Professors Noel Watson and Rogelio Oliva

Professors Noel Watson and Rogelio Oliva (Texas A&M University) and Research Associate Laura Winig, Global Research Group, prepared this case. All names along with other details of the case have been disguised. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2005 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

N O E L W A T S O N

R O G E L I O O L I V A

Leitax (A)

Brian J. McMillan apologized to Kevin C. Fowler, senior director of planning and fulfillment, as he reclined in his chair at the conference table. It was mid-January 2005 and McMillan, who had opted for back surgery during the holiday break, was frustrated that his recuperation was not proceeding as quickly as his surgeon had promised. McMillan, head of the Demand Management Services (DMS) group, and Fowler were discussing possible changes to Leitax’s consensus forecasting process, a system at the heart of the company’s 18-month-old revamp of its supply and demand planning processes. Headquartered in Memphis, Tennessee, Leitax was the seventh-largest player in the digital camera business.

The consensus forecasting process, as the name suggested, culminated in a single forecast (for each Leitax product) that was agreed to by all interested functions: finance, sales, product planning and strategy, and DMS. The supply-planning group used the forecast to drive Leitax’s supply chain, and the finance group used it to set and monitor progress toward profitability and growth targets. The changes introduced to the supply and demand planning processes over the previous 18 months were thought to have yielded improvements in Leitax’s operating performance, which included a 50% increase in forecast accuracy,1 virtually no excess or obsolescence costs,2 a 37% decrease in inventory levels, and an increase in inventory turns from 1.8 to 5.3 in 2004.

Two events were forcing Fowler and McMillan to revisit the forecasting process. During 2004, the consensus forecasting process had overestimated the demand for a new product family, the SF-6000, an 8-megapixel camera for the high-end consumer market. The process had also underestimated the cannibalization of the ShootXL by another newly introduced product, the Optix-R. Three-month- ahead forecast accuracy had dropped to 30% and 45% for the SF-6000 and ShootXL, resulting in write-offs of 1% and 3% of lifetime volume materials cost, respectively, on both products. Furthermore, the scheduled end-of-life date for the SF-6000 had to be extended by six months. Fowler and McMillan believed that further changes to the process would reduce these types of errors.

1 Forecast accuracy = 1 minus the ratio of the absolute deviation of sales from forecast to the forecast = 1 – ABS(forecast – sales)/forecast.

2 “Obsolescence costs” were inventory charges to remove excess units from the supply chain once a product family had been discontinued.

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Fowler and McMillan’s main concern about potential changes to the forecasting process was that the changes not interfere with the principles that underpinned the process they had put in place. These included efficient and timely sharing of information and assumptions, and respectful consideration of all points of view in reaching the consensus that would drive the organization’s financial and operations planning. Fowler and McMillan needed to set the agenda for the upcoming consensus meetings, one in four days and the other in a month. The forecast to drive the FY’06 financial plan, which would also be shared with the board of directors and Wall Street, would be developed at the second meeting.

Digital Camera Market

The digital camera was considered a breakthrough product in the photographic industry. While conventional film cameras depended entirely on chemical and mechanical processes, digital cameras had built-in computers to record images electronically, without the need for chemical developing. Like a conventional camera, a digital camera had a lens that was used to capture the light that bounced off a subject. However, the digital camera focused the light onto an image sensor called a charge-coupled device (CCD) which converted the light into tiny colored dots called pixels. The amount of detail that a camera could capture was called the resolution; the more pixels a camera had, the more detail it could capture and the higher the resolution.

By 1998, prices were falling and for less than $300 a quality camera could be purchased using 640×480-pixels (307,000 pixels)—a resolution appropriate for sharing images on an electronic monitor or computer screen, but too grainy to yield paper prints. While 640×480 pixels was pretty much the norm in 1997, by 1998 the bar had risen to 1024×768 pixels, with some consumer digital cameras having CCDs of up to 1280×1024 pixels, yielding good paper prints in 4“x5“ or 4“x6“ sizes. At that time consumers could purchase cameras that produced high-resolution, 8“x10“ paper images using 1600×1200 pixels (2 megapixels)3 or higher pixel count cameras. Simultaneously, digital camera prices began to fall with the introduction of CMOS (complementary metal oxide semiconductor) image sensors. CMOS sensors were much less expensive to manufacture and consumed less power than CCD censors, but offered consumers lower resolution, lower sensitivity, and lower quality. Nevertheless, manufacturers began to install CMOS sensors into their lower-end products and were consequently able to price cameras as low as $199.

Most digital cameras had an LCD screen, which allowed users to view their pictures immediately. Early generations of digital cameras had fixed storage inside the camera; users needed to connect their cameras via cable to a computer to transfer the images. By 2000, most digital cameras used removable storage devices and data compression software to make the files as small as possible.

By 2003, digital cameras were outselling film cameras, and many included features not found in film cameras such as the ability to record video and audio. Indeed, Kodak announced in January 2004 that it would halt manufacturing of reloadable (as opposed to disposable) film cameras in 2005. The market, however, was showing signs of saturation as the worldwide growth rate for digital cameras began to plummet. For 2005, the worldwide sales growth rate was estimated to be 21%; for 2006, 5.2%.4 The estimated forecasts peaked in December 2006 when the penetration rate for digital

3 1 megapixel is approximately one million pixels.

4 Susan Berfield, “The Big Picture,” BusinessWeek, June 13, 2005, available from http://www.businessweek.com/ @@1qP8q4YQn2c5FAEA/magazine/content/05_24/c3937013_mz003.htm, accessed July 8, 2005.

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cameras in the U.S. was expected to be 63%.5 The growth rate in 2007 and beyond was expected to be negative.

Leitax

Newplex was a $22 billion print and imaging product company founded in the late 1970s. The company owed much of its early success to a line of computer printers; by the 1990s Newplex manufactured projectors, inkjet and laser printers, scanners, and other digital imaging products. Newplex sought to leverage its imaging technology investments and targeted the emerging digital camera market. After several fits and starts, the company released a 1-megapixel consumer camera. A year later, the consumer digital market was growing rapidly and the company unveiled the first in a series of pocket-sized digital cameras. In 1997, Newplex spun off its digital camera division as a separate company, Leitax. In that same year, Leitax introduced its digital LX280 Zoom camera—the first point-and-shoot megapixel consumer digital camera priced under $1,000.

Leveraging Newplex’s relationship with members of its distribution network, by 2002 Leitax had rapidly become a global seller with moderate success, generating $423 million in revenue and a net income loss of $7.5 million in 2002.

By the fall of 2004, the U.S. digital camera market was $8 billion, up from $5.7 billion in 2003.6 Digital camera shipments in the U.S. rose to 22 million units—a 36% increase over 2003.7 (See Exhibit 1 for market share data by manufacturer.) Leitax sold its cameras primarily through such retailers as Best Buy, CompUSA, and Circuit City in North America; Carrefour in Latin America; and others in Europe and Asia.

Organized in three geographical regions—the Americas; Europe, the Middle East, and Africa (EMEA); and Asia Pacific (APAC)—Leitax employed, in addition to its respective directors, separate sales directors for Latin America and Canada. (Exhibit 2 provides summary information for the regions.) Distribution centers (DCs) were located in Little Rock, Arkansas; Amsterdam, Holland; and Hong Kong, China. The Little Rock DC sold directly to resellers; the other DCs sold to wholesalers who then shipped to resellers. Production was handled by two contract manufacturing plants located in China, and one each in Mexico and Chile. Contract manufacturers made either retail-ready or viewer units. Retail-ready items were packaged units ready to be shipped through the DCs to resellers, and viewer-ready units were “packed out“ by DCs and made retail-ready.

On average, Leitax maintained eight camera models in its product portfolio offering a broad optical zoom range, megapixel resolution, and internal memory capacity. Each model could have multiple SKUs based on such variables as bundled accessories and geographic and promotional packages. (Exhibit 3 lists models in Leitax’s portfolio during the fall of 2004.) Digital camera product life averaged about 17–22 months and was getting shorter. High-end, feature-packed products tended to have the shortest product lives. (Exhibit 4 shows samples of digital camera product life cycles.)

5“Digital cameras—whereto?” Softpedia, March 21, 2005 available from Softpedia .com, http://news.softpedia.com/news/ Digital-cameras-whereto-709.shtml accessed July 8, 2005.

6 Ben Dobbin, “Kodak Gains on Sony in U.S. Digital Camera Market,” Associated Press, November 20, 2004, available from Post-Gazette.com, http://post-gazette.com/pg/04325/414626.stm, accessed June 1, 2005.

7 “Kodak Overtakes Sony in U.S. Digital Camera Shipments,” Japan Computer Industry Scan, February 7, 2005, available from Factiva, http://www.factiva.com, accessed June 1, 2005.

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Leitax in Crisis and Supply Chain Management Response

By the end of 2002, Leitax had suffered through poor planning of three camera models: that year, the launch of one camera was delayed, another outsold its inventory, and a third reported sluggish sales. To compensate, Leitax extended the life of an existing model and made a mad scramble to find product and customers for the extended product. It was easier to find product than customers, as some customers preferred to wait for the delayed camera. One executive estimated the cost of this delay—including lost sales and the opportunity cost of inventory, warehousing space, and capital that had been set aside for the launch (which had to be written off)—to be $19.5 million. The lost sales on the second camera were estimated to be about $4.5 million in gross margins, while excess and obsolescence costs on the third model were estimated to be $2.5 million.

Executives at Newplex were concerned. The young company had failed to ensure an adequate supply of product when the market was still showing a healthy growth rate. The expected reduction in growth rate also meant that, going forward, operational efficiency was even more vital for survival. The young company had obviously not learned this aspect of the business since its inception. The high growth rate may have masked some of these inefficiencies, or the development of more efficient processes had taken a back seat to entry and growth in the market.