Chapter 2. Operations and Supply Chain Strategies CASE STUDY Netflix NETFLIX, now 20 years old, has more than 94 million sub- scribers worldwide and is the most popular subscription media business in the United States.5 In the fourth quarter of 2016 alone, Netflix had estimated total revenue of nearly $2.4 billion. But the road has not always been so smooth for Net- flix. In 2011, Netflix dramatically changed its business strategy from one based on the physical distribution of DVDs and Blu- ray discs, to one based predominantly on the direct streaming of entertainment content across the Internet. This case study looks at the impact on Netflix's supply chain strategy. Netflix's Supply Chain Strategy, before 2011 Before 2011, Netflix's supply chain strategy mixed information technology and physical logistics to replace traditional brick- and-mortar stores, such as Blockbuster. The Netflix Web site not only served as a virtual storefront but also used custom- ized software to track its subscribers' preferences and make recommendations based on an individual's viewing habits. Enough subscribers responded to these recommendations that Netflix could keep many of its older DVD titles circulat- ing and continuing to earn revenue, while lowering demand somewhat for the "latest" releases. The second major piece of Netflix's supply chain, its dis- tribution system, was just as critical to the firm's success. By operating several distribution centers around the United States right from the start, the company was able to accept, inspect, and clean DVDs quickly and ship them out just as fast, so cus- tomers experienced very short wait times between placing their orders and receiving their DVDs. By 2011, Netflix had about 60 distribution centers in operation. For the most part, Netflix's traditional supply chain, with its one-day delivery and same-day processing, was effective. Its inventory system not only automatically tracked incoming DVDs that customers had returned, it also emailed each cus- tomer a confirmation of receipt and alerted the appropriate shipping center to send the next title on that customer's list or queue. It also ensured that subscribers weren't sent more DVDs than they had paid for (customers were limited to a cer- tain number of DVDs per month). However, a number of fac- tors affected which DVDs a subscriber got and when they got them. If there weren't many copies in the system, the company would ship one from a center that was far from where a sub- scriber lived. Another was the popularity of the movies. Often there were fewer copies of a newly released film than there were people who wanted to see it. And the shipping process, Netflix's Supply Chain Strategy, Today In retrospect, all the problems listed earlier stemmed from the fact that Netflix's traditional supply chain tied the delivery of an intangible service (information content) to a tangible item (a DVD or Blu-ray disc). With this in mind, starting in 2007 Netflix made a conscious effort to take advantage of advances in information technology and move to a truly virtual sup- ply chain that uses the Internet to both manage subscribers accounts and stream content directly to them. Such a supply chain has numerous advantages, including: . Subscribers can receive content immediately. Netflix no longer needs to manage an expensive net- work of distribution centers. In addition to cutting costs, this also allows Netflix to quickly expand into any market that has Internet access. Netflix no longer needs to make decisions regarding how many DVDs or Blu-ray discs to order or where to stock them. But this new supply chain solution is not without its risks: Upstream supplier risks. Netflix depends on enter- tainment companies to provide the content subscrib- ers want, yet many of these companies have concerns about having their content-particularly newer shows and movies-delivered in electronic format.17 If enter- . tainment companies refuse to license their products or provide only limited access to their "best" content, this could undermine the quality and range of Netflix's offerings. Downstream distributor risks. Instead of hav- ing the U.S. Postal Service deliver discs, Netflix's new supply chain strategy depends on Internet service providers (ISPs), such as cable companies and satel- lite network providers, to deliver the content. Many of these providers have been arguing that Netflix or its subscribers should pay higher fees due to the higher levels of traffic they generate. And even if these issues are resolved, higher traffic levels could result in over- loaded networks and service interruptions. Competitive risks. Today, Netflix faces a new set of competitors, including Amazon, Google, and Hulu, and possibly new companies that have not yet entered the market." is Nevertheless, Netflix provides an excellent example of how supply chain strategies can provide firms with a disting

Enough subscribers responded to these recommendations that Netflix could keep many of its older DVD titles circulating and continuing to eam revenue, whille lowering demand somewhat for the "latest" releases. The second major piece of Netfix's supply chain, its dis. tribution system, was just as critical to the firm's success. By operating several distribution centers around the United States right from the start, the company was able to accept, inspect, and clean DVDs quickly and ship them out just as fast, so customers experienced very short wait times between placing their orders and receiving their DVDs. By 2011, Netflix had about 60 distribution centers in operation. For the most part, Netflix's traditional supply chain, with its one-day delivery and same-day processing, was effective. Its inventory system not only automatically tracked incoming DVDs that customers had returned, it also emailed each cus. tomer a confirmation of receipt and alerted the appropriate shipping center to send the next title on that customer's list or queue. It also ensured that subscribers weren't sent more DVDs than they had paid for (customers were limited to a certain number of DVDs per month). However, a number of factors affected which DVDs a subscriber got and when they got them. If there weren't many copies in the system, the company would ship one from a center that was far from where a subscriber lived. Another was the popularity of the movies, Often there were fewer copies of a newly released film than there were people who wanted to see it. And the shipping process. which involved multiple handling steps, sometimes resulted in damage to the DVDs. But this nerr supply chain solution is not without its riske - Upstream supplier risks. Netflix depends on entertainment companies to provide the content subscribess want, yer many of these companies have concerms about having their content-particularly newer shows and movies-delivered in electronic format. "If entertainment companies refuse to license their products or provide only limited access to their "best" content, this could undermine the quality and range of Netflix's offerings. - Downstream distributor risks. Instead of having the U.S. Postal Service deliver discs, Nerflix's new supply chain strategy depends on Internet service providers (ISP), such as cable companies and satellite network providers, to deliver the content. Many of these providers have been arguing that Nefflix or its subscribers should pay higher fees due to the higher levels of traffic they generate. And even if these issues are resolved, higher traffic levels could result in overloaded networks and service interruptions. - Competitive risks. Today, Netflix faces a new set of competitors, including Amazon, Google, and Hulu, and possibly new companies that have not yet entered the market. Nevertheless, Netflix provides an cecellent example of how supply chain strategies can provide firms with a distinctive competitive advantage and how these strategies need to adapt to changes in technology and the marketplace. Questions 1. What were some of the key structural and infrastructural elements that defined Netflix's supply chain strategy before 2011 ? Today? 2. How have the customers' order winners for Netflix's customers changed over time? Would today's customer be satisfied by the delivery performance or selection of Netflix's "old" supply chain? 3. As of early 2017, Netflix still supported customers who want to rent DVDs, although the number of subscribers has fallen to around 4.1 million (vs. 94 million online subscribers) 19. Should Netflix abandon its physical distribution system altogether? Why or why not? Netflix NETHIX, now 20 years old, has more than 94 million subscribers worldwide and is the mose popular subscription medla business in the United States. 15 In the fourth quarter of 2016 alone, Netflix had estimated total revenue of nearly \$2.4 billion. "But the road has nok always been so smooth for Netflix. In 2011, Netflix dramatically changed its business strategy from one based on the physical distribution of DVDs and BLFray discs, to one based predominantly on the direct streaming of entertainment content across the Internet. This case study looks at the impact on Netflix's supply chain strategy. Netflix's Supply Chain Strategy, before 2011 Before 2011, Netflix's supply chain strategy mixed information technology and physical logistics to replace traditional brick. and-mortar stores, such as Blockbuster. The Netflix Web site not only served as a virtual storefront but also used customized notrware to track its subscribers' peeferences and make recommendations based on an individuat's viewing habits. Enough subscribers responded to these recommendations that Neflix could keep many of its older DND tieles circulating and continuing to eam revenue, while lowering demand somewhat for the "latest" releases. The second major piece of Netflix's supply chain, its distribution system, was just as critical to the firm's success. By operating several distribution centers around the United States right from the start, the company was able to accept, inspect. and dran DVDs quiclly and ship them out just as fase, 10 customers experienced very short wait times between placing their onders and receiving their DVDs. lly 2011, Netflix had about 60 distribution centers in operation. For the most part, Nertlix's traditional supply chain, with its one-day delivery and same-day processing, was effective. Its invrary system not onily autoauzically tracked incoming OVD that customers had returned, it alo emaikd each cus: twiner a confinmation of receipt and alented the appropriate shipping center to send the next titic on that customer's list or queve. It alve casured that sobscribers werent sent mote DWbe than they had paid for kcustoeners were liniad to a certoss affected which DVDi a uubucriber got and when they jot thim. H there worem? mamy copics is the syatem. the company would ship one frem a center itas was ber from whicte a nob. Netflix's Supply Chain Sirategy, ioday In retrospect, all the problems lisied earlier suenamed from the fact that Netflix's troditional supply chaln tied the delivery of an intangible service (information content) to a tangible item (a DVD or Blu-tay disc), With this in mind, starting in 2007 Nefflix made a conscious effort to take advantzge of advances in information technology and move to a truly virtual supply chain that uses the Internet to both manage subscribers? accounts and stream content directly to them. Such a supply chain has numerous advantages, including. - Subscribers can receive content immediatdy. - Neflix no longer needs to manage an expensive network of distribution centers. In addition to cutting costs, this also allows Netflix to gutickly expand into any market that has lnterner access. - Netflix no longer needs to make decisions roganding bow many DVDs or Bla-ray dises to order or whene to stock them. But this new supply chain solution is not without its riskx. - Upstream supplier risks. Netflix depends oa entertainment companies to prowide the content subscribos want, yet many of these companies have concerm about having their content-particularly newer shows and movies- - delivered in elcetronic format." "If entertainment companies refuse to license their products or provide enly limited access to their best" content, this could undermine the quality and range of Nafilix's offerings. - Downstream distributor risks. Insead of has. ing the US. Postal Service deliwer discs, Netflixs new supply chuin straicgy depends on Internet servke providen (IST), suah as cable companies and satellite netwoek providers, to detiver the cuatent. Many of these providers have been arguing that Nerfix or its subscribers shomild pay higher fees due to the higher kvis of traffic they generine. And eves if these insues are rewotwed, ligher traflic kvels could mault in over losded networks and service iaterrupuicos. - Campetitive risks. Today, Nedilix laces a new ner of and possbly new cuenpanies that haw not jur criver. dhe morker