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Supply Chain Management of Iomega Corporation

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Supply Chain Management of Iomega Corporation
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Netra Shetty
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Supply Chain Management of Iomega Corporation - January 11th, 2011

One of the fastest-growing companies in the United States during the late 1990s, Iomega Corporation manufactures removable disk drives for use with computers. Known primarily for its Zip disk drive, Iomega took the data storage industry by storm during the mid-1990s as consumers quickly embraced Zip drives as the product of choice. In one year, Iomega's sales shot up from $362 million to $1.2 billion, making the company one of the most promising prospects in the ever-growing computer industry. Aside from Zip drives, the company also manufactures drives and cartridges marketed under the names Jaz and Ditto.


Few companies during the 1980s and 1990s experienced as many intoxicating highs and dismaying lows as Iomega, a company whose path of development charted a rollercoaster ride that carried all those associated with it through the full spectrum of emotions. This volatile course of development began in 1980 when the company was founded by David Bailey and David Norton as Databyte Corporation, a corporate title that existed for little more than a month. Iomega Corporation was adopted as the company's name in May 1980, and from that juncture forward the remarkable story of a small data storage company and its fitful growth was played out.

Iomega came into being through the financial assistance of the Bass family of Texas, specifically through a venture capital fund they controlled called Idanta Partners. With the less than $5 million Iomega received from this source, the company delved into the lengthy and costly task of developing the technology that could support a viable entrant into the small but promising market for computer data storage products. The early years were difficult ones, a period spent out of the public eye and devoted to developing a product that could draw consumer interest. Capital was hard to come by, yet desperately needed, as engineers tinkered and toiled in the company's modest facilities in Roy, Utah, a small town one hour north of Salt Lake City. There, relying exclusively on financing through venture capital, Iomega engineers searched for a product design that could be brought to market, and after three years of labor a design was found, its foundation based on scientific principles two centuries old.

Iomega's first product was the Bernoulli Box, a high-capacity disk drive whose design (developed and abandoned by IBM) was based on an aerodynamic principle named after an 18th-century Swiss mathematician named Daniel Bernoulli. When Iomega engineers settled on the design for the Bernoulli Box, the only high-capacity disk drive available to personal computer users was a five-and-a-half-inch, hard-disk drive known as Winchester. Winchesters, which generally could not be removed from the casing holding the disk, were vulnerable to minute particles of dirt. If a particle of smoke from a cigarette, for instance, lodged itself between the magnetic head that reads the data and the disk that holds it, "head crash" could be the result, causing total loss of information on the disk. Bernoulli's physics, however, enabled Iomega engineers to design a spinning disk that remained infinitesimally close to the magnetic read/write head, which could bend away from a threatening smoke particle, let it pass by, and keep the head from crashing into the disk. Moreover, the Bernoulli disk was flexible, it could be removed, and the proximity of the head to the disk meant that more data could be squeezed onto the disk. The design was revolutionary, and its development meant Iomega was in business. In 1983, the company went public, raising $21.7 million in an initial public offering, and generated $7 million in sales. After three years of laboring in the confines of company headquarters in Roy, Iomega was ready to move to the forefront with its lauded Bernoulli Box. Expectations were high.

Success and Failure During the 1980s

High expectations were validated when the financial totals for 1984 were tallied. The company reported its first annual profit, earning an encouraging $2.5 million, and reported an enormous leap in annual sales, collecting $51 million in sales during the year and thoroughly besting the previous year's total of $7 million. The patented Bernoulli Box, which retailed at $2,700, had proved to be an instant hit. The flexible, removable disk it contained combined the ruggedness (one skeptical reporter threw an Iomega disk like a Frisbee, and it still worked) of a floppy disk with the high capacity of hard-disk drives. Iomega's eight-inch, 10 megabyte disks stored 30 times as much information as the widely used five-and-a-half-inch floppy disks and eight times as much as IBM's top-of-the-line disk. Through the Bernoulli Box, Iomega had secured a position in a profitable, fast-growing niche market. The research and development effort had paid off, and Iomega executives envisioned a bright and prosperous future, a future in which businesses in need of extra data storage space would turn to the best product available: the much-heralded Bernoulli Box.

In a pattern that would repeat itself time and time again, Iomega's glowing prospects quickly soured, sending executives and investors into a fit of despair. Annual sales climbed to an astounding $126 million in 1986, increasing 18-fold in three years, but the meteoric rise in sales ended there. The heights to which Iomega had climbed proved to be illusory. In late 1986 and early 1987, Iomega was caught holding the door as conditions in its industry changed quickly and the company's once-promising prospects turned bleak. Disk drive manufacturers began slashing prices and the number of personal computers manufactured with hard-disk drives already installed in them increased considerably. As this was happening, Iomega badly miscalculated demand, and soon found itself saddled with bloated inventories and soaring expenses. By the end of 1986, Iomega owed $8.5 million in bank debt and the value of its stock was beginning a downward spiral from a high of $23 per share to $4 per share. The company racked up $39 million in losses during the first nine months of 1987, a year in which sales plunged 30 percent to $89 million and all manufacturing was shut down for four months, as management contended with a cash flow crisis. Iomega was teetering on the brink of bankruptcy, and desperately needed help. Help arrived in the form of Michael Kucha, an early investor in Iomega.

Kucha was named Iomega's chief executive officer in January 1987 and immediately began cutting costs wherever possible, including a sharp reduction in the company's workforce from 1,350 to 750. Money earmarked for research and development, however, was spared from any cuts, as would be the case during Iomega's first two decades of business. For a company like Iomega, a continued, constant commitment to developing new technology was essential to survival, and Kucha realized this important point as he tightened the reins on spending. By mid-1988, after earning $8 million during the previous three quarters, Iomega once again looked healthy. Kucha's cost-cutting efforts gave the company $18 million in cash, reduced its bank debt to zero, and thanks to uninterrupted research and development activities, a revamped Bernoulli Box had been shipped to customers in January 1988. Having restored Iomega's balance sheet, Kucha felt it was time to go, his work, in his mind, completed. Intent on starting his own investment firm, Kucha announced he would vacate his post as soon as a replacement was found.

Kucha's replacement arrived in 1989, a 22-year veteran of Hewlett-Packard named Fred Wenninger. Wenninger set himself to the task of completing the rescue started by Kucha, who had cleaned up Iomega's financial problems but had done little to find solutions for the company's other problems. These other problems, as Wenninger perceived the situation, were primarily in the manufacturing and design development processes employed by the company. Improvements in manufacturing and design efficiency were needed, and Wenninger orchestrated dramatic improvements on both fronts. Under Wenninger's stewardship, manufacturing turnaround time--the time elapsed from the beginning of production to the shipment of finished goods--was cut drastically, whittled down from 28 days to less than two days. The design time for the aerodynamics of new products was trimmed nearly 90 percent and the time spent designing circuit boards was cut more than 80 percent. These significant leaps in efficiency invigorated Iomega, boosting confidence and convincing many that the recovery begun in 1987 had successfully run its course. Earnings reached $14 million in 1990 and sales during the year climbed to $120 million, a revenue volume nearly equal to the total recorded in 1986 before the company's fall. For the second time in a decade, Iomega had ascended to a promising plateau, but the heights reached under Wenninger's command would prove to be as tenuous a standing as the company's position in 1986.

The first sign of trouble emerged in late 1992 when Iomega's earnings slipped. During the company's fourth fiscal quarter, it recorded earnings of $41,000 on sales of $37.5 million, significantly less than the $4.3 million it earned from $39.4 million in sales during the fourth quarter of 1991. For the year, 1992's financial totals were alarmingly low. Sales registered a negligible two percent increase to $139.2 million while earnings plunged 161 percent, dropping to $4.7 million. In early 1993, Iomega took action, laying off 99 of 1,150 employees and trimming costs wherever possible. It was a familiar refrain, one last heard in 1987 when cost-cutting was the order of the day. "From an expense standpoint," an Iomega board member said, "we have to make some changes. Any fat that exists now we've got to get rid of."

By the end of 1993, Iomega's condition had worsened. The value of the company's stock dipped to $2 and it slipped into the red, registering a $14.5 million loss for the year. To blame were problems with the niche market for Bernoulli drives and the lack of demand for the company's high-capacity "floptical" drive. Priced at $695 during the early 1990s, Iomega's Bernoulli drives attracted only a small customer base, their price too costly for most consumers. The Iomega product line was sold primarily to the government and some large businesses, and was withering on the vine in these small, niche markets. "There are so many other products out there," noted one analyst in reference to Iomega's product line, "and with all of them coming down in cost, it's not competing well." To make matters worse and to further erode investor confidence, Wenninger announced in late 1993 that he wanted out as soon as a replacement was found. While the search was on for a new chief executive officer, it became clear that what Iomega needed were changes more profound than sweeping cost-cutting measures. Iomega needed a dramatic change in direction.

Since its inception Iomega had been a technology-driven company, immersing itself in the development of new technology to deliver a superior product. This emphasis on engineering was essential to the success of Iomega, but what the company needed as the mid-1990s neared was greater skill in delivering a superior product to market. Iomega, in retrospect, needed to be a marketing-driven company, rather than a technology-driven company. This change in perspective was the philosophy of Wenninger's replacement, Kim B. Edwards, who preached marketing with the fervor of a Baptist minister. Edwards arrived in 1994 and later revealed what he found when he assumed control. "What I saw," Edwards said, "was an underutilized technology, an excellent reputation, an outstanding research and development group, but no conception of marketing and no contact with the customer." In a matter of months, Edwards shaped Iomega into a marketing powerhouse. The results were astounding.

Mid-1990s Explosive Growth

Immediately after his arrival in January 1994, Edwards sent Iomega employees on the road to talk directly to customers and determine what they wanted from high-capacity data storage devices. Next, Edwards developed a focused retail strategy aimed at bringing the company into the mainstream market, hired personnel familiar with the retail trade, and developed packaging that met with retailer approval. In October 1994, the company announced plans to introduce a low-cost drive that would make removable data storage more affordable and free Iomega from its dependence on niche markets. This was the product that would receive the massive marketing support Edwards had developed, the newest Bernoulli drive, christened Zip. Said one retailer prior to the drive's introduction, "I've got a tip for you. Zip drive is going to be hot."

Unlike the Bernoulli products that had competed in niche markets due to their hefty price tag, the new Zip drives were priced at $199 for the drive, $19.95 for 100 megabyte disks, and $9.95 for 25 megabyte disks. Equally as important as the significantly reduced prices was the packaging of the Zip drives, an integral part of Edwards's marketing plan. Iomega tested eight variations of retail packaging before settling on the final design that would hit the stores. Iomega also launched two other products with the same attention to detail: Jaz disk drives, which stored 10 times as much information as Zip drives, and backup drives and cartridges sold under the name Ditto. When the first wave of Iomega products marketed by Edwards hit the stores in 1995, the results were incredible.

The debut of Zip was announced in advertisements in mainstream magazines such as Newsweek, on prime-time television, and all over radio. Zip drives sold out on the first day, and consumers clamored for more. Soon, the magical influence of marketing turned the Iomega logo into a fashion label. Shirts, hats, and pens were emblazoned with the Iomega logo, generating by themselves more than $80,000 in revenue. "Kim Edwards," one analyst noted, "came into a stagnant company and turned it into one of the most lively and successful storage manufacturers in the industry." "After Bill Gates," another analyst remarked, "Edwards has done the best job of marketing in the computer industry."

As accolades showered over the company, Edwards tapped the immediate success of Zip to carry the company's expansion overseas. In mid-1995, Iomega signed on with electronics giant Seiko Epson to market Zip drives in Japan. Plans were also developed to market Zip in Europe and the rest of Asia, as the Zip frenzy swept across the United States. The company's stock value rose from the 1993 depths of $2 per share to more than $20 per share by mid-1995, as company workers struggled to keep pace with the voracious demand for Zip drives. More than two million Zip drives were shipped in the first 15 months of production, eclipsing even the most optimistic projections and setting the stage for the announcement of the impact Zip had on Iomega's financial stature.

Iomega collected $362 million in revenue in 1995. In 1996, when the full weight of the Zip introduction could be measured, the increase was overwhelming. In one year Iomega's revenue total skyrocketed from $362 million to $1.2 billion, a meteoric increase that positioned the company as the dominant player in the data storage industry without rival. After years of euphoria dashed by heartbreak, Iomega stood alone as king of the data storage industry, its Zip drive quickly becoming the industry standard. As Edwards and Iomega's management team plotted their future course after the introduction of Zip, one immediate goal was to make Zip drives the primary choice of computer manufacturers. The company's mid-1990s success stemmed from sales directly to the consumer, but its future success hinged on the number of drives sold to computer manufacturers. To achieve this objective, Edwards's strategy was focused on winning over consumers, rather than convincing manufacturers through persuasive negotiations. If enough consumers demanded Zip drives from computer manufacturers, then manufacturers would be forced to meet the demand of the buying public. If successful in this shrewd, yet difficult task, Edwards was capable of sparking successive years of annual sales increases that could dwarf the mind-bending sales growth recorded in 1996. Iomega, a technological maverick and zealous marketer, headed toward the 21st century facing enormous opportunities for growth.

Principal Subsidiaries: Iomega United Kingdom Ltd.; Iomega International Inc. (U.S. Virgin Islands); Iomega France Inc.; Iomega Iberia Inc. (Spain); Iomega Belgium Inc.; Iomega Europe GmBh (Germany); Iomega Italia (Italy); Iomega Canada; Iomega Germany.

Last edited by netrashetty; January 11th, 2011 at 12:20 PM..
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