Inventory Management Disasters: Atari

Atari is a gaming and electronics corporation that led the industry in the 1970s and early 1980s. Their consoles were the first popular gaming systems where consumers could play in their own homes. Originally, these games were only on arcade systems. However, these were too expensive and large for the average consumer.  Atari consoles ported well-known classic games such as Pong, Space Invaders, Pac-Man, and Frogger.

It is impossible to have a series about inventory management disasters without taking a look at Atari. They suffered one of the worst inventory disasters in history. It led the company to the brink of bankruptcy, from which it was never able to recover from. More impressive, perhaps, is its contribution to the video game crash of 1983, which saw industry revenues fall 97%.

What happened?

In 1982, Atari was the top performing video game console. Their sales were high and they had confidence to match. Atari believed that their consumers would buy any of their products with high demand. Under this assumption, Atari started producing low quality consoles and games. Not viewing others as competition, they were convinced that they would sell the 60 million cartridges they produced in 1982. In comparison, other companies only produced a few million games that same year. 

Atari was overconfident in their customer loyalty and overestimated their demand. The most notorious video game flop was Atari’s E.T. the Extra Terrestrial, which is often cited as the worst video game ever made.  Developed over the course of five weeks, it lacked the quality of previous Atari titles. Without good visuals, complex problems, or smooth gameplay, it was a flop.  Atari produced 5 million copies for the holiday season, selling less than 2 million. Most of the latter were returned.

Another mistake was the idea that as game titles increased, so would console sales. As a result, they came out with new consoles for each game. In addition, Atari was producing more gaming cartridges than consoles. They were assuming that consumers would buy two or more of the same game. For example, they produced about 2 million more copies of Pac Man than systems. Not only were they stuck with obsolete stock, but also the cost of storing it.

With profits plummeting, the company famously ended up dumping millions of copies of games and systems in a landfill. Atari denied allegations of this, and it became urban legend until 2014, when an excavation unearthed hundreds of copies of E.T.

How to Avoid This Issue

Atari held a major portion of the market share in 1982 and let the success go to their head. Their first mistake was to base forecasts on assumptions. As a result, they did not properly predict the supply and demand. Also, they did not consider their competitors. Instead, thought consumers would only purchase Atari products. Obviously, this was not true.

More importantly, home computer prices were beginning to drop. They became more affordable and functional. As a result, they were rivaling stand-alone video game consoles. Instead, Atari should have been improving gaming quality to differentiate their product. Without quality, why wouldn’t consumers just play on the computer instead?

There are many inventory management solutions today that could have helped Atari. To name a few, reporting, tracking, fulfillment, and replenishment. These would help Atari forecast their consumer demand.  Accurate forecast is the first step to avoiding a disaster of this nature. With an inventory system, they would know exactly what was in demand.

Another mistake was holding onto large amounts of stock. This avoidable error leads to large carrying costs. To avoid this, Atari should have put lean manufacturing into use. With this strategy, they could eliminate non-value adding items, reducing wastage, and streamline inventory processes. This strategy would have Atari producing items as they need them. As a result, it would reduce overstocks, stock shortages, and eliminate obsolete stock.

How could they achieve this? A system with automatic replenishment would have restocked items when they reached their reorder points.

Don’t Repeat History

The tools we have today to manage inventory are highly advanced compared to any tools Atari had available at the time. Cases like this are a way to learn from the past. and to highlight the importance of both quality inventory management systems to the supply chain and customer relationships.

This article is the second in a series on inventory management disasters. Check out the first article to find out how Target Canada’s inventory disaster destroyed their relationship with Canadian customers.