Opportunities for digital enhancements to Google’s Pixel supply chain
Can mobile OS giant Google manage its supply chain to become a smartphone hardware leader, too?
The rise of the smartphone is a global trend that’s impossible to ignore. From 2010 to 2016, smartphone connections increased 7.5x ending 2016 at 3.3 billion connections worldwide – a number expected to increase by 2.6 billion by 2020[1]. On October 20, 2016, Google, the leader in the smartphone operating system market with 87.5% of the global smartphone OS market[2], launched their iPhone competitor, the Google-branded Pixel smartphone, in an attempt seen by many to capture an even larger part of the mobile ecosystem. As the first public launch by Rick Osterloh, former Motorola president who now heads Google’s new hardware group, the Pixel is Google’s first foray into producing smartphone hardware as a company traditionally specializing in mobile software. Could Google reap the benefits of owning the supply chain and getting visibility into each step?
In order to compete with the success of Apple’s iPhone, Google decided to “own” the production of the Pixel, effectively purchasing the HTC team that initially worked on the Pixel in a $1.1B deal[3]. Through this sale, Google theoretically had visibility into all stages of the supply chain, from parts manufacturing, to warehousing, to shipments. The Pixel launched to critical acclaim, and consumer demand spiked. However, it quickly became apparent that Google was not prepared to handle the consumer demand. As people hit the Google store website, they were greeted with “out of stock” messages – for over a year. Predictably, this enraged consumers; as Stan Shroeder from Mashable wrote, “No matter how much you love Google’s Assistant, the stock Android experience or the Pixels’ subdued design, simply not being able to order one, or having to wait many weeks to get one, is a deal breaker.[4]” How could a company that had visibility into its entire supply chain be unable to fulfill orders for months, damaging their brand, enraging potential customers, and losing a revenue opportunity with a good product?
While we do not have details nor visibility into the inner workings of the Google Pixel team, it is immediately apparent from attempting the purchase flow that basic information about consumer demand was not being collected nor sent to the manufacturing team, at all. Whereas Apple allows people to pre-order the iPhone, Google did not have an option to do so – you could simply enter your email to be notified when phones were in stock. Here, Google missed an opportunity to implement digitization into their supply chain to better capture, predict, and eventually execute on demand. They addressed that the following year with the Pixel 2, whereby users were able to pre-order phones, but it is likely many who were going to make a big ticket purchase of the Pixel have already bought another phone.
Google is not the only smartphone company to experience problems with their supply chain. Apple, long-lauded as an extremely savvy controller of their iPhone supply chain, is also currently suffering a shortage of their new iPhone 8 devices due to a global shortage of organic light emitting diode screens (OLED)[5]. This shortage led to a “series of pile-ups along the supply chain” which starved other parts in the manufacturing process. An analyst at Credit Suisse commented on Taiwan-based Hon Hai Precision Industry, the company assembling Apple’s latest iPhone, saying: “We knew there was going to be idle capacity, we just didn’t’ know it was going to be this size.[6]” While we don’t have exact visibility into where in Google’s manufacturing process the problems arose, from looking into Apple’s production of the iPhone, it is quite clear how sensitive the smartphone manufacturing flow is to component availability and inventory. Companies like Google and Apple need to ensure their manufacturing teams are well stocked with a supply of parts, enough to satiate any level of consumer demand, lest risk losing revenue from people who cannot purchase phones when they want. Digitization, in the form of real-time inventory reporting, could help reduce the time it takes to fix bottlenecks in the process. Google should implement a digital inventory tracking and measurement system to ensure parts are well stocked at every step of the supply chain, to avoid this problem.
While Google has not revealed their long-term plans to digitize their supply chain, one would hope their implementation of a pre-order function for their new Pixel 2 is an encouraging sign they are looking towards some improvements in the short-term. With large players like Apple and Samsung vying for the same consumers and components, it is critical that Google collect and use every advantage they can get.
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[1] The Mobile Economy 2016 (GSMA, 2016), https://www.gsmaintelligence.com/research/?file=97928efe09cdba2864cdcf1ad1a2f58c&download
[2] Kharpal Arjun, “Google Android hits market share record with nearly 9 in every 10 smartphones using it,” https://www.cnbc.com/2016/11/03/google-android-hits-market-share-record-with-nearly-9-in-every-10-smartphones-using-it.html
[3] Savov Vlad, “Google sets its sights on the iPhone with HTC deal,” https://www.theverge.com/2017/9/21/16343342/google-htc-deal-apple-iphone-war
[4] Schroeder Stan, “The most important Pixel 2 upgrade is hopefully, availability,” http://mashable.com/2017/10/05/google-pixel-2-availability/#i_Wycq88AOqR
[5] Culpan Tim, “Apple swallowed a fly,” https://www.bloomberg.com/gadfly/articles/2017-10-23/apple-losing-its-supply-chain-mojo-is-a-major-threat
[6] White Edward, “Foxconn profits tumble on iPhone X supply chain challenges,” https://www.ft.com/content/a7421056-c9d4-11e7-ab18-7a9fb7d6163e
Interesting perspective, while I agree with you that it is critical for Google to identify and utilize any advantage they can get over Apple, I question whether they will be able to integrate the HTC team sufficiently. To unlock the benefits of a fully digitized and transparent supply chain, Google would need to be deeply involved in the HTC production system. My doubt here stems from Google’s previous foray into hardware with their purchase of Motorola in 2011. Google ran Motorola as a separate team, unable to mesh their software core with the new hardware entity before ultimately giving up and selling it off to Lenovo in 2014. [1] What will Google do differently to ensure that the HTC purchase doesn’t end in a similar outcome? I hope that Google can overcome the Pixel supply issues and provide a strong competitor to the iPhone, but I worry they still have a lot of growing to do before they’re successful as a hardware company.
Pierce, David. “Google Paid HTC $1.1 Billion To Turn Itself Into a Phone Maker.” Wired, Conde Nast, 20 Sept. 2017, http://www.wired.com/story/google-htc-smartphone-agreement/.
Visibility into the downstream suppliers capacity and production plans through digitization is extremely valuable, however I question the practicality of this. As we saw in the Beer Simulation exercise, even if members along the supply chain have visibility into demand 1 week out, there is no such thing as perfect alignment due to the bullwhip effect. Furthermore, suppliers may be reluctant to share their production capacities with Google as it exposes them to further scrutiny and indicates that there is a lack of trust in suppliers. If suppliers do provide buy-in and offer transparency to Google, I would suggest Google to use apps built by start-up Elementum [1] to track inventory. Elementum’s Inventory app aggregates inventory information across suppliers so that they can monitor inventory in real time and re-allocate across suppliers as needed to meet demand.
[1] https://www.elementum.com/inventory
Thanks for highlighting these issues! I completely agree that while the Pixel is an incredible product, Google has encountered a number of challenges in successfully penetrating the smartphone market. Their supply chain management issues have definitely played a major role.
Another element of the supply chain that Google needs to focus more attention on is the role of cellular carriers. A report from strategy& emphasizes the importance of prescriptive supply chain analytics, including real-time demand information, in a digital supply chain. As Google continues to strengthen partnerships with carriers, they need to consider how to best integrate these partners into their digital supply chain.
Carriers hold very valuable data on customer preferences and demand; however, similar to the concerns expressed in the comment above, I presume that the carriers will be hesitant to share certain data points with Google. Nonetheless, a certain level of information flow between the two is essential to take advantage of perspective supply chain analytics. If they fail to align carriers to their internal digitization initiatives, consumers will continue to face issues in receiving the Pixel phone when and where they want it.
Source: strategy&, “Industry 4.0: How digitization makes the supply chain more efficient, agile, and customer-focused,” https://www.strategyand.pwc.com/reports/industry4.0
Thanks for the insightful article! This was a great example of how bad execution paired with customer psychology can result in a hit on actual business targets – it is especially interesting as we see Google as a data giant who should theoretically, be able to be at the forefront of digitization and improve their business by harnessing the data they can glean from their other businesses. Your point around the lack of the option to pre-order the phone being a missed opportunity as well as a compounding factor of the difficulty in responding to consumer demand was particularly insightful. Google’s strength is that they are able to provide search optimization services, and the power of harnessing google searches for insights on demand has been documented [1]. It will be interesting to see how Google addresses this gap in their supply chain for the Pixel in future years.
[1] Askitas, Nikolaos. “Google search activity data and breaking trends.” IZA World of Labor. https://wol.iza.org/uploads/articles/206/pdfs/google-search-activity-data-and-breaking-trends.pdf
Prior to reading this article I wasn’t aware at some of the major problems Pixel had in forecasting demand. I’m curious – what specific digitization efforts do you think Google should prioritize in order to address some of these issues down the line? While I agree better demand forecasting would be ideal, I’m unclear on what specific digitization efforts you foresee Google adopting to better predict these trends.
Additionally, do you think it was a smart move for Google to “own” the production of Pixel by purchasing HTC? While I agree this move gave them greater control and flexibility with their production processes, I wonder over the long-term whether it puts too much burden on Google to keep pace with modernizing their supply chain, especially relative to competitors like Apple.
I think this is an interesting problem because it touches on the supply chain difficulties that arise from long lead time items. Right now, OLEDs may be in short supply. The problem arises because it is extremely capital intensive and time-consuming to build an OLED factory that achieves reasonable yields. Because demand for OLED is temporally separated from supply, there are likely to be a series of shortages and oversupply situations. This is similar to oil and gas in which projects have such a long lead time that they risk entering markets that have significantly changed from the time the investment decision was made.
https://www.supplychaindive.com/news/iphone-x-oled-shortage-diminishes-supply/504789/
Thanks for all your analysis on Google’s supply chain to produce the Pixel! I find it paradoxical that a high-tech company such as Google, whose core business is based on the exchange of information, faces some of the basic challenges that traditional manufacturers experience in their supply chain. Nevertheless, I would infer from this case that setting up a supply chain from scratch is never easy, particularly if the product contains parts which are in high demand such as the OLEDs.
I agree with you that Google should look to implement tools to better forecast demand and match supply accordingly. Furthermore, I also agree with MH that the integration of HTC is critical to ensure that supply chain runs smoothly and that Google can compete at the same level that Apple is able to. I wonder, though, if Google has an edge over Apple once the supply chain issues are straighten out, given the amount of data that they hold from consumers and the ability to run highly targeted marketing activities. It will be certainly interesting to follow the development of this new entrant to the competitive smartphone market.