Who would have believed there would be a day when Universal and Paramount combine forces in distribution? Or that manufacturing on demand (MOD) would be the only way to get a 1930s James Cagney movie? These factors play a part in managing the supply chain more efficiently, which is not only keeping the physical disc alive, but will keep it alive for several years to come.
Content providers, replicators, packaging companies, and trucking companies all need to analyze supply chain instead of just going after every question or problem that pops up. If you manage on a case by case scenario, “The only thing you are doing is firefighting,” says Meindert Boorsma, Partner, Intelligence For Business (i4b), a management consultancy bureau that offers sustainability services in the value chain. A successful business is about return on investment (ROI), but to accomplish that, a plan must be in place. It’s confusing to have a procurement guy, a sales guy, a supply chain guy, and an operations guy, all making decisions in a box.
According to analysts, replicators and packaging experts, the media industry has improved in terms of consolidating the supply chain, but there is still room for improvement. To be profitable, manufacturers have had to combine all processes into their business. The definition of a ‘one stop shop’ has changed over the years, sources say.
ONE STOP SHOPS
Bringing down component, manufacturing, and shipping costs; cutting turn-times; and eliminating returns are key elements of the one stop shop. Haitham Wahab, CFO of replicator CMI Media Management explains, “We have a large contingent of customers that are shipping quite a lot of DVDs. While we are consolidating our supply chains, those customers are also tightening their own supply chains. Rather than using three different houses for replication through to distribution, many of our customers are doing everything with us because we offer the back end.”
According to Wahab, the days when manufacturers wouldn’t look at orders under 5000 units are long gone. No reason for that philosophy exists any more. With more competition on the retail shelf, television on demand and digital downloading, there is little reason to refuse any disc order. Manufacturers are learning to deal with smaller orders which, at one time, were too tedious, but with optimization of manufacturing and distribution, small orders are profitable.
In the past, customers were ‘shoe-boxed’, says Joel Maxey, Senior Director of Operations, Disc Makers. “It was more cost-effective in the past to make at least 100,000 copies of a title. Customers were forced to buy more than they needed because the price was better. Now, we are able to offer exactly what you need. Turn-times can be as quick as one day. That is helping people keeping their inventories lower. And, if content needs to change, they are not stuck with old discs they have to throw away because they were cheaper to buy.”
With fewer companies manufacturing discs, pricing scenarios have changed and customers are paying more for service. “When there was over-capacity in disc manufacturing, pricing was king, but we are seeing signs of that calming down now that a lot of capacity has been taken out of the market,” Wahab explains. Customers will pay for service.
In order to make the small orders profitable, Frank Salvaggio, General Manager, packaging firm Ross-Ellis, says, “We increase efficiency and productivity by tweaking our methods. With smaller runs, the set-up times on the equipment become an even more significant component of the cost. We use production methods like Kaizen to take the non value added component out of some of these processes so that it is faster and costs less and therefore allows us to deliver earlier.”
Development of a business model for MOD is going slowly, but it is definitely moving forward, believes Steve Brown, CEO, at manufacturing company, Cinram. “The problem with MOD is that the model is not totally baked yet.” It has positives and negatives. While MOD is a great solution to get rid of inventory, it negatively impacts impulse buys and that hurts disc sales, he says. However, Cinram is doing some MOD in Europe and is looking at starting up the service in North America as well.
MOD is happening particularly for the older titles where stock holding is expensive says Jim Bottoms, Director, Futuresource Consulting. “There is quite a strong increase in interest, and I know of two companies (that have to remain unnamed right now) that are developing very focused on-demand strategies.”
FORECASTING AND RETURNS
Order forecasting from the studios is an area that still needs work in the supply chain. “The industry still works on a model of over-supply and returns, which means that product is manufactured, shipped, returned, and then scrapped,” says Bottoms. “All this product needs to be manufactured, handled, processed, shipped and stored.” It’s certainly not the most efficient method.
The problem with forecasting is human error. According to Wahab, “Forecasting is flawed and tends to be more optimistic than it should be. As a replicator, having better software that will offer better real-time information is key. Knowing how much of a client’s product is on the shelf allows a replicator to give customers a heads up when it is time to reorder. However, reordering has to be the customer’s decision. There are delicate points of interaction, and a fine line of how to navigate the situation.”
Salvaggio agrees that manufacturers can help content providers achiever lower inventories. “It’s a difficult process of knowing how much inventory to keep. We supply to the labels, but we have to work with our own materials suppliers so that we have whatever we need to get orders out quickly.”
Increased emphasis on IT and systems will provide better, faster, more detailed management information to improve planning and help reduce waste. In terms of consulting, Bottoms says the Futuresource Systems activity has seen a surge in interest from companies across the entertainment spectrum looking to improve their management information systems to give better data on account and title profitability, and improved detail on stock levels and product movement.
Another area of business where the old rule books have been thrown out is distribution, according to Bottoms. “Studios and distributors look at every avenue for reducing costs and improving efficiency. A taboo for so long – shared distribution – is back on the table in many markets. The days of one box with Warner product in it and a separate one containing Fox product will soon be a thing of the past in many markets.”
In 2011, there was a long list of company announcements about combining local offices: Universal and Paramount; Sony and Fox; Universal and Sony. Bottoms thinks it is almost certain that plenty more such initiatives will be announced this year.
Replicators are helping combined distribution as well. Cinram’s Brown explains their involvement with UK retailer, Morrisons: “We category manage. We bring all of the studios together and put them all in one box and deliver. Not only studios, but record labels and games customers as well. Rather than the retailer receiving products in separate boxes, there is one delivery, one invoice, etc.” It’s a much more efficient way of doing things.
In the US, home video companies have shared returns for a while. Bottoms comments: “In video, retailers have to deal with ten different suppliers whereas with milk it is treated as a single product no matter what the company. This is particularly a concern when it comes to returns handling. Retailers say, ‘We don’t want to go through the pile of discs to separate studios and replicators.’ In the US video returns handling has been going on by Technicolor.”
While the US has made a few strides, returns are still an issue in Europe. “In the case of Disney product, for example, returns in the UK are sent back to Poland to be destroyed,” says Bottoms. Companies are looking at local destruction more often now. Why not just discount the product to sell? “That can open the door for more problems. For example, how many units has Walmart sold before cutting the price by 30%? Managing all of that is time consuming.”
“Physical product is not competing with download, it is competing for space in the retail stores!” according to Olivier Durand, Managing Director at supply chain development company, Emthelo. Issues are complex on the disc marketing side as well with studios battling the retail market for shelf space. To entice potential customers, there are more packaging SKUs than ever on both new and older product. “Too many SKUs may be a problem in terms of customer confusion and comparison shopping,” notes Salvaggio.
Durand agrees, from a consumer point of view, too many SKUs are confusing. “It may look like a good idea from a label point of view, but we are overcomplicating the shopping experience and customers may download out of pure frustration.”
Cinram’s Brown has been particularly outspoken about getting a handle on SKUs. In speaking to consumers, Cinram’s marketing group found that often people didn’t buy the Blu-ray combo discs because they didn’t “stop to read the package to see that there was a DVD in there as well. The sooner the industry standardizes SKUs, the sooner people know exactly what they are buying.” More than two SKUs for the same title, because it has different graphics, is difficult to deal with not only from a consumer perspective but for retail returns.
From Disc Makers’ perspective Maxey says multiple SKUs continue to be the norm right now, so they have learned to deal with it. “We have made some pretty flexible packaging lines that allow us to place people at different spots so that they can stick in a bubble gum card for example. On the positive side, extra features on different boxes allow consumers to see the value of more in the box.”
TRANSPORTATION AND WASTE
Increasing oil prices are also playing a part in the changing supply chain. Many of those we spoke to believe that content providers as well as manufacturers and packagers want to do as much work as they can locally. Whatever money they may save manufacturing or buying product overseas is now spent on shipping.
Another problem doing work far from home has to do with turn-times. As they are getting shorter and shorter, it makes more sense to do the work locally. “We have the CD plant, the print shop, the packaging, direct mail. Product only travels the 140,000 square feet of our plant. That not only saves on shipping costs, but it also saves time!” says Maxey.
If localized business is not possible, there are other ways to save money, says Durand. “It is worthwhile thinking about the size of the product.” Jewel boxes are a definite shipping culprit, he believes. “The disc market in Europe is about 400 to 500 million discs. That’s about 40 to 50 million tons of product moving across Europe. Most of that weight is packaging. A jewel box is 60 grams of polystyrene. Not only is that expensive to ship, but using something less bulky allows you to put more product on the retail shelf.”
Brown agrees: “Look at the logistics companies and the freight companies. They are picking up the graphics and boxes then delivering them to the replicator. Then they pick up the finished units and deliver them to retail. Later, they pick up the returns and deliver them back. Looking at carbon footprint, we have to drive out that waste in the trucking system to get those logistics worldwide down. I am confident that the marketplace is seeing that and waste will be driven out.”
Boorsma adds that, of course, a more efficient supply chain is tied into sustainability issues. “I am sure that sustainable companies with the best carbon footprint have the best ROI. There is a lot of CO2 used to manufacture a disc. The fewer discs you throw away, the less CO2 there is in the garbage. If you look at the components used in your manufacturing you can come up with ways to improve the supply chain and efficiencies.”
Admittedly, there may be a long way to go before the disc industry can claim complete supply chain efficiency but, as the old saying goes, ‘Necessity is the mother of invention.’ New ways of thinking can make those involved in the industry more profitable.