178 Million Reasons Why Fitbit Needs an Operations Executive

By Brian Withers Markets Fool.com

Image Source: Fitbit.com

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Fitbit (NYSE: FIT) took a hit of $178 million last quarter due to issues with the supply chain, warranty, and soft sales. So it's not a surprise that Fitbit hired Jeff Devine as an Executive Vice President (EVP) of Operations reporting directly to the CEO. With Fitbit's business becoming more complex and sales volumes reaching almost one fitness tracker per second, small mistakes in the supply chain can quickly impact the bottom line. This new position, and Jeff Devine's experience, should help Fitbit improve its operations engine to match the pace of sales and aggressive product transitions the company has planned, while keeping gross margins high.

Let's look at why Devine was hired, what he brings to the table and what impact he could have on Fitbit's global operations.

Why now?

A picture is worth 1,000 words.

Source: Fitbit's Q4-2016 earnings release presentation

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Fitbit's 2016 gross margins took a 9.4% or $178 million hit related to:

  • Tooling equipment and component scrap
  • Increased rebates and promotions
  • Increased return reserve
  • Increased warranty reserve for legacy products

All these items are due to poor operations execution and could be helped with a focused operations team with a voice in the executive boardroom.

Despite these issues, Fitbit continues to enhance its product line, making trackers smaller with more capabilities and therefore more difficult to manufacture.A new smartwatch with technologies from three separate companies will further add to the operational challenge. Additionally, James Park, Fitbit's CEO, wants to streamline the existing product line to make room for the smartwatch. These upcoming product transitions will be a challenge to pull off with minimal scrap and no gaps in supply.

Significant improvements to Fitbit's operations are required or these issues from 2016 will only become worse.James Park has taken the first step to addressing the problem and hired Jeff Devine as EVP of Operations.

Why Jeff Devine?

Jeff Devine has a broad base of high-tech experience that Fitbit needs to breath new life into the company's ever growing operations. With a BS in Mechanical Engineering, Devine started his career in the heart of operations, as a production manager at Texas Instruments. He quickly moved to a leadership position at Boeing overseeing a high quality electronics manufacturing facility while completing an MBA at the same time. Devine then moved through progressively larger and more global roles at Nokia, Hewlett-Packard's Palm division, Cisco and finally Chief Operating Officer at start-up uBeam. It seems from Devine's resume that he has the "right stuff" for the job.

What impact could the right operations executive have?

Devine will have responsibility for the functions of "operations, customer service, and overall quality" which should bring a number of benefits. Because of this functional alignment, when a problem is brought to customer service, it should be quickly addressed by the operations team. As Devine owns both overall quality and customer service this should facilitate customer service data being used to enhance the customers' overall experience.

This new EVP role will report directly to Fitbit's CEO, giving operations a voice and a seat at the table at the top levels of the business. This reporting structure could help bring attention to manufacturing issues such as the problems with the Flex 2, potentially resolving these types of issues more quickly. Lastly, Devine should own all of the end-to-end functions to manufacture and deliver products to the end customer. As the sales teams make future sales projections, Devine can have input to ensure the plans can be executed well.

James Park is setting Devine up for success with his breadth of functional responsibility and reporting structure. James Park, indicated the importance of this role in the recent announcement.

Jeff and Samir bring valuable experience to our leadership team and these new roles will help us increase speed and efficiency throughout the company as we continue to create world-class health and fitness solutions that people can't live without.

Investors should be able to see whether this executive change is making a difference by watching whether gross margins can improve back to the 2015 levels.

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Brian Withers owns shares of Fitbit. The Motley Fool owns shares of and recommends Fitbit. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.