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The ‘Whoops’ Business Strategy in the Supply Chain

Industry observers have been saying for a while that one of the advantages of a just-in-time or build-to-order supply chain is the compression between the time a problem is discovered and its resolution. A decade ago, a deficit or excess of inventory in the supply chain could take as long as two quarters to correct; now, inventory can right itself in as little as eight weeks.

Theoretically, bad decisions should take even less time to correct, and we are seeing some compression there as well. Two high-profile businesses — {complink 10269|Netflix Inc.} and {complink 2376|Hewlett-Packard Co.} — have amended their strategies within weeks of announcing painful course corrections to their businesses.

Netflix is a movie and TV programming content supplier and nothing if not a supply chain company. A few months ago, Netflix announced it was doubling its subscription fees because it was getting hammered by on-demand and pay-per-view content services. The company immediately lost a huge number of subscribers and watched its stock go into free-fall. Now, according to the Wall Street Journal, the company is explaining why the rate hike: it's splitting its business into two separate enterprises: one for streaming video and the other, DVD by mail.

I don't see the connection — in fact, Netflix has yet to explain why the split is going to cost money — but that's the story, and Netflix is sticking to it. Part of the reason Netflix is responding (sort of) to the hullabaloo is that customer talk on email, YouTube, talk radio, cable TV, Twitter, and Facebook made it immediately clear that consumers were irate. So, even though Netflix isn't dropping its rates, users at least know why they will be paying more. But the company has a bigger hurdle to overcome: the US Postal Service (USPS). If the USPS has to eliminate Saturday deliveries or shut offices down around the US as it is threatening to, Netflix is going to have bigger problems than rate hikes.

HP did something similar when it announced it would spin off its PC business and discontinue its TouchPad tablet device. HP took a different tack: it slashed prices of its TouchPad and experienced the opposite problem of Netflix. Customers liked the new price point so much that HP decided to make a few more tablets. (See: Bumbling HP Strikes Again.) Luckily, HP has some inventory in the pipeline so it will be able to meet demand. (See: HP Chooses the Lesser of Two Evils.)

HP had some extra inventory on hand not because of poor planning (at least inventory-wise) but because it canceled a product line. The inventory will be consumed by the next production run. Netflix doesn't have a physical inventory problem — most of its content is digital — but it is going to have a big supply/demand problem if it can't win subscribers back. Also, at the time of the conception of its business model, it's unlikely Netflix could foresee the possible demise of the USPS. Streaming video is definitely the way to go, but it should have raised prices after its business was modified, not before.

At any rate, both companies are moving more quickly than they might have a decade ago when businesses relied on quarterly conference calls and shareholder correspondence for feedback on their business plans. Whether or not HP and Netflix are following the correct course is still up for debate. HP may want to rethink its strategy once again: it is still the leading PC brand in the world, according to a recent report by IHS iSuppli. Shipments increased by 2.8 percent in second quarter of 2011 over the prior year. Can you imagine how well the company could have done if it was actually trying?

13 comments on “The ‘Whoops’ Business Strategy in the Supply Chain

  1. Ariella
    September 20, 2011

    I love your title, Barbara. As for Netflix, part of the problem is that it is not acknowledging that it did anything wrong in increasing the rates for its customers — which is what prompted them to complain online and drop the service — but took the stance that so long as they explain why they did it, everything would be just peachy. Well, it isn't, and that becomes abundantly clear from the reactions to Reed Hastings' blog http://blog.netflix.com/2011/09/explanation-and-some-reflections.html. It now up to nearly 24,000 comments, and some of the comments generate over a hundred comments of their own.

  2. AnalyzeThis
    September 20, 2011

    Barbara, you have some really interesting points here… and I do agree with you that it is much easier to change direction these days, thanks to technological advances in the supply chain and other factors.

    However, while I do agree that bad decisions should theoretically now take less time to correct, I think a valid counter-argument would be that, conversely, companies are now more apt to make riskier decisions because any mistakes they make are now easier to fix.

    So perhaps this is causing companies to make decisions too recklessly, due to the fact that the stakes aren't quite as high now and the consequence of their mistakes are less dire?

    Just something to think about. As for the two examples you cited, I certainly do agree that both Netflix and HP have made some significant gaffs. And in the case of Netflix, I don't believe their attempt to “fix” the issue is making that situation dramatically better, although I do see their logic. Somewhat.

  3. Anand
    September 20, 2011

    HP may want to rethink its strategy once again: it is still the leading PC brand in the world

    @Barbara, I agree with your point. HP should rethink about its decision to spin off its business unit. I firmly believe many people still prefer PCs when it comes to high processing power, and HP is in a very good position to cater to that segment.

  4. _hm
    September 20, 2011

    Material inventory is one part of story. Human inventory, man power is another. Developing human man power inventory cost much more as compare to parts inventory. Business may be able to change course much faster, but they make significant loss in man power inventory. This sudden decision also is bad to trained technical persons.

     

  5. Daniel
    September 21, 2011

    Barbara, from end user point of view they are not bothered about companies’ internal politics and statics. They need a better quality service with minimal or affordable fee. In that case I don’t how Netflix can justify the price hike. For their administrative purpose, they had made two divisions each for DVD and steaming video section. For that why the user has to pay for them?

  6. Eldredge
    September 21, 2011

    It really seems like NetFlix didn't think through their rate increase very well. While an increase may very well have been justified and needed by the company, consumers are usually resistant when they are doubled, particularly in these economic times, and given that they know there is competition in the marketplace. And since their business model deals with supply direct to consumers, the loss of goodwill should be a primary concern in their decision. Whoops.

  7. jbond
    September 21, 2011

    Netflix has definitely caused discontent with customers and potential customers. On top of raising their rates, they have not given a solid explanation as to why the increase is needed, other than competition from free services. HP, should really think about their business model. On one hand they are still the leading PC maker, even though they say they're exiting the business. And on the other hand they are going to try and compete with IBM in their new business model. It would appear their better move is to stick with what they're good at and find the weak links and repair them.

  8. Eldredge
    September 21, 2011

    In retrospect, it does seem like HP missed the mark in choosing such a deeply discounted price point for the TouchPad, even though they were discontinuing it. Another contrasting point with NetFlix's 2X increase for services. Both cases seemed to inaccurately predict the elasticity curve, although the impact is a much larger issue for NetFlix.

  9. Ariella
    September 21, 2011

    @DennisQ from what I've seen in defense of Netflix, the argument is that the division makes sense from a business point of view. But it fails to take into account the fact that customers who signed on expecting everything for one price feel both cheated and betrayed to have the terms switched on them. They are not only leaving because they don't think the service is worth the higher cost but because they feel the way they were treated by Netflix shows a total lack of consideration for them. The topper was Reed Hastings' “Explanation and Some Reflections,”which took it for granted that an explanation was all that was needed to smooth things over. The wording and tone simply reinforced the impression of the compnay arrogance and cluelessness about what its members are upset about.

  10. prabhakar_deosthali
    September 22, 2011

    What conclusions I draw from this article is that , with increased pace , the industry has lost  the long term vision. The feedback loop has become unstable and hence the Supply chain “control system”  has become overreactive.

    Like in the stock market where a company president's sneeze can cause tremors in the stock prices,  the technology companies also seem to have become overreactive to market conditions.

     

     

  11. Ariella
    September 22, 2011

    And they would be wise to anticipate them with some thorough market research before they act.

  12. Himanshugupta
    September 22, 2011

    I actually draw two conflicting conclusions from the examples of Netflix and HP: either that the companies have become bold in decision making that they no longer need to explain their strategy in public even though it can affect their share price or that the executives have become so dumb that they no longer think ahead than a day. 

    Ariella has a very valid point that the companies should invest in market research and collect consumer opinions to better streamline their decisions. The flip side is that this is no longer valid for new products as consumers might be as confused as any company.

  13. Ariella
    September 22, 2011

    In the case of Netflix, though, the company was not introducing new products but repackaging its existing product into two boxes, which translates into double the cost for members — something they were not pleased about at all. That's what they should have tested: what is a person's reaction when told s/he will continue to receive the same service but have it handled by two different entitities, each of which will have to be paid? 

    As for new products, I think it is very important to test those out before release. You should learn about problems in operation, confusing or difficult to manage controls, or even what people think about how the design looks before mass production and shipment. Otherwise, you can be stuck with a lot of stuff people don't want to buy.

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