to get a Wii likely will have to shell out a premium.
