Snapshot: Entertainment Logistics
Kelly Clarkson's first album sold four million copies. Her second exploded with 12 million. The third moved an anemic two million. Then four songs for her fourth album were stolen pre-release, and circulated by a hacker who penetrated her co-writer's Web site.
For a musician that may be show business, but for a supply chain professional, it's a business wrought with peril. In entertainment, every title is treated like a new product; sales history often does little to inform projections. And the risk of piracy is ever-present, diluting potential sales. Just ask Kelly Clarkson.
Whether the product is a movie, music, video game, or computer software, the issues facing the entertainment supply chain are common: short production windows, hard-to-forecast sales, high street-value products, and the looming specter of digital distribution promising to change it all.
Here we raise the curtain on some top issues challenging the entertainment supply chain.
HOT TOPICS: That's Entertainment
The entertainment supply chain is all about the last minute. The pressure to work on a movie, software title, game, or music release until it's just right means artists and developers push right up to the release deadline—and often past it. It is not uncommon for a new title to simultaneously undergo manufacturing and fulfillment to meet street dates. By necessity, the manufacturing and supply chain built around entertainment products is designed to accommodate delays.
"The entertainment supply chain operates at 75 percent of full capacity, which creates the flexibility to receive and master content, replicate it, then package and ship the same day," says Greg Schoener, vice president of technology and quality at The ADS Group, a Plymouth, Minn.-based replicator of DVDs, CDs, USB drives, videotapes, and audiocassettes.
"Those tight fulfillment deadlines are mixed with products requiring seven- to 10-day turnaround times," he adds.
These collapsed production schedules deter entertainment companies from turning to third-party logistics providers. Much of the mastering and replication process still takes place in North America, and parcel shipments predominate due to the tight deadlines and short runs. Entertainment titles are produced and distributed through a complex mix of licensing deals and sales terms, from outright purchases to consignment arrangements.
The entertainment industry continues to consolidate, thanks to an over-capacity of replication facilities in North America. A handful of replicators serve the major players in each format. Some entertainment companies, such as Sony Corporation of America, based in New York, are vertically integrated—owning everything from the label through to distribution, including licenses or cross-licenses for the formats (DVD, CD, Blu-ray) themselves. Replicators are expected to pay royalties to the license holders for every disc they create.
Each new title requires forecasting the volume of initial and subsequent sales, and developing a strategy for managing disc replication and packaging services.
"We could not launch so many products successfully without the ability to integrate the manufacturing and fulfillment/distribution functions within a single facility," notes Ron Vangrov, chief operating officer for replicator JVC America, Wayne, N.J. "Visibility to store-level demand is fed directly into the production planning process to ensure we allocate the necessary resources."
Format changes are a fact of life in the entertainment industry. The latest example: Sony's Blu-ray, which won the current DVD format war in January 2008.
"Replicators now have to invest in Blu-ray manufacturing lines," says Alison Casey, head of global content at Futuresource Consulting, a UK-based research firm tracking the video, music, and games supply chain. "And they must make this investment at a time when the market for home video has flattened, and consumers are less likely to upgrade their technology."
Each time the industry adopts a new format, the supply chain must accurately forecast the pace of consumer acceptance and produce accordingly.
"In the interim, entertainment companies are forced to carry two types of inventory in steadily changing volumes," says Dave Berry, director of logistics for Movie Gallery Inc., a video rental company and gaming store based in Wilsonville, Ore.
Fluctuating fuel costs impact entertainment software in two ways: how products are made and how they move.
Most products include three different types of plastic, as well as cardboard. "The cost and availability of polycarbonate (the strong plastic used to manufacture CDs and DVDs) has always been an issue," says Schoener. "High gas prices track closely to polycarbonate prices."
It's difficult to pass raw material increases on to the consumer, he says, resulting in tighter margins and industry consolidation.
On the transportation side, shippers are cutting back on expedited shipping and consolidating carriers to contain costs. For example, Koch Entertainment Group, an independent music distributor in Port Washington, N.Y., leveraged its high volumes to consolidate carriers, cut the use of next-day air from 20 percent to four percent of orders, and shifted more international shipments from air freight to ocean. Koch says its customers will trade longer delivery times for lower costs.
TIGHT DELIVERY WINDOWS
A key part of marketing a new entertainment title involves stirring up anticipation for its release. Distributors work closely with carriers to stage shipments to meet narrow delivery windows.
"This business is very time-sensitive," notes Philip Wulff, senior vice president of logistics at Koch Entertainment Group. "New releases are typically scheduled to hit retail shelves on Tuesday. You want the product at the store just in time so the retailer can't put it out too early. But it can't get there too late or you miss out on initial sales."
To achieve that balance, Koch built an in-house shipping matrix based on delivery times: first delivering to the West Coast, then to retail warehouses, and finally to independents.
"We constantly fine-tune the matrix; if FedEx or UPS improves their delivery time, we have to adjust the system," shipping later to avoid delivery too early.
The need to rush goods to meet street dates "puts a lot of stress on logistics infrastructure," says Jeff Strobel, senior account manager at Duplium Corporation, a Carrollton, Texas-based replicator and distributor. "Sometimes it's not humanly possible to meet a deadline. When that happens, manufacturing gets the blame."
Inefficiencies in entertainment distribution have driven up costs. For example, one distribution company could be shipping two half-empty cartons to the same retailer, each containing DVDs from different studios.
"In a sector that is controlled by vendor-managed inventory, and expects daily stock replenishment, this distribution approach is highly inefficient," says Casey.
To drive out such inefficiencies Walmart, which represents more than one-third of the U.S. home video market, is focusing heavily on sustainability and ecological issues. Other companies are bringing together different categories of entertainment product.
"Until recently, there have been separate supply chains for different entertainment products," says Casey. "No content company today plays in the music, video, and games space, except Sony."
On the packaging side, efforts are underway to use less plastic, slimmer packages, more post-consumer paper, and stacked—rather than separately packaged—discs within a jewel case. It's a balancing act, however, because materials and transportation savings can be lost to increased production time and cost.
CHANGING TASTES/CHANGING DISTRIBUTION
Billboard magazine's Top 100 list is celebrating its 50th anniversary. But its cachet has been diluted by a diversification of musical tastes; Billboard now maintains dozens of charts across a wide range of musical genres—from Hot Adult R&B to Latin Tropical.
The impact on distribution includes proliferating SKUs and smaller order volumes for any one title. Also driving smaller orders is increased demand for direct-to-store and direct-to-consumer delivery.
These changes require companies distributing product to retool their operations to handle everything from pallet-sized orders for big warehouse deliveries to each-pick and parcel shipping.
"The entertainment supply chain now handles many more SKUs, in much smaller production runs," says Strobel. "That drives up the cost of goods and shrinks margins."
Standardization has helped supply chain managers automate some handling processes. Video games and movies, for example, are packaged in a standard 15mm DVD case. But the emergence of interactive video games such as Guitar Hero and Rock Band, which require additional hardware, have complicated matters.
"We must adjust and build new facilities and processes to handle electronic components and large, bulk products," explains JVC's Vangrov. "This includes managing the supply and transportation of gaming devices from Asia; as well as the storage, materials handling, assembly, and distribution of large box products."
Those who missed the animated movie Flushed Away when it was released in theaters on Nov. 3, 2006, could catch it online about six weeks later, thanks to Salvador Nunez Jr., who allegedly pilfered a screener copy of the DVD from his sister, an Academy of Motion Pictures Arts & Sciences member who received the DVD as part of the Oscar voting process.
Nunez was caught thanks to watermark technology, which embeds data within content such as digital movies to connect them with a particular recipient. The replicator used the technology to read the code within the content after it was posted on the Internet and provided the FBI with the recipient's name and address.
Such techniques are among an evolving arsenal of tactics designed to help protect intellectual property in a world where one in three of all music discs purchased worldwide is illegal, and one of every three business software installations uses pirated content.
The Content Delivery and Storage Association (CDSA), a Princeton, N.J., trade association and standard-setting body, certifies and audits mastering and replicating operators who comply with security standards governing everything from access control, personnel policies, chain of custody, and over-run destruction practices to ensuring that customers have legal authority to duplicate the product.
Efforts to implement new technologies and practices must continually evolve to stay ahead of those seeking to break them. One idea currently under consideration is tracking or controlling the transfer of replicating equipment to prevent purchase by questionable parties, particularly as the industry transitions to Blu-ray.
"Companies need to mitigate the gap between what they are doing and what should be done," says Timothy Gorman, director, worldwide anti-piracy and compliance programs for the CDSA. "They must accept a certain amount of risk."
In a lawsuit filed in August 2008, game developer Ubisoft, with U.S. offices in San Francisco, claims an employee at its former disc reproduction firm, Optical Experts Manufacturing, took home a copy of the video game Assassin's Creed and leaked it on the Internet six weeks prior to the title's launch. That not only caused 700,000 illegal downloads of the game and millions of dollars in lost sales, but circulated a deliberately buggy version that deflated sales and damaged Ubisoft's reputation.
Fear of such breaches and other types of piracy, as well as lax, and often unenforced, intellectual property laws in low-cost countries, have affected replicator selection.
THE 800-POUND GORILLA: DIGITAL DISTRIBUTION
The entertainment supply chain is in the throes of a business model change as digital distribution picks up steam. Unit shipments of CDs were down 17.5 percent in 2007 over 2006, while downloaded singles jumped 38 percent and albums 54 percent.
To ensure they play an ongoing role in the industry, many replicators have launched digital distribution divisions to manage and secure the process. And the CDSA is developing a security standard covering the digital distribution of content.
"We're positioning ourselves with an infrastructure and logistics model that has nothing to do with discs," says Duplium's Strobel.
But the migration to digital is not moving as fast as some expected, and for many companies it consumes more investment than it reaps in revenues. What's more, all that content still must be placed in some storage format; what's changing is where that transfer takes place.
CHANGE IS PREDICTABLE
Every entertainment release strives to be a dynamo, not a dud. Excitement over the possibility of creating the next big thing bleeds into the entertainment supply chain, which must be tuned to accommodate both dynamos and duds with equal energy.
Format issues, time pressures, security practices, and cost concerns will continue to challenge supply chain executives to keep entertainment content moving. It's a tough act to follow.
CASE STUDY: 3PLs Pull the Strings
October 26, 2008, was the much-anticipated street date for Guitar Hero: World Tour. Getting the hot video game to stores quickly meant bypassing standard distribution routes.
"Distributing hot titles is one of our biggest challenges," says Dave Berry, director of logistics for Movie Gallery, the Dothan, Ga., operator of 3,500 Movie Gallery, Hollywood Video, and Game Crazy stores. "We have to be creative and flexible in how and where to do fulfillment."
Movie Gallery has developed relationships with 3PLs close to the locations of major game producers. The 3PLs handle fulfillment directly to stores, so retailers can start moving product—especially best-selling titles such as Guitar Hero—the moment it becomes available. In other cases, Movie Gallery personnel carve out space right on the game vendor's docks and do fulfillment there.
A game such as Guitar Hero, with packaging configurations accommodating accessories including a guitar controller, add to the complexity. Movie Gallery distributed approximately eight truckloads of Guitar Hero product via these 3PL partner relationships.
Handling a highly coveted product outside Movie Gallery's own distribution facilities raises security concerns. The company mitigates that through stringent checks and balances. "We analyze starting and ending inventories to make sure the weights match," says Berry. "Granted, this approach is not as bulletproof as measuring inventory levels in our own DCs."
For hot products, however, the security risk pays off. "We are more efficient and achieve quicker time to market," Berry says.
CASE STUDY: Taking a Cue From Customers
A software marketer turns to a 3PL co-star to help it manufacture software titles within narrow delivery windows as well as tackle inventory management and sales forecasting.
Just because consumers bought packaged anti-virus software in a big way in 2008 doesn't mean they'll buy in the same volumes in 2009. Forecasting sales is "a dartboard game," says Paula Hoisve, director of operations for Microgistix, a Minneapolis software marketer. "We've gotten better at it because we've had to."
Microgistix licenses software titles under strict contracts with publishers, then creates assortments of value-priced software for retailers such as Best Buy and Hastings Entertainment. These retailers often require custom graphics and assortments. Doing the job right means staying on top of trends; many consumers have shifted to downloads and software-as-a-service, for example, requiring Microgistix to constantly fine-tune its assortments.
These days, retailers are waiting longer to replenish inventory, putting increased pressure on Microgistix to order and deliver. To cope, the company relies heavily on The ADS Group, a second-tier replicator of DVDs, CDs, USB drives, videotapes, and audiocassettes, to not only manufacture its titles in tight time frames, but also to manage its inventory.
Customers increasingly are moving to a consignment model, further complicating Microgistix's ability to manage inventory, including returns. A portal into ADS' internal systems enables inventory visibility. "The visibility helped us allocate labor resources more efficiently and create more accurate forecasts," says Hoisve.
Microgistix receives daily sales data from customers. The information feeds a home-grown inventory management and forecasting application that identifies trends in four-week segments. "Customers are running tighter supply chains, so we have to as well," says Hoisve.
CASE STUDY: Getting the Game to the Gamers
Confronted with the challenge of helping a customer launch a top-selling, device-interactive product spanning all game platforms, JVC America jumped right in and took control.
When a leading video game manufacturer approached JVC America for help in launching a device-interactive product spanning all game platforms, the provider of global supply chain management and fulfillment solutions, optical media replication, and multimedia packaging was up for the challenge.
The initial goal was to jointly develop a new inbound logistics plan to cost effectively transport the gaming devices from their manufacturing plant in China to JVC's fulfillment facility in Kennesaw, Ga. The plan needed to account for possible manufacturing delays in China, unsettled West Coast dock union contracts, and unpredictable weather that could impact ocean transport.
JVC also had to confront the physical challenges of unloading, storage, and materials handling, given the product's large size and weight. And, the company had to develop an outbound logistics plan that could ramp up quickly and support 200-plus daily truckloads headed to retailer DCs, as well as thousands of daily small parcel shipments to fill direct-to-store and e-commerce orders.
Discussions and planning began nearly one year before the product launch, and both companies concluded that a dedicated facility was required.
In addition to the necessary square footage to accommodate storage, assembly, and outbound staging, the dedicated facility needed a cross-dock design with adequate dock door and truck court capacity to handle the anticipated high launch volume.
JVC and its customer shared concerns about the product's long-term viability. They also recognized that the facility requirements needed to support the product launch would greatly exceed ongoing replenishment needs. Because the companies did not want to be overly burdened with fixed overhead, the challenge was to quickly find a suitable facility with lease flexibility.
Thanks to a real estate buyer's market, JVC was able to locate a 542,000-square-foot spec facility in Douglasville, Ga., that had been unoccupied for an extended time.
Because the manufacturing delivery schedule and retail forecast was still unknown, the companies also needed a contingency plan in case JVC's primary facility would be insufficient to support the demand. With help from a sister company, JVC sub-leased underutilized space within a JVC electronics distribution center in Douglasville, Ga., which provided tremendous flexibility.
JVC spent months seeking the optimal pallet configurations and storage methods for warehousing and outbound logistics. This required the assistance and approval of many supply chain partners, including transportation providers and retail customers.
"It was easy to focus on the challenges of managing inbound containers; however, we continued to remind our customer that outbound logistics may, in fact, be the 'gating' item," says Ron Vangrov, chief operating officer, JVC America. "It doesn't matter how many inbound devices we can receive and assemble if there is insufficient hardware to support the launch volume. There was also the question of truck availability and whether retailers could handle high volumes of product with limited shelf space and store-level warehouse capacity."
JVC worked closely with retailers and their 3PL partners to develop a reasonable launch plan, including allowing 3PLs to operate within the JVC facility. The 3PLs brought their hardware to the facility and processed store-level orders on-site, eliminating transportation costs and time associated with moving product to a DC.
CASE STUDY: The Art of Automation
Warehouse automation upgrades set the stage for Koch Entertainment Group to speed order fulfillment and move its music products to market faster than competitors.
Koch Entertainment Group bills itself as an independent music distributor, but its volume suggests it's no small operation. Koch maintains a catalog of 25,000 titles and supports 100 active labels—including 40 of its own—out of its 100,000-square-foot warehouse in Port Washington, N.Y.
Koch has turned to automation in a big way, outfitting its warehouse with enough equipment to make even the most stoic distribution geek drool. Robotic picking and an automated storage and retrieval system crane handle large orders, while a pick-to-tote system helps facilitate smaller picks. Over the last five years, while artists began migrating away from the standard jewel case to alternative CD packaging, including cardboard sleeves, Koch experienced increasing demand for small shipments, which often are delivered directly to stores or to the end customer.
The warehouse totes were designed to hold 150 CDs or DVDs, but a plethora of orders for 10 to 20 CDs began taking up tote space and causing backlogs. The company lost additional time to manual shipping processes.
To manage the change, Koch invested in a high-speed sortation machine and a new shipping solution capable of handling up to 1,200 small orders an hour, and 18 orders simultaneously. A load balancing system helps operators redirect orders within the warehouse to prevent backups. Extremely sensitive gripping mechanisms on the sortation machine allow variable form factors, including cardboard sleeves, so Koch has the flexibility to use automation on a variety of package types. The new equipment has enabled Koch to stay competitive, even in the high-cost New York market.
"Our operations are highly automated and extremely flexible," notes Philip Wulff, Koch's senior vice president of logistics. "We've been able to adapt to fast changes in the entertainment industry."
CASE STUDY: Distributors Add a Bonus Feature
Some entertainment distributors help companies launch new titles without upfront investment.
In many industries, distributors buy finished product and resell it to retail and other channels. In entertainment, distributors may put even more skin in the game—and gain the potential for larger margins than other distribution models deliver.
"We act like a bank for our customers," explains Jeff Strobel, senior account manager, Duplium Corporation, a Texas-based distributor. "We spend money on print, packaging materials, even on risk buys. We don't charge the customer until we've sold the product into the channel. They use our dollar, instead of their own, to get the initial product manufactured."
For example, Strobel just cut a deal to release four titles in the United States for a customer big in the European music scene. He planned an initial run of 50,000 CDs.
"I ordered print components and packaging for 75,000 CDs. That was a risk buy on my part, but I got a better price point, resulting in stronger margins," Strobel says.
After the product is sold into a channel, Duplium charges the customer back for the investment. The customer reaps the initial sales and assumes liability for unsold product, but Duplium owns the replenishment side of the business.
Duplium also manages e-commerce, kitting, assembly, fulfillment, and reverse logistics through a partnership with King Solutions, Dayton, Minn. "We act like a 3PL," Strobel adds.