The Start-Up Harley-Davidson isn’t the only one using traditional post-and-parcel service as a way to revamp traditional supply chain tenets. In 1999, software engineer Reed Hastings established a subscription-based mail-order DVD rental business called Netflix in a small distribution warehouse in Los Gatos, Calif. At the time, if you wanted to rent a movie, you hopped into your car, stood on line at the video store, paid for your rental, and drove back home to your TV, only to hop back into the car the next day to get the DVD back to the rental location lest you face overdue fines and fees.
Using a propriety software system that remains secret to this day, Netflix allows users paying a monthly fee to instead select their movies over the Internet. DVDs are then mailed free of charge (usually in one business day) and can be returned at any time via the U.S. Mail in postage-paid envelopes without fees or hassles. As of this month, the company has more than 5 million subscribers and is shipping enough DVDs every week that if stacked together they would be taller than Mount Everest.
“Netflix has revolutionized the way Americans rent movies, and the proof of that is in our growth. We have more than 5 million members now, and we’ll finish 2006 with more than 6 million,” says Netflix director of corporate communications and company spokesman Steve Swasey. Paramount to that membership growth, Swasey says, is speed and dependability of delivery. “We realized early on that success wasn’t as much having a cool Web site or [providing] personalized recommendations, it was the fact that members got their movies fast,” Swasey says. “More than 90 percent of our members get their DVDs generally within a day. That’s where the logistics comes into play as a part of how we have put this process into an efficient model that we can replicate region after region after region.”
Fueled by a capital influx from a 2002 IPO, Netflix has done just that, erecting a total of 39 distribution centers across the United States, including two recent openings in Idaho and Alaska, proof that Netflix is indeed gaining a market well beyond its metro roots. For a construction supply business that has come to disdain the term cookie-cutter, Swasey suggests a re-evaluation, in as much as supply chain optimization coupled with growth is a central corporate goal. “We can set up a distribution center in 48 hours,” he says. “Once we identify real estate and sign a lease, we can be in there and operating in less than two days. The coupling of the automation and the manual labor from a hub in Gaithersburg, Md., to one in Phoenix is identical, it is absolutely cookie-cutter, and that is efficiency. Hub managers can step out of their hub and into someone else’s and run it without any delay.”
For delivery, Netflix partners with the U.S. Postal Service (USPS), which as a government agency is barred from offering the company any type of preferred services, despite Netflix’s status as the nation’s fastest-growing first-class-mail customer. Therein lies another of the company’s supply chain strategies easily transferred to any industry: adaptability. “When we talk about supply chain, a lot of that is managing and partnering with your vendors for maximum benefit,” Swasey says. “We ship and receive 14 million DVDs a week, so the key is for us to understand USPS processes to know how we can manage ourselves better to work within their processes.” To that end, Netflix drivers pick up incoming mail at USPS distribution centers rather than waiting for it to be delivered. The company also employs “ZIP-sorters” in all of its hubs to automatically organize mail in ZIP code–sorted standard U.S. Mail plastic trays, alleviating USPS of that responsibility in its facilities.
Indeed, Swasey suggests that any company, from DVD rental to motorcycle manufacturer to building materials supplier, focus on the needs and wants of its core customers before implementing any type of supply chain management effort, technological or otherwise. “This is a great software company,” he says, “but the graveyard is full of the bones of great software companies that never listened to their customers. Great technology means nothing if you are not applying it to a customer.”
AMR Research’s O’Marah agrees, lamenting that executives still seem to want to run their businesses where job No. 1 is to keep pushing product out the door and hopefully sales can get rid of it. “To be a best practice in today’s supply chain, you really have to find a way to let customer demand and market demand—the overall opportunity in the marketplace—to set the rules about the way you do things,” he concludes. “Everything from replenishment policies, assortment policies, or even product development where you are trying to bring new products and lines of business to your customers, you want to have that stuff happen on the basis of what people want. It seems really obvious, but it is remarkable how much work still needs to be done.”
