Netflix: Business Success Achieved through Information Systems
First formed in 1991, Netflix has become today’s predominant video rental service. They offer a hybrid service allowing DVD delivery by mail as well as streaming movies and TV shows via their company website or access on 200 other devices. Their unique business process has netted them over 16 million subscribers and revenue around $500 million annually. The reason for their growing success can be attributed to a good business model and just as important, properly implemented systems. An extremely efficient supply chain management system (SCM) and customer relationship management system (CRM) have helped Netflix become the world’s largest video subscription service. Before looking at the systems that make Netflix’s service possible, a brief overview of this service is needed. Subscribers pay monthly based on a tier pricing plan determined by the amount of DVDs that can be rented at a time. The tiers range from $7.99 for only streaming video, up to $55.99 for 8 DVDs at one time. It is important to know about this tiered-pricing system and how the amount of DVDs a subscriber can have at a time varies amongst their 16 million customers. Without an effective SCM system they would not be able to keep up with the always varying amount of DVDs being mailed out at a time. With millions of customers requesting various amounts of DVDs to be shipped to them every minute of the day, how can Netflix keep its inventory moving fast enough to earn a profit? According to Tom Dillon, Netflix COO, “the way you get more competitive, lower your costs, and provide better service is through continuous improvement of the information technology”. Dillon oversees the DVD fulfillment and believes that the source of the company’s competitive advantage is their investment in proprietary inventory management software. Originally using an Oracle ERP system, still used now only for financial information, Dillon felt that the system was “to big and bulky and was hindering innovation” in shipping DVDs. To improve this operation Netflix decided to write its own system (InfoWorld). Netflix had to design a new system that allowed their 37 shipping centers to process 1.3 million movies per day for one-day delivery. DVDs arrive back to the warehouses every morning and it is crucial to have a quick turnaround in order to satisfy customers and post office deadlines. The SCM they created runs supply-and-demand algorithms that take the information the company has, such as, who is owed a movie and what movies are available, and computes the 1.3 million daily orders in less than 25 minutes (InfoWorld).
So how effective is the new proprietary SCM software at improving the DVD shipping process? Before the new software was implemented, staff at the distribution centers did the following with all of the hundreds of thousands of movies that would arrive daily; the clerk would pick up a box from a pallet, locate the paperwork, and match that box with the purchase order. With the implementation of the new system, the clerk’s job has gotten a lot less time consuming and therefore more cost effective. Now the staff checks the disk sleeve to make sure it is the proper movie and scans the serial number. Netflix’s software takes over from here, considering the total inventory of that film, how many customer wish lists it appears on, and several other factors. The software then decides if this film needs to be shipped back out, placed in inventory, or retired due to lack of demand. The company is now able to check in a DVD and ship it back out same-day more than 90% of the time, as to 75% of the time with their old system (Stevens).
The system does not just decide where a DVD is going, it decides what DVD that customer actually wants to receive next. Since Netflix customers request their DVDs using a queue system, the software needs to decide what movie in that particular customer’s queue it is able to get to...
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