"1. What were some of the key structural and infrastructural elements that defined Netflix's supply chain strategy before 2011? After 2011?
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. At the end of 2013, Netflix still had 39 distribution centers mailing DVDs to seven million subscribers, although the latter number had fallen by half from the prior year. Should Netflix abandon its physical distribution system altogether? Why or why not?"
NETFLIX, at almost 20 years old, has more than 44 million subscribers worldwide and is now the most popular subscription media business in the United States.14 In the fourth quarter of 2013, Netflix had estimated total revenue of nearly $1.2 billion.15 But the road has not always been so smooth for Netflix. In 2011, Netflix dramatically changed its business strategy from one based on the physical distribution of DVDs and Bluray 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 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 circulating and continuing to earn 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 clean DVDs quickly and ship them out just as fast, so customersthe 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.
Netflix's Supply Chain Strategy, after 2011 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 Bluray 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 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: 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 customer 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
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