Even if they are being conservative, couldn't they ship at least 500k+ units a month and once they notice sales taper off they can reduce production? They know it's going to eventually sell over 1 million, 2 million, 3 million, so on and so forth. What is wrong with having units readily available on shelves after a couple months if they are going to eventually sell? Do retailers require that the product be sold days after it has been received even though it was floor space dedicated specifically for it permanently.
Sorry I just woke up and I'm having trouble parsing this.
Do you mean manufacture at least 500k per month? Because there's no reason to believe that they're sitting on unshipped stock. That doesn't benefit them. They're shipping them out literally as fast as they can produce them, and then retailers are selling out as fast as they receive them. There's nothing to help that situation right now.
The best they can do is ramp up production, which involves many moving parts and several different suppliers for the components. The screens are not made by the same company as CPU, etc. They need to independently increase their orders from all suppliers and not all of them are going to have the means to just flip a switch and make 500k instead of 250k. Then, when they do manage to get that production line all greased up and running overtime, they still need to ship. Stock is usually shipped by boat, as it's cheapest and most economical. It takes around 3 weeks for shipments to go from factories in Asia to stores in America.
And yeah, it's extraordinarily expensive for Nintendo to overship to retailers. That happened with the 3DS and the Wii U and they took a massive hit in profits as a result.
Especially with key software launching in summer, expect supply constraints like this for at least another few months. They way things are spaced out, and then leading into the holidays, it may be 2018 before Nintendo is fully able to match demand.
