EMI Music Creates a Hit with Supply Chain: An Interview with Mike Frey
What operational challenges does the music industry face?
There are a number – the first is the unpredictable nature of selling music. Consumer tastes are constantly changing, and the past success of an artist’s album doesn’t necessarily mean that their next album will perform the same way, making it very difficult to plan. And when an album takes off, it takes off fast, and we have to be able to respond quickly. Inventory is also a huge issue. Retail floor space is expensive and retailers only want to carry enough inventory to meet consumer needs. Most of our customers are eliminating their traditional warehouses. They also want to minimize their risk of returns, and returns tend to run high in our industry. We introduce thousands of new titles each year, and most of these albums have a short life cycle – we don’t want to be caught with excess inventory or returns.In terms of distribution, our customers are putting more pressure on distributors to ship store-ready product directly to their retail stores. This means shipping product that has security tags and customer-specific price stickers to upwards of 25,000 locations. These challenges have placed a great deal of pressure on us to significantly improve our supply chain’s efficiency and delivery performance.
How did you go about identifying the issues that were hampering EMI’s performance?
Feedback from customers indicated that our service and delivery performance did not stack up to that of our competitors, and we set out to develop the capabilities to put us at the top. The first step was to better understand what our customers needed. We conducted a series of extensive customer interviews to identify deficiencies in our performance as well as to better understand current and future customer needs. A troubling piece of feedback was that our customers said that they usually knew when we had a hit album when EMI was out of product. This meant that our first issue was to quickly transform our ability to deliver hit product – those titles that are the best-selling albums in the market. In less than 150 days, we reduced our delivery cycle time by 60%, improved delivery performance to above 95%, and reduced our inventory levels by 45% for hit product. This did a great deal to improve our customers’ confidence in our operations.We then addressed the most critical aspect of our operations: releasing new music. New releases make up 40 to 50% of our customers’ business. It is very difficult to predict how a new album is going to sell before it’s available in the retail stores. And, of course, we hope every new album will become a hit. So as a solution to the unpredictable nature of music sales, traditionally we pushed our customers to order more product than they needed up front. This practice, however, was resulting in unproductive inventory and excessive returns. Except for the cases in which an album unexpectedly takes off, our customers routinely had more product than they could sell, and in our business, unsold albums are accepted as returns. We pushed excess product on our customers up front due to our fears that if an album became a hit, we would not be able to respond fast enough to our customers’ and consumers’ needs.
The other major issue was with our delivery performance for catalogue music. This segment includes albums that have been in our catalogue for as long as 10-20 years. Our catalogue includes artists like Frank Sinatra, Nat King Cole and specialty genres like jazz, blues, and classical music. We had very low on-time and complete delivery performance for this segment. Our poor performance was heightened by excessive levels of inventory for product that was not selling as well.
You were fairly aggressive in your performance targets, and expected results in a short period of time. What were the elements of the new program?
The key focus of the supply chain effort was to dramatically improve our time-to-market for all categories of product (new music releases, hits, and catalogue albums). Our goal was a 75% to 80% reduction in order cycle time with a target delivery of same day for top-selling product and next-day delivery for the balance of our catalogue. We also set out to significantly reduce our costs and reduce inventory by 50%. We will use the future cost savings to fund value-added services for our customers, including store-ready product, security tags, and price stickers.To achieve these objectives, we implemented improved demand-based planning and pull scheduling across our operations. A key differentiating strategy was to physically integrate production and distribution so that a single, cross-functional team of people are responsible for managing product from the start of production until it is received by our customers. Rather than storing our catalogue product in a remote distribution center, we developed the capability to fulfill customer orders for catalogue directly from our integrated fulfillment center in the Midwest, which is near our key customers' distribution centers. For new releases, we implemented a make-to-order model — manufacturing new releases to actual customer orders — so that product comes off the production line and is directly packed for shipment. This enabled us to cut the customer order cycle time by 60% and reduce our inventory liability by 40%. Our new abilities allow us to increase our service while reducing our inventory and costs. Finally, we renamed the combined manufacturing and distribution business "Customer Fulfillment Operations."
How have EMI's customers been responding?
Customer feedback has been outstanding. Numerous customers have rated us as their top-performing distributor. Because our strategy focused on quickly meeting our customers' critical needs, their perceptions began changing midway through the implementation effort. We've recently put our new capabilities to the test with our new D'Angelo album. Within two weeks of its release, demand was four times what we had expected. With our old model, we would have had to focus all our resources on this one album, causing our performance on other albums to suffer. Today, our quick response capability enables us to meet the enormous spikes in demand that come with having the number one album on the charts, on time, and with no impact to delivery performance.How has EMI used technology to achieve these performance improvements?
By focusing on process simplification and dramatically reducing non-value added steps we were able to achieve these improvements with little technology investment. The Accenture team we worked with challenged the way we were making and delivering music, and they helped us develop and implement practical improvements. By looking for ways to simplify our processes, they helped us reduce our technology investments.What technology we did leverage was focused on fulfillment automation and electronic integration with our customers to provide such capabilities as advanced shipping notification and electronic receipt. With the unpredictable nature of our product, our most effective means of improving our ability to plan is to collaborate with our retail customers. Our planning initiatives include utilizing our marketing efforts and point-of-sale purchases to identify activities that drive consumer purchases. By providing quick response capability and capturing consumer information, we can support both local and national market activity more effectively.
