|
From YourSITE.com News Executive Summary: • Today the sales executives realize that they must understand and manage the demand-driven supply chain. • E-proof of delivery has the potential to really reduce the time and cost associated with charge backs for discrepancies • Broad use of EPC and
utilization of RFID for electronic POD would significantly remove this
expensive kink out of the supply chain.
SUPPLY CHAIN MANAGEMENT: BECOMING EVERYONE’S BUSINESS Over a decade ago when video sell thru became dominant in the home video industry where rental had reigned supreme, the operations executives of the home video companies launched direct store delivery and achieved a competitive edge in the marketplace. Since then the executive triumvirate of operations, information technology and sales/marketing have embraced a holistic approach of supply chain management while moving from being manufacturing-centric to consumer-centric. Today the sales executives realize that reduction of stock outs, improved execution of marketing promotions, optimization of allocation of advertisement dollars and minimization of product returns can be achieved by understanding and managing the demand-driven supply chain. For example, the actual management of inventory at the retailer’s shelf is actually driven by the sales planning and forecasting process, which utilizes very powerful and mathematically sophisticated tools of operations research. Today as the $28 billion home video industry begins to mature, the supply chain executives face challenges of further improving consumer experience by taking kinks out of the supply chain. THE LAST 100 FEET: PRODUCING THE BULL WHIP EFFECT Since 1989 when Wal-Mart made point of sale data available to its suppliers, the supply chain has truly been driven by consumer demand. Studio initiatives of category management, electronic data exchange, vendor managed inventory, advanced shipping notice, business intelligence systems and sophisticated forecasting have enhanced sales, taken significant costs out of the supply chain and improved inventory turnover. Today the battleground for maximization of customer satisfaction depends to a large extent on the execution in the last 100 feet of the supply chain - the distance between the receiving docks of a retail store and its checkout counters. The steps undertaken in the final lap are burdened by cost, inaccuracy and time spent to track product flow and take physical inventory. The problem is exacerbated by inadequate business processes, lack of information synchronicity, quality of employees, and the reality that information cannot be economically and accurately gathered at the points of necessity. Simply, the supply chain does everything it can right – except get the product on the store shelves. According to management consulting firm VeriSign, nearly 70% of chain stores fall below compliance levels for key operational processes mandated by headquarters. Out of stocks (OOS) are the result of inaccurate inventory and lack of visibility into product location, causing shelf outs and “can't find” situations. Over 70% of out-of-stock scenarios are the result of the staff's inability to locate items that are in the store. Furthermore, an inexperienced and uncommitted work force contributes to nearly 50% of the shrinkage issues that cost retailers on average 2% of sales. The often-quoted “Bull Whip Effect” which magnifies the small kinks at retail to considerably larger magnification in the supply chain upstream, epitomizes the fact that insufficient visibility of inventory and non-real-time information in general have a disproportionate impact on stock-outs, inventory turns, product pricing, product mix, promotional effectiveness and product returns. If a chain is only as strong as the weakest link, addressing the last 100 feet is the most pressing issue for collaborative resolution. SYNCHRONIZING DATA: SHIPMENTS, RECEIPTS AND RETURNS The overall accounts receivables write off and negative adjustments made to sales recognized by the studios is estimated to be about $440 million according to research reported by MND Resources in 2006. As a matter of fact, one of the studios has a $50 million write off annually for discrepancies between transactions of suppliers and retailers. Resulting primarily from the discrepancies of vendor shipments VS. reported receipts by retailers, returns shipped by retailers VS. products processed by studios, proof of delivery matters and pricing/billing adjustments, etc., the studios carry a huge burden, which its large staffs of financial personnel handle. This huge waste in the supply chain is viewed today as a cost of doing business. E-proof of delivery has the potential to really reduce the time and cost associated with charge backs for discrepancies between what a vendor ships to the retailer and what the retailer says it received – though some wonder whether the retailers are really that interested in solving the problem. Broad use of EPC, however, would likely provide a solution that is unavoidable. Utilization of RFID for electronic POD would significantly remove this expensive kink out of the supply chain. Once E-POD becomes a reality, one could step outside the box and contemplate a situation where studios served by a replicator collaborate and authorize their replicator and shipper to consolidate their shipments to individual stores of a retailer for significant economies in transportation. Similar initiative on the reverse logistics would produce results as well. Finally, it does not take much of imagination to conclude that the labor-intensive operations of handling, processing and matching billions of transactions of EDI, ASNs, PODs, inventory, planograms, etc. is best out-sourced for improved customer service and cost reduction. RETURNS: PLUGGING THE PROFIT LEAK Nirvana in the home entertainment industry would be a one-way sale of product while the experience today is an average returns rate of 15 to 20 %. The industry incurs a cost of nearly two billion dollars annually in handling, processing returns and so-called damaged goods. Over the product life cycle of a DVD, new releases and promotions have high returns while catalog has minimal. The competitive nature of the business to gain market share and the error-proneness of forecasting for new products are natural contributors to returns. Certain retailer requirements of minimum ship quantities to individual stores and improper replenishment in the release period due to poor visibility and inaccuracy of inventory date aggravate the returns problem. One can only imagine the huge competitive advantage 20th century Fox Home Entertainment must be realizing today because it consolidates the shipment and returns of its products with those of MGM and Lionsgate. If the transportation carrier of returns, such as UPS or FedEx or another company, were entrusted with the task of destroying excess inventory under certification, would we have a leaner supply chain? The decision making for optimal ship quantities is determined by the economic principle of margin revenues being greater than marginal cost. When DVD manufacturing royalty fees of 8 to 12 cents, which are significant compared with manufacturing costs of 80 to 100 cents, are included in the cost of gross shipments of goods, one wonders how the equation would change if royalty fees were applied and paid only after the goods were sold. The accounting world would shudder at this thought but will it produce a paradigm shift? After all the world of distribution is likely to have this aspect of royalty payment at use, a kink of the physical supply chain that digital distribution does not have. Furthermore, the total system cost of handling returns of nearly $1.20 per unit is considerably greater than the cost of manufacturing a DVD. Would it be more economical to scrap the excess product at the retail store and remanufacture for additional demand? Of course, if the Kestrel Wireless technology to activate a DVD at the POS station were to be practical, the process of reverse logistics would be a moot point. ALTERNATE CHANNELS OF DISTRIBUTION: AN ELUSIVE GROWTH! The exploitation of the alternate channels of distribution has remained a difficult challenge for the studios as the majority has resorted to two-step distribution through rack jobbers who have failed to deliver because of their unsound business model for the DVD product category in a high cost-to-serve channel. Today there are about 150,000 outlets in the grocery and drug chains in the country, and many in the travel stop channel. Selective direct distribution to the grocery and drug stores has been profitable for some studios. There is a kink in the historical business relationship between studios and rack jobbers that is worth removing by redefining the business model. Traditionally, the grocery chains with very high customer traffic every week support the promotion of videos - both new releases and budget catalog. On the other hand, the drug chains have not been a destination store for videos because of 1. Failure to compete price-wise with the mass merchants who use new releases as loss leaders, 2. Locked up fixtures with restricted access because of uncontrolled high shrink, and 3. Poor inventory and location control of DVDs in the store. At the same time, the business model of the rack jobber has several unfavorable parameters, such as, 1. The payment terms of their retailer customers is generally much longer than that obtained from their studio suppliers, 2. The retailer deducts the returns from its A/Rs once it is determined whereas the rack jobber obtains credit for returns upon submission and approval of the returns, 3. Retailers demand shipment to all stores because of national advertising commitments to have the titles at every store, 4. The minimum quantity shipped per title to individual stores is disproportionately higher than what is required by sales velocity, and 5. Inability to combine shipments of titles because of varying new release schedules. This aspect of the current physical distribution has constrained the penetration of retail outlets where America shops. Removing the kink would call for transforming the current relationship with rack jobber who carries the inventory and receivables from the retail accounts needs to be transformed to a distribution arrangement where it is an extension of the supplier and not a third-party-service provider. This reconfiguration of distribution has the potential to ensure that the Long Tail is not cannibalized by digital distribution in the near future. INFORMATION SYSTEMS: THE HOLY GRAIL The research of MNDS International indicates that over the last five years all the major studios except one and their three major replicators have invested nearly $1.5 billion in installing SAP systems, mainly the financial and the human resource management suites. So how can you differentiate yourself from an information technology perspective? The answer lies not in optimizing the parts, but in optimizing the whole through effective end-to-end integration of business processes and information. With the IT infrastructure now in place, the potential for greater collaboration amongst the supply chain partners exists with the efficient sharing of information. The challenge is to leverage the IT assets drive to grow sales as well as squeeze costs out of the supply chain. Fortunately, new technologies and architectures, such as SOA, have emerged to make the quest for visibility and control over complex supply chain processes practical. The challenge today is to connect retail stores with manufacturers to monitor business activity and enable real- time decision-making and not merely have a warehouse of real time data. While significant results have been achieved in developing mathematically sophisticated forecasting models, it is the timely replenishment and product pull back of returns based on timely, accurate and complete POS data, which will produce the next quantum of results. A major challenge born out of the proliferation of the B2B infrastructure is that critical transactions which have to be exchanged with trading partners must navigate a maze of firewalls, systems, and applications to make it to the final destination of an order management system or and ERP system where inventory replenishment takes place. The touch points for the IT systems of a home video company can be with at least 130 with major suppliers, customers and service providers. The Exhibit illustrates the disparate systems, platforms, operating systems, and configurations for the business processes of an enterprise. What is not very apparent is the inherent characteristics of process differences and potential misalignment, discontinuity in information flow, real time or batch processing modes, time shifts, and data translation and accuracy issues. For example, the current inventory replenishment driven by vendor managed inventory systems is extremely sub-optimal in the first two weeks of launch of the DVD because 100% of the stores of the chain have not been polled every 30 minutes as scheduled, SKU information is erroneous, disconnects between systems introduce delays, and data reconciliation takes a back seat because they are labor-intensive and time consuming.
If business processes are the lifeblood of any organization, it is the visibility, efficiency and effectiveness of these processes that enable organizations to reach and exceed their goals and differentiates them within a fiercely competitive market. The new way of doing business requires a fundamental shift where business process owners accountable for cross-functional and inter-enterprise business processes that focus on the ultimate “user”, the customer. Rewiring the supply chain may be a vital missionary goal. I have often wondered, if all but one of the studios could adopt the SAP software solution, why could not there be a studio-supported B2B infrastructure built by IBM, Teradata, WebMethods, Sterling Commerce or some other IT service provider to standardize, streamline and automate the transactions between retailers and achieve the ultimate value. After all the business processes are fundamentally the same. It is the proprietary usage of the information that distinguishes the competitors. This infrastructure could also be leveraged for the emerging digital delivery of content which has exponentially greater demands. Many industries, such as semiconductors, automotive and others have adopted a common, shared B2Bsolution for the entire industry. RFID DEPLOYMENT: LESSONS FROM RETAIL AND THE CPG INDUSTRY Technology may have come to the rescue with RFID which has the potential of making a tremendous impact on the supply chain provided retailers enable visibility of inventory in the last 100 feet at all the stores of the chain. According to Bob Willett, the CEO of Best Buy and its CIO, "Supply chain is probably the single biggest enabler to customer centricity and one of the major areas of growth. With application of RFID on a test basis, on-shelf' availability has gone from the mid-80 percent up to 93 percent overall with promotional availability even higher.” P&G used RFID to track Fusion razors going into store shelves in 400 retail locations. The technology enabled the company to get the razors onto shelves 11 days faster than normal for product launches. Using RFID to track inventory, Wal-Mart was seeing a 16% out-of-stock reduction. In addition, RFID-tagged items were manually reordered 10% times less and replenished three-times faster than non-tagged items. British retailer Tesco is going one step further with RFID technology by introducing so-called “smart shelves” that record any changes as a product is removed from the shelf. Future uses of this intelligence may even help retailers interact with their customers as they navigate their way through the aisles of a store. VeriSign recently reported that the inventory of an RFID-enabled store was better than 99.5% accurate, as opposed to the traditional manual inventory approach, which can be off by as much as 15-20%. In addition to realizing additional sales, the need for safety stock is also greatly reduced because safety stock is maintained to reduce OOS. Finally, the increased visibility of product movement and location provided by RFID makes it possible to compare the actual inventory count and location against model stock, enabling proactive response to current or pending OOS conditions. Real time RFID data promises to empower store and supplier management to make optimal decisions in a very dynamic marketplace. The challenge for manufacturers and retailers is 1. The cost of RFID and its application, and 2. Managing the vast amount of information that those tags and readers produce, and 3. realizing an ROI. It is opportune for studios to investigate and test the ROI of deploying RFID for promotional executions. FINAL NOTE A white paper of Sterling Commerce (subsidiary of AT&T) articulates an operating philosophy for taking kinks out of the supply chain by stating, “The global economy is transforming the way you do business. It favors organizations that can reach across boundaries effectively. It rewards those that can collaborate smoothly with their partners and customers. As a result, business excellence is no longer about individual players -- it’s about effortless coordination and orchestration across your value chain. To thrive in this environment, you must optimize the performance of your entire business community -- from your smallest supplier to your largest customer.”
Entertainment Supply Chain Academy (ESCA) chairman Devendra Mishra, over a span of 30 years, has served every segment of the home video industry supply chain as a retailer, rack jobber, replicator and home video and music supplier in the US and Europe. He has built, operated and transformed world-class multi-media manufacturing and distribution businesses worldwide. Prior to 1997 Devendra served as President and CEO of Multifoods' billion dollar specialty distribution subsidiary; President of Technicolor's Worldwide New Media & Distribution; President and COO of LIVE Entertainment, a diversified supplier, wholesaler and retailer of home video and music; Managing Director of VCL-Carolco, a leading home video company in Germany, and, Vice President of the $900 million world-wide manufacturing and distribution operations of RCA-Ariola where he revolutionized distribution for the industry. Since 1997 Devendra is engaged in providing management consulting services to the entertainment, media, Internet and distribution industries world-wide. Currently Devendra is an adjunct professor of Decision Sciences at Pepperdine University, and contributor to Dealerscope and Mediaware publications.
© Copyright by YourSITE.com |
