Supply and Demand - Case Study: Cabbage Patch Kids

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Turning the Supply Chain into a Revenue Chain
Turning the Supply Chain into a Revenue Chain
by Gérard P. Cachon and Martin A. Lariviere 
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In the summer of 1997, movie fans flocked to their local Blockbuster video stores eager to rent The English Patient and Jerry Maguire, only to find that all ten or so copies of each had already been checked out. Blockbuster shared their frustration. It knew it was annoying customers and losing sales.

It wasn’t that the company didn’t know how many copies it could have rented; demand could easily be predicted by looking at theater receipts. And it wasn’t that the company was inefficient at getting tapes into stores and returning rented tapes to shelves; its buying and replenishment processes were fine-tuned. The problem was that at $60 a copy, Blockbuster couldn’t afford to stock the number of tapes it needed to serve every customer, only to replace the mall a few weeks later with copies of the next hot movies.

Its suppliers, the movie studios, had to charge a high initial price to earn enough revenue themselves. But at $3 per rental, Blockbuster had to rent a tape more than 20 times to earn a profit. Given that peak demand for a title lasts only a few weeks, the company couldn’t justify buying enough tapes to even come close to satisfying initial demand. The studios’ high wholesale price limited availability, and no one—not the supplier, not the retailer, not the customer—was happy.

But in 1998, Blockbuster solved the problem by radically changing the way it paid its...
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