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a5490 - 1 - FINAL CONFIDENTIAL The UK Book Industry Unlocking the Supply Chain‟s Hidden Prize 16th February 1998 Working together for a more profitable industry Management report Contents a5490 - 2 - FINAL CONFIDENTIAL Summary of main conclusions and recommendations Introduction Objectives and scope Approach Participants Analysis of current situation 5 areas of change – – – – – transaction processes partnership in demand and list management management of stock and capacity distribution efficiencies returns Our recommendations – quick wins – – strategic change programme: benefits priority projects longer term projects Obstacles to change The case for change Next steps Book Industry Supply Chain Project Phase 1 - Conclusions a5490 - 3 - FINAL CONFIDENTIAL The current book industry supply chain structure is complex and costly, characterised by high fragmentation, few economies of scale, and many-to-many trading relationships At root are fundamental issues about the nature of the publishing and bookselling process The structure is the legacy of an age of large batch sizes and infrequent orders and is not relevant to today‟s little-andoften ordering patterns There is an inevitable tension between the creative processes in publishing and bookselling and the technical disciplines of supply chain management There is little exploitation of opportunities for economies of scale in physical distribution and transaction processing Trading relationships are complex, largely adversarial, with little partnership activity There is little joint planning across the supply chain The long tail of slow moving titles is responsible for a disproportionate share of costs and wastage The very high number of new titles is dealt with inefficiently and cause lost sales, high costs and wastage Little-and-often ordering has reduced returns somewhat, but sales are being lost in the process Category management and demand planning are not properly understood or applied in the book industry Opportunities for electronic commerce are not being seized The competition for retail exposure causes Publishers to push stock into the supply chain, accepting the risk of returns this creates. Partly this is due to: – – – – dependency on new titles shortcomings in the responsiveness and efficiency of the supply chain perceived limitation of retailers‟ re-ordering policies retailers not incentivised to resist because they carry little stock risk There are a number of obstacles to change to be overcome for the industry to reap all the benefits available These include mistrust of trading partners‟ motives, complacency, the difficulty of balancing requirements for individual versus industry-wide benefits, and short-termism There is a pressing need for action, as financial returns are low, and there is major competition for consumer attention and spending Book Industry Supply Chain Project Phase 1 - Recommendations a5490 - 4 - FINAL CONFIDENTIAL Phase I has identified a number of quick wins that industry players can initiate by themselves These will have a material impact on the supply chain within one year The industry needs to take co-ordinated action in five interrelated areas to move from high cost trading conditions to more effective and efficient trading relationships Improvements in transaction processes Partnership trading arrangements in list and demand management Improved stock management and better use of printing and distribution capacity Distribution efficiencies Reduction in the level and cost of returns We recommend a number of priority and longer term projects that form a strategic change programme to unlock the benefits available An industry pressure group of senior executives should be appointed to overcome existing obstacles, drive through the change programme, and co-ordinate industry action KPMG also recommends that the industry establish formal liaison mechanisms between the Booksellers and the Publishers Associations to reflect their common supply chain Book Industry Supply Chain Project Phase 1 - Description a5490 - 5 - FINAL CONFIDENTIAL Project description Identify the opportunities available to the book industry to reduce operating costs and increase service levels through improved supply chain management Project objectives Analyse the cost of the common processes in the supply chain Size the prize by analysis of the scope for cost reduction and improvements in customer service by comparison with best practice in other sectors/markets Identify quick wins achievable and outline scenarios for alternative solutions Project scope The focus is on the UK retail book trade, and encompasses publishers, printers, distributors, wholesalers and retailers Project deliverables Costs involved in the common supply chain processes and the potential benefits available to the industry Where the major benefits might lie, and what options are available for action What benefits there are for individual sectors in the industry What quick wins are available immediately Book Industry Supply Chain Project Phase 1 - Summary of Findings a5490 - 6 - FINAL CONFIDENTIAL Book industry spend on the UK retail supply chain is £3/4 billion per annum The industry is more costly and wasteful than other consumer goods sectors – publishers‟ logistics costs are 13% of sales, amongst the highest in industry (average costs to a typical consumer goods manufacturer are 6%) Returns alone cost about £100 million per annum, each return typically costing a Publisher £1 and a Retailer 50p Inventory management through the supply chain is uncoordinated. The result is more than 60 weeks stock in the system. There is substantial stock wastage which is inflated by inappropriate supply chain processes (up to 20% of total production) Real service level requirements are unclear and show wide disparity both in delivery and perception 3% of titles sold make up 50% of unit sales in traditional bookshops yet there is no differentiation in the supply chain between major and minor titles Consolidation of distribution is still comparatively low, leaving an industry characterised by many-to- many trading relationships and limited economies of scale – booksellers can source 80% of their requirements from 29 distributors, yet individual stores still deal direct with a multitude of smaller suppliers Benefits available from an industry-wide change programme could exceed £150 million per annum Contents a5490 - 7 - FINAL CONFIDENTIAL Summary of main conclusions and recommendations Introduction Objectives and scope Approach Participants Analysis of current situation 5 areas of change – – – – – transaction processes partnership in demand and list management management of stock and capacity distribution efficiencies returns Our recommendations – quick wins – – strategic change programme: benefits priority projects longer term projects Obstacles to change The case for change Next steps Introduction a5490 - 8 - FINAL CONFIDENTIAL The supply chain has become a much quoted phrase and its importance was highlighted at the 1997 Booksellers Association conference in Dublin. There is a substantial prize for all players if the industry can move towards a more efficient supply chain model The book industry's supply chain is particularly complex and has to handle a large number and wide variety of products. It involves many different players (publishers, printers, distributors, wholesalers, retailers) and many common processes and related information flows (e.g. buying, distribution, sales, customer service, returns) The key to achieving the benefits available from improved supply chain management is to simplify and standardise these common processes by co-operation between trading partners. All players can benefit from lower operating costs, improvements in customer service and a reduction in lost sales To achieve change requires industry focus. In order to address the challenge, the PA and the BA together set up a steering committee to identify the size of the benefits locked within the supply chain and how to release them in ways which bring mutual benefit to all players This management report summarises phase 1 of the study Contents a5490 - 9 - FINAL CONFIDENTIAL Summary of main conclusions and recommendations Introduction Objectives and scope Approach Participants Analysis of current situation 5 areas of change – – – – – transaction processes partnership in demand and list management management of stock and capacity distribution efficiencies returns Our recommendations – quick wins – – strategic change programme: benefits priority projects longer term projects Obstacles to change The case for change Next steps Objectives and Scope a5490 - 10 - FINAL CONFIDENTIAL The scope of the study focused on the core components of the UK retail supply chain Supply chain Library and school supplier Printer Institutions Wholesaler Author/ illustrator Consumer/ reader Publisher Distributor Retailer Scope definition Flow in scope In scope Book Club Flow out of scope Out of scope Export channels Contents a5490 - 11 - FINAL CONFIDENTIAL Summary of main conclusions and recommendations Introduction Objectives and scope Approach Participants Analysis of current situation 5 areas of change – – – – – transaction processes partnership in demand and list management management of stock and capacity distribution efficiencies returns Our recommendations – quick wins – – strategic change programme: benefits priority projects longer term projects Obstacles to change The case for change Next steps Approach a5490 - 12 - FINAL CONFIDENTIAL Our study focused on those processes which were common to participants in the chain Buying Distributing Selling Customer service Returns Informations flows Publisher Printer Process shared across industry Process not shared by player Distributor Wholesaler Retailer Approach a5490 - 13 - FINAL CONFIDENTIAL The process for change was phased with clear objectives and deliverables at each stage Phase 1: Assess the scope for improvements in supply chain management within the industry Analyse the cost of common Phase 2: Design an optimal supply chain model and recommend a procedure for realising benefits identified in Phase 1 including: Description of alternative models and processes in the supply chain „Size the prize‟ by analysis of the scope for cost reduction and improvements in customer service by comparison with best practice in other sectors/markets Identify „quick wins‟ achievable and scenarios for future management of supply chain, and analysis of their strengths, weaknesses and benefits Recommendations for optimal design and performance methodologies for industry Recommendation of procedures for attaining Phase 3: Implementation of recommendations from Phases 1 and 2 through multiple projects the identified benefits Clear and implementable action plan outline scenarios for alternative solutions showing ease and cost of implementing each element Approach a5490 - 14 - FINAL CONFIDENTIAL During phase 1, the emphasis has been on collecting and analysing high level data in order to develop options and approaches to change and build commitment for phase 2 Step 1: Planning Step 2: Data collection Step 3: Data analysis and option development Agree information requirements Conduct discussions with management of participants and other industry players Identify opportunities and potential barriers to change Develop options and approaches to change Identify potential benefits Compare with best practice parameters Mobilisation Agree participation criteria Validate information request Roll out to participants Validate and analyse information Agree participants Contents a5490 - 15 - FINAL CONFIDENTIAL Summary of main conclusions and recommendations Introduction Objectives and scope Approach Participants Analysis of current situation 5 areas of change – – – – – transaction processes partnership in demand and list management management of stock and capacity distribution efficiencies returns Our recommendations – quick wins – – strategic change programme: benefits priority projects longer term projects Obstacles to change The case for change Next steps Participants a5490 - 16 - FINAL CONFIDENTIAL Leadership for the project was provided by a steering committee comprising 14 senior industry figures Project structure Steering Committee BA Council Iain Burns (Aspen Group) - Chairman Ian Taylor (Publishers Association) - Secretary Charles Ashford (Marston Book Services) Sydney Davies (Booksellers Association) Toby Faber (Faber & Faber) Alan Giles (Waterstone‟s) Brian Green (BIC) Les Higgins (HarperCollins) Terry King (THE) Michael Johnson (Devizes Books) Shirley Noakes (W.H. Smith Retail) David Pemberton (TBS) Joe Sinyor (Dillons) David Young (Little, Brown) PA Council Participating companies BIC Supply Chain Focus Group KPMG Core Team Sarah Charles: lead partner Gary McIlraith: supply chain partner Alan Newman: engagement director Kirti Thanki : engagement manager Andrew Hodder-Williams: publishing specialist Andrew Tidey: wholesaling/retail specialist Chris Stanley: distribution specialist Simon Hay: supply chain analyst Tim Harwood: supply chain analyst Other KPMG Resources Global supply chain practice Global book industry network Other industry expertise Participants a5490 - 17 - FINAL CONFIDENTIAL Quantitative and qualitative data was gathered from a representative sample of the industry Data providers Publishers Printers Distributors Wholesalers /RDC/Library Supply Bertrams THE WHS Swindon Interviewees (from data providers except as specified) Retailers Publishers Printers Distributors Wholesalers/ RDC/ Library Supply Julian Rivers Retailers Random House Macmillan Press HarperCollins Clays (St Ives) Bath Press TBS Macmillan Distribution WHS Retail Waterstone‟s Dillons Tesco Devizes Independents „panel‟ Simon Master Gary Iceton David Pemberton Beverley Hodson Alan Giles & Adrian Soar, Dominic Knight & Liz Warner Les Higgins David Young Peter Ferris Toby Faber Philip Kogan & Peter Palframon & David Smith Richard Tucker Jeff Prince Chris White Charles Ashford Tony Wagstaff Desmond Clarke Martin Lee Joe Sinyor Fiona Kennedy Michael Johnson Mark Wait Marston Thomas Cork Ian Walker Biblios Little, Brown Wiley Faber & Faber Kogan Page (ITPS) Alan Martin (IBD) (Heffers) Mark Clutterback (Johns Booksellers) Matthew Huntley Gordan Watts Mark Barty-King (P&G Wells) Malcolm Gibson (Transworld) Anthony Forbes (Volume One) Watson & Andrew Welham (Penguin) Others: Tony Ferratro (Securicor) Mike Barnard (PIRA/Macmillan) Shaun Plunkett (EMI) Cees Hagenbeek & Henk Geer (Centraal Boekhuis) Paul Pounsford (Teleordering) Richard Knight & Jeremy Neate (BookTrack) Dennis Bennett (VISTA Computer Services) Iain Burns (Aspen Group) Ian Taylor (Publishers Association) Sydney Davies (Booksellers Association) Frank Fishwick (Cranfield Business School) Brian Green (BIC) BIC Supply Chain Focus Group Contents a5490 - 18 - FINAL CONFIDENTIAL Summary of main conclusions and recommendations Introduction Objectives and scope Approach Participants Analysis of current situation 5 areas of change – – – – – transaction processes partnership in demand and list management management of stock and capacity distribution efficiencies returns Our recommendations – quick wins – – strategic change programme: benefits priority projects longer term projects Obstacles to change The case for change Next steps Analysis of current situation a5490 - 19 - FINAL CONFIDENTIAL The study focused on the one third of UK publishers‟ revenues derived from the UK retail channel Publishers invoiced sales (1996) UK via retail channel UK via non retail channel* c £0.95 bn c £0.95 bn Mark up UK total consumer and institutional expenditure on books (1996) Via retail Via non retail* £1.5 bn £1.2 bn £0.55bn £0.25bn UK expenditure £2.7 bn Export Total £0.9 bn £2.8 bn * non retail defined as direct, institutional, bookclub and other non retail channels UK publishers‟ revenues are derived broadly 1/3 from UK retailers, 1/3 from overseas, and 1/3 from other UK sources (including institutional and direct supply) The UK component of distribution costs incurred by publishers from wholly owned or outsourced operations was estimated at £215 million Revenues of trade and merchandising wholesalers were estimated at £260m invoiced value Source: PA, BA, Book Marketing Ltd, Participant Data, KPMG Analysis of current situation a5490 - 20 - FINAL CONFIDENTIAL The UK book industry is characterised by the huge range of publishers selling through the retail channel Publisher Sales 100 The size of the publisher tail Number of imprints publishing in year Number of titles published % of sales Larger imprints % titles published by larger imprints 80 60 40 20 0 33% 1996 56% 9,188 8,844 8,509 108,625 102,703 97,494 1,436 1,409 1,378 84% 84% 83% 1995 1994 10 39 No. of Publishers Source: P.A. KPMG, Book Marketing Ltd, retail participant > 15,000 Notes: Larger imprints are those publishing more than 10 titles in a year Large publishers may own many imprints Not all imprints publish each year (16,742 different imprints have published in the last three years) 48,000 imprints are recorded on Whitakers Bookbank Source: Whitakers There is a low concentration ratio in the UK industry – the market share of the leading publisher is less than 9% by value The difficulty of controlling information about titles grows year on year Almost 17,000 “imprints” published titles between 1994 and 1996 Analysis of current situation a5490 - 21 - FINAL CONFIDENTIAL The retail base is more concentrated than the publishing community, but there is still a long tail of smaller accounts Retailer Sales 100 700 600 UK Independent Booksellers by Book Turnover (source: The Booksellers Association) % of sales 80 No. of outlets 70% 500 400 300 200 100 60 42% 40 20 0 5 25 Number of Retailers 3,312 * 0 0-50 50100 100200 200300 300400 400500 500750 750- 1000+ 1000 Source: B.A. KPMG (* 3,312 = B.A. membership) Sales £ 000's With a few notable exceptions, localised store buying and direct delivery to store is the norm EPOS system penetration is not complete, but initiatives by chains should see major gains in 1998 Small deliveries are required for both smaller and larger retail customers Analysis of current situation a5490 - 22 - FINAL CONFIDENTIAL 3% of titles sold make up 50% of the total volume Sales analysis by title 50000 Number copies sold 40000 30000 20000 10000 0 1 51 101 151 201 251 301 351 401 451 501 Ranking of title The remaining 50% of volume is derived from a long tail of slower moving product The “tail” includes titles aimed principally at the non retail market, or whose economics depend on international co-editions These figures do not include those titles for which no sale was recorded! Source: Booktrack, based on data from their “£600m” high street bookshop segment, which excludes supermarkets, multiples, academic and religious bookshops, over three month period Analysis of current situation a5490 - 23 - FINAL CONFIDENTIAL Booksellers can source 80% of their requirements from 29 distributors and 53 publishers, yet individual stores still deal directly with a multitude of smaller suppliers Comparison of number of publishers and distributors making up 80% market share of £600m high street bookshop market 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 Market share M arket share - publishers M arket share - distributors Number of companies Consolidation of distribution is still comparatively low leaving an industry characterised by many-to-many trading relationships Source: Booktrack, again based on data from „high street bookseller‟ segment Analysis of current situation a5490 - 24 - FINAL CONFIDENTIAL Industry stock levels are driven up by the tendency to focus on unit print costs rather than title life cycle costs 12 10 Cost / unit (£) 8 6 4 Hardback Paperback 2 0 <100 100 - 499 500 - 999 1000 - 9999 2000 - 4999 5000 - 9999 10000 - 49999 50000 - 99999 100000 249999 >250000 Print run size Source: KPMG sample data, fully illustrated titles excluded The print decision is still often dependent on achieving target unit costs, not on actual forecasted demand Average paperback print runs are half their levels ten years ago but many more titles are printed annually Minimum print quantities can only be further substantially reduced by implementation of digital and on-demand technologies Experts suggest that within 5 to 10 years, printing on demand will be cost effective for books currently printed in batches of 5,000 to 10,000 Analysis of current situation a5490 - 25 - FINAL CONFIDENTIAL The UK book supply chain is more costly and wasteful than most other consumer goods sectors FMCG manufacturer logistics costs 20 15 % of sales 10 5 0 FM CG manufacturers average Publishing equivalent Stock holding in consumer products 70 60 50 40 No of weeks 30 20 10 0 FM CG Best Practice Records Books Sources: KPMG Supply Chain Excellence Awards 1997 KPMG participant data 1996 calendar year Analysis of current situation a5490 - 26 - FINAL CONFIDENTIAL Despite the reduction in print run sizes, there remains at least 60 weeks of inventory in the book supply chain Retailer Distributor 559m units 41 weeks W/saler 8m units 7 weeks 41.4m units 16 weeks Source KPMG participant data Industry feedback suggests that 64 weeks inventory may be understated Whilst the bulk of stock is held at the distributor, 16 weeks of stock at retailers is high for the retail sector These „average‟ figures distort individual companies‟ performance – – academic publishers would typically have substantially more than 41 weeks inventory for large booksellers, stock levels of between 20 and 40 weeks are more frequent Analysis of current situation a5490 - 27 - FINAL CONFIDENTIAL There is a wide variation in processing efficiency across the industry Distributor sales orders* Average order size Processing cost per order Processing cost per book % electronic orders Wholesaler sales orders* 34 units £13.61 40p 78% Retailer purchase orders 22 units £2.18 10p 80% 53 units £20.35 38p 35% Source: KPMG participant data - *all orders received, home and export Penetration of electronic commerce is mainly in the orders area – faxed and telephoned orders are common especially at peak seasons – – some retailers report telephoned orders are processed quicker than EDI orders publishers report examples of bad practice usage of EDI at retailers Similar average processing costs per book mask the difference in efficiency between distributors and wholesalers – – distributors' orders include a larger proportion of high volume export, bookclub and centrally shipped orders which are cheaper to process than orders from core bookshop business wholesalers' consignment sizes to the retail channel are on average much larger than equivalent distributors' figures Distributors report that the „small order problem‟ is just as acute from major and medium sized chains as it is from smaller retailers – 60% of one major distributor‟s invoices are for less than £60 Analysis of current situation a5490 - 28 - FINAL CONFIDENTIAL Wastage in the book industry appears very high at up to 20% of total production Returns Returns units (as % total sales) Returns destroyed (as % total returns) at customer at distributor Returns back to stock (as % total returns) Publishers sample Distributors sample 7-14% 7-14% 6-10% 59-98% 12-75% 2-44% 25-88% Source: KPMG participant data - home & export Wastage Remainders Returns destroyed Total wastage As % of total production 5-8% 8-12% 13-20% Source: KPMG participant data - home & export Total returns reported at 9% of gross units for all home and export sales Returns for UK retail trade reported in range of 14 to 20% Total wastage is combination of overproduction and returns Analysis of current situation a5490 - 29 - FINAL CONFIDENTIAL Service level requirements are unclear and show wide variation both in delivery and in perception of delivery. The difference in the roles of distributors and wholesalers in serving the retail channel is unclear Retailer Distributor (service provided) (service received) 10% 24 hr 59% 72 hr 31% > 3d W/saler (service provided) 2 % 24 hr 12 % 72 hr 86 % > 3d ? 49 % 24 hr 46% 72 hr 5% > 3d C o n s u m e r Source: KPMG participant data No real industry understanding of consumer service requirements Distributors are competing with wholesalers to offer next day delivery “Hotlines” are becoming more dominant at peak selling seasons Retailers report delivery ranges between 3 and 14 days One major chain reports that 30% of deliveries received are incorrect Analysis of current situation a5490 - 30 - FINAL CONFIDENTIAL Our analysis indicates that the cost of the “common processes” is almost 40% of sales The cost of the UK Book Industry Supply Chain (1996) 39 100 Figures in £ m 214 £m 327 153 202 57 739 % Sales 17 8 11 3 39 90 80 Logistics Costs * Sales & Marketing In Store Customer Service** Obsolescence from returns and financing cost *** Total Cost of common processes * % Total cost 70 161 60 50 40 258 30 20 10 67 All costs excl. sales & marketing, retailers customer service cost, obsolescence and stock financing Balance of customer service costs, those incurred by distributors and wholesalers, included in logistics Financing cost of 10% assumed on inventory at printed cost ** *** Distributing Order Processing Returns handling & destruction Customer service Selling Source: Participant data 1996 Calendar year Analysis of current situation a5490 - 31 - FINAL CONFIDENTIAL The cost of returns to the industry is circa £100 million The cost of returns to the UK book industry (1996) 100 90 80 39 Figures in £ m % Total cost 70 60 50 15 13 Outbound Logistics Inbound Logistics Sales & Marketing Obsolescence from returns and financing cost * Total cost of returns £m 25.6 28.2 13.8 28.4 96.0 40 30 20 9 20 Returns cost = 12.9% of total cost * Financing cost of 10% assumed on inventory at marginal cost of production 10 Distributing Order Processing Returns handling & destruction Customer service Selling Source: Participant data 1996 Calendar year Analysis of current situation a5490 - 32 - FINAL CONFIDENTIAL At root are fundamental issues about the nature of the publishing and bookselling process There is an inevitable tension between the creative processes in publishing and bookselling and the technical disciplines of supply chain management There is little exploitation of opportunities for economies of scale in physical distribution and transaction processing Trading relationships are complex, largely adversarial, with little partnership activity There is little joint planning across the supply chain The competition for retail exposure causes Publishers to push stock into the supply chain, accepting the risk of returns this creates. Partly this is due to the following: – – – – dependency on new titles shortcomings in the responsivness and efficiency of the supply chain perceived limitation of retailers‟ re-ordering policies retailers not incentivised to resist because they carry little stock risk Analysis of current situation a5490 - 33 - FINAL CONFIDENTIAL The current book industry supply chain structure is complex and costly, characterised by high fragmentation, few economies of scale, and manyto-many trading relationships The structure is the legacy of an age of large batch sizes and infrequent orders and is not relevant to today‟s little-and-often ordering patterns The industry is dominated by the long tail of slow moving titles which is responsible for a disproportionate share of costs and wastage The very high number of new titles is dealt with inefficiently, creating high sales and buying costs, and causing lost sales, high costs and wastage Little-and-often ordering has reduced returns somewhat, but sales are being lost in the process Category management and demand planning, techniques which have been developed and widely adopted in other areas of consumer retail, are not properly understood or applied in the book industry Opportunities for electronic commerce are not being seized Contents a5490 - 34 - FINAL CONFIDENTIAL Summary of main conclusions and recommendations Introduction Objectives and scope Approach Participants Analysis of current situation 5 areas of change – – – – – transaction processes partnership in demand and list management management of stock and capacity distribution efficiencies returns Our recommendations – quick wins – – strategic change programme: benefits priority projects longer term projects Obstacles to change The case for change Next steps Areas of change a5490 - 35 - FINAL CONFIDENTIAL The industry needs to take co-ordinated action in five interrelated areas to improve industry performance . . . Partnership trading arrangements in list and demand management Improved stock management & better use of printing & distribution capacity As Is / Current Reduction in the level and cost of returns To be / Vision Improvements in transaction processes Distribution efficiencies Action in any one area will deliver significant benefits but maximum benefit will be achieved by addressing all 5 areas Areas of change a5490 - 36 - FINAL CONFIDENTIAL . . . and move from high cost trading conditions to more efficient and effective trading relationships From: Transaction processes To: High transaction processing costs; partial use of electronic commerce; a high level of labour intensive query resolution Simplified low cost transaction processing based on electronic commerce; reduced level of queries and cost of query resolution Partnership in list and demand management Adversarial trading relationships; limited use of shared sales and stock data for marketing and planning; problems around ownership and integrity of bibliographic data Cooperative trading relationships based on partnerships; differentiation between innovative and functional product types; marketing and planning based on common data sets; consistent and accurate bibliographic data Management of stock and capacity Fragmented supply chain planning processes making limited use of EPOS; print runs dictated by conventional technology Supply chain planned as an integrated process based on EPOS, stock and capacity data; flexible use of digital printing technologies Distribution efficiencies Fragmented distribution operations, with excess capacity and stock; multiple stocking points, limited exploitation of economies of scale; and cost and performance poorly understood Simpler, more consolidated distribution arrangements; exploitation of economies of scale; flexibility in supply strategies; trading terms reflecting cost-to-serve and performance Returns Lack of accountability coupled with supply chain inefficiencies generates excess returns; processing and handling of returns are complex and high cost Reduced level of returns by alignment of accountability and decision making and improvement in supply chain efficiency; simplified returns processing and handling systems A. Transaction processes a5490 - 37 - FINAL CONFIDENTIAL Partnership trading arrangements in list and demand management Improved stock management & better use of printing & distribution capacity As Is / Current Reduction in the level and cost of returns To be / Vision Improvements in transaction processes Distribution efficiencies A. Transaction Processes - Changes proposed a5490 - 38 - FINAL CONFIDENTIAL Major benefits can be achieved by designing processes for ordering, paying and query resolution which increase standardisation, make use of the economies of scale available, and release the power of electronic commerce From: To: Many unique processes between individual players adding complexity, delay and cost in order processing Standardised, systematised processes supported by common procedures, forms and data sets Unique and multiple arrangements between retailers and publishers for returns and debit notes Standardised, systematised processes for returns and debit notes A majority of small value transactions (e.g. <£60) incurring excessive administrative cost Develop low cost processes and systems across the industry to reduce small order transaction cost Partial application of EDI/e-commerce applications; standards and technologies largely in place; inconsistency in data management giving an excessive number of queries Implementation of standardised message formats; agreed trading incentives for EDI use; revised data management guidelines A. Transaction Processes - Trends and comparisons a5490 - 39 - FINAL CONFIDENTIAL Despite early availability of electronic ordering and agreed standards, there are substantial benefits available from full implementation of electronic commerce across the range of transaction processes Book industry trends Examples from other industries Electronic ordering has been in existence for many years, but its penetration is still low in comparison with other sectors (and countries) Standards and systems are in place to allow other messages Some players are developing ad hoc electronic commerce solutions with major trading partners (not always based on purest standards) BookEasy initiative provides Internet based solution to customer queries and ordering Slow take-up of electronic invoicing and payment; plans to automate Booksellers Clearing House Retail productivity: Tesco reports a step change in productivity through the introduction of technologies such as EDI, EPOS and bar coding 36 98% 92% 7 13 2 Securicor Omega introducing parcel tracking and electronic Proof of Delivery service Wholesalers offer simple information and ordering system Distributors are addressing some root causes of queries by –developing post-invoicing (matching to actual contents delivered) –improved labelling Stockturn Delivery Accuracy Order lead times/days Source: Management Today, Nov 1996. Coca Cola Research Group 1994 Purchase cards: are proving beneficial for transactions under £1000, and being used in many large corporations. – big reduction in transaction processing costs by use of purchasing cards - up to 50% savings are being achieved. Major benefits come from including smaller suppliers/customers into automated payment systems Fed Ex. launched an Internet shipment tracking service in 1994 – cost to handle tracking enquiry by Internet is $0.08 against over $1.00 through customer telephone centre A. Transaction Processes - Benefits and implications a5490 - 40 - FINAL CONFIDENTIAL Publishers Increase in operating Printers Potential to be Distributors Reduced administrative costs Wholesalers/RDC/ Library Supply Reduced Retailers Greater simplicity in margin flowing from lower distribution costs Reduced burden to sales force from improvements in returns processing Smaller publishers to brought into “loop” of e-commerce particularly as printing-ondemand evolves from increase in electronic commerce traffic Reduction in error rate resulting from keying errors and “pre-invoicing” Increased customer service administrative costs of purchasing from suppliers Improved ability to buying and settling invoices, particularly from smaller suppliers Improvement in levels through automated query procedures Improved real lead times benefit from improved ease of purchase through extended role of Booksellers Clearing House (warehouse to shelf) by reduction in invoice errors Reduction in cost of invoice deal with smaller publishers through extended Booksellers Clearing House Increased accuracy of invoices increases speed of goods-in to shelf Improvement in lead times available through best practice electronic ordering Simplification and matching, checking, and settlement procedure Agreement in debit note procedures improving debtors position and reducing costs and write offs Reduction in cost of processing challenge from improved service levels from distributors See also retailer consolidation of payment processes to reduce administrative burden Procedures for debit and distributor returns claims Inclusion of smaller customers notes streamlined Ordering from smaller into electronic settlement of invoices through extended role of Booksellers Clearing House suppliers simplified by extension of Booksellers Clearing House role A. Transaction Processes - Estimated financial benefits a5490 - 41 - FINAL CONFIDENTIAL Redesign of transaction processing and application of electronic commerce creates an opportunity for cost savings in the range of £20 to £25m Benefits are derived from a combination of: – – – – – – reduced purchasing and invoice process costs reduced settlement costs, particularly through automatic invoice matching reduced costs of small order transactions elimination of distribution and stock wastage from incorrect keying reduced returns and debit note processing costs reduced query burden Savings are based on the assumption of: – – 38% reduction in processing costs 25% reduction in order related queries A. Transaction Processes - Actions a5490 - 42 - FINAL CONFIDENTIAL Transaction processes offer a number of opportunities for quick wins and process redesign Quick Wins - actions which will have material impact within one year Simplify and rationalise returns processes Standardise current debit notes procedures through agreement on how to handle discrepancies Develop penalties for the non-use of electronic commerce BIC benchmarking review of electronic commerce usage Strengthen current use of EDI by retailers through in-store training Recommended projects Map and redesign all transaction processes e.g. – – – returns processing invoicing and settlement debit notes Low cost transaction processes for low value orders Address root causes of query burden, e.g. – post invoicing Integrated change programme to develop electronic commerce B. Partnership in List and Demand Management a5490 - 43 - FINAL CONFIDENTIAL Partnership trading arrangements in list and demand management Improved stock management & better use of printing & distribution capacity As Is / Current Reduction in the level and cost of returns To be / Vision Improvements in transaction processes Distribution efficiencies B. Partnership in List and Demand Management - Changes proposed a5490 - 44 - FINAL CONFIDENTIAL Cooperative planning between retailers and publishers can improve sales and profitability for all parties From: To: Fragmented data sets leading to limited analytical and forecasting capabilities Data sharing between key trading partners to allow the whole supply chain to understand customer demand patterns and to build analytical and forecasting capabilities Inconsistencies and inaccuracies in bibliographic databases leading to excess queries and administrative costs Consistent and accurate bibliographic data providing a foundation for simplified trading and marketing based on electronic commerce Adversarial trading relationships with value destroyed and complexity introduced by lack of communication and accounting behaviour Co-operative trading relationships between major players based on cross functional communication and reduction in value destroying behaviours Production planning in publishers, distributors and wholesalers based on sales in to retailers Production planning based on actual title retail sales and list segmentation into functional and innovative products; category demand patterns understood leading to improved forecast accuracy and reduced returns B. Partnership in List and Demand Management - Trends and comparisons Transaction Processes a5490 - 45 - FINAL CONFIDENTIAL The increasing availability of EPOS data provides opportunities to improve planning processes by trading partners working co-operatively Book industry trends Examples from other industries Investment in EPOS and use of BookTrack to enable better demand tracking Retailers increasingly delaying firm orders for new titles until very close to publication date, while demanding more product/marketing information earlier Sales reps incentives shifting to achieve “selling to plan” rather than exceed short term sales revenue or subscription targets Some publishers reducing their „tail‟, and focusing effort on fewer titles with improved financial results Increased number of specific line item negotiations causing increase in publisher selling costs and retailer buying costs Some publishers tracking sales & profitability for new titles over the whole life cycle Some retailers moving to, others moving away from, firm sales deals Increasing reliance on bibliographic database providers Understanding of segmentation of product into functional and innovative categories based on the relative certainty of demand. This is then used as a basis for developing a more effective and responsive supply chain Sport Obermeyer: design and manufacture of ski-ware, for sale through 800 retailers. 95% of products are new each year, producing uncertain demand profile. Sport Obermeyer developed an effective production planning model to manage the uncertainty by working with key retail customers. Service levels increased from 80% to 99%, production wastage and underproduction was reduced by 50%, and profits rose by 60% 6 Demand Models Under/Over Production Cost Model Consolidated Demand Model Production Planning Model Source: Harvard Business Review, March-April 1997 2 Production forecasts Pre season plan Derived from actual orders Mail order operators: a new order is placed on a supplier in two components, with a typical split of 50:50 – a firm order to meet initial stock requirement – an option over the remainder of the forcasted demand B. Partnership in List and Demand Management - Benefits and implications a5490 - 46 - FINAL CONFIDENTIAL Publishers Printers Distributors Wholesalers/RDC/Library Supply Retailers Finding the right balance between pull vs push marketing strategies Improved ability to offer collaborative promotions Reduced burden on field sales and administration function Improved success rate in new product introduction Reduction in level of returns Implications for list management as result of improved understanding of retailers‟ category management policies Understanding of demand patterns and ability to manage certainty and uncertainty Potential reduction in print volumes through reduction in level of returns Potential benefits for capacity planning if publishers have greater control of, and confidence in, forecasting Improved access to retail sales and stock data Potential to move from „reactive‟ to „proactive‟ management through sharing forecasting information Improvement in ability to plan capacity and stock Improved access to retail sales and stock data Opportunities for wholesalers to work more closely with publishers to serve agreed retail segments Reduction in buying and merchandise management burden because of improved communication with publishers and more focused offer Improved ability to offer collaborative promotions Reduction in level of returns Reduction in working capital requirements through stock reductions Reduced burden from returns Opportunities for distributors to work more closely with retailers as part of more co-operative trading partnerships Requirement to identify shadow forecasts alongside initial purchases B. Partnership in List and Demand Management - Estimated financial benefits a5490 - 47 - FINAL CONFIDENTIAL The benefits of increased partnership between publishers and retailers could amount to £30-£50m Benefits are derived from a combination of: – – – – – – – reduced stock wastage and improved stock turn from better forecasting improved responsiveness to titles whose demand is inherently uncertain greater efficiency of supply for titles where demand is more certain ability to manage more titles more effectively reduced administrative buying burden through information being available accurately and on time opportunity to provide information which delivers better capacity planning at printers and distributors increased potential to make the sale from information about a book rather than actual physical stock Improved forecasting could lead to benefits of £15 to 25m – resulting from a 10% reduction in returns rates and associated reductions in stock, queries, transaction processing and distribution costs Category management provides major component of benefits identified from “efficient consumer response” programmes – we have assumed a further £15 to £25m in benefit from increased sales as a result of better targeted marketing, list segmentation, category management and more focused list management as publishers and retailers co-operate strategically B. Partnership in List and Demand Management - Actions a5490 - 48 - FINAL CONFIDENTIAL Actions to be taken in co-operative demand management lie in improved use of EPOS data in forecasting, improved understanding of the nature of the demand of different titles and greater control of title information Quick Wins available from improved partnerships Eliminate distortions of both sales and returns driven by accounting or cash pressures Commitment to resourcing the supply of accurate and timely bibliographic data and the development of the role of bibliographic agencies Recommended projects Develop joint forecasting based on list/category lifecycles and demand characteristics – evaluate current forecasting capabilities and use of shared EPOS data – develop industry scorecard to measure retailers EPOS system capabilities – segment lists according to title/category lifecycles and demand characteristics – optimise display quantities and stock location to meet demand patterns Improve title information management and data integrity – define bibliographic and marketing information best practice and implement across industry – develop strategies for use of information about books as proxy for actual stock Implement co-operative relationships between trading partners – minimise accounting based distortions to selling and returns behaviours – develop buying and selling strategies through joint planning – agree lead times for placing of estimated and confirmed pre-publication orders – align publishers‟ lists more closely to retailers‟ category management – integrate planning strategies with stock and capacity management systems Develop industry-wide capabilities in data warehouse management, integrating with decision management processes C. Management of Stock and Capacity a5490 - 49 - FINAL CONFIDENTIAL Partnership trading arrangements in list and demand management Improved stock management & better use of printing & distribution capacity As Is / Current Reduction in the level and cost of returns To be / Vision Improvements in transaction processes Distribution efficiencies C. Management of Stock and Capacity - Changes proposed a5490 - 50 - FINAL CONFIDENTIAL Integrating supply chain management planning systems across the industry will improve the efficiency and responsiveness of supply to consumer demand through improved management of stock and use of available distribution and printing capacity From: To: A few retailers using EPOS for their own stock management, with little sharing of sales & stock data EPOS and stock data made available by both parties and routinely used in joint supply decisions Separately managed functions & systems for forecasting, demand monitoring and stock replenishment Supply chain managed as a complete process, using supply chain management systems and data shared between partners Print runs dictated by conventional technology and batch economics, with few long term supply arrangements Publishers and printers working in partnership, investing in and exploiting new short run technology C. Management of Stock and Capacity - Trends and comparisons a5490 - 51 - FINAL CONFIDENTIAL The closer matching of supply to actual demand is made possible by smaller manufacturing batch sizes and distribution strategies which make little-and-often replenishment cost effective Book Industry Trends Examples from other industries From push to pull: retailers have co-operated with suppliers to Major reductions in initial print runs, and advance subscription order quantities Reduction in reprint quantities to better match supply to demand Print run quantities reduced to “recognised economic minimum” Some examples of postponement e.g. printing book blocks in larger quantities and binding as late as possible in different formats Electronic transfer of copy to printers located close to centre of demand Some printers using combination of technologies to offer onestop-shop of short and long run printing over the product life cycle implement continuous replenishment programmes based on: – daily exchange of demand and stock data – agreed inventory targets – little-and-often ordering patterns This has maximised the efficiency of supply for products where demand is relatively certain, with consequent reductions in inventory and an increase in margin. Retailers who have partnered with suppliers in this way have grown at twice the rate of retailers who prefer to operate more autonomously 4 2 2% Use of digital printing for high value professional & academic publications 1% Source: Harvard Business Review March/April 1997 Before After Before After Weeks inventory Margin EMI music segments products according to life cycle characteristics and plans supply accordingly to optimise capacity usage C. Management of Stock and Capacity - Benefits and implications a5490 - 52 - FINAL CONFIDENTIAL Publishers Printers Distributors Wholesalers/RDC/ Library Supply Retailers Potential to reduce working capital requirements through stock reduction Reduction in wastage through supply more accurately meeting demand Improvement in capacity utilisation Reduction in physical capacity requirement Ability to increase both responsiveness and efficiency of supply Requirement to manage more little-and-often deliveries at goods-in as well as pick, pack & ship levels Opportunities to develop communication with printers to improve stock and capacity management Opportunities to act as print brokers for client publishers Growth opportunities as provider of responsive supply Ability to leverage digital print technologies Develop strategies for print-on-demand Reduction in working capital requirements through stock reduction Improved delivery lead times Fewer stock outs Requirement for management of littleand-often deliveries Develop partnerships with retailers to improve stock management New partnerships with publishers providing improved stock management in segments served Potential for more co-operative stock management with retailers Requirement for co-operation with printers to improve capacity planning in context of more, smaller print orders More co-operative supply agreements and systems with suppliers C. Management of Stock and Capacity - Estimated financial benefits a5490 - 53 - FINAL CONFIDENTIAL Benefits to the industry of improved stock management alone could be in the order of £20 to £30m Benefits are derived from a combination of: – – – – – – – – improved speed of stock replenishment improved efficiency of stock replenishment reduced total stock-holding across the supply chain more effective use of printing capacity elimination of excess print runs and consequent wastage, including a reduction in returns potential to reduce distribution capacity requirements over time development of capabilities required to manage printing on demand effectively ability to fulfil special orders for previously out of print titles through digital printing Savings are based on the assumption of: – – – – – 608 million units of inventory currently in the supply chain inventory can be reduced by at least 5% average marginal cost of production of 50 pence financing cost of excess 5% of stock is eliminated more efficient replenishment and digital printing resulting in increased sales C. Management of Stock and Capacity - Actions a5490 - 54 - FINAL CONFIDENTIAL Action should be taken by the industry to integrate supply chain planning processes Quick Wins to improve capacity usage Publishers to agree with printers standard sizes for common formats of books to reduce print set-up costs and improve use of capacity Recommended projects Develop use of EPOS – co-operate to understand how retailers use EPOS – develop best practice guide for EPOS usage by trading partners – evaluate data and systems available for sharing data – integrate EPOS into decision making cycles Implement integrated planning process – develop models for supply chain planning – establish and implement joint planning systems based on EPOS – integrate stock with EPOS data where appropriate Integrate printers into supply chain planning – develop publisher/printer/distributor partnerships – jointly evaluate opportunities provided by digital technologies and e-commerce – integrate short-run printing and supporting processes D. Distribution Efficiencies a5490 - 55 - FINAL CONFIDENTIAL Partnership trading arrangements in list and demand management Improved stock management & better use of printing & distribution capacity As Is / Current Reduction in the level and cost of returns To be / Vision Improvements in transaction processes Distribution efficiencies D. Distribution Efficiencies - Changes proposed a5490 - 56 - FINAL CONFIDENTIAL The industry can improve distribution efficiencies and effectiveness by understanding the cost of supplying different market segments and speeding the migration to more consolidated distribution arrangements From: To: Stock sub-optimally located across the supply chain, with multiple stocking points Stock levels reduced and held where needed, at fewer locations Limited initiatives to improve handling of returns and format of product delivery to retail outlets Jointly implemented storefriendly delivery systems and returns handling systems A mis-match between service levels needed and provided, with costs and performance poorly understood or measured Service levels agreed, costs understood, and trading terms reflecting cost-to-serve and performance An excess of distribution capacity, operating a variety of processes and models Fewer, more consolidated and standardised distribution arrangements to retailers, realising the benefits of scale D. Distribution Efficienciesm - Trends and comparisons a5490 - 57 - FINAL CONFIDENTIAL Distribution strategies require consideration of both the cost-to-serve a particular market segment, and its cost-to-be-served. Trading arrangements should reflect these costs, and efforts made to provide „friendly‟ deliveries Book Industry Trends Examples from other industries Slow moving versus fast moving inventory: some sectors have developed Continued trend to smaller, more frequent orders with shorter lead time requirements Increasing use of fast service (e.g. Academic Hotline) to order large quantities at short notice Wholesalers have taken the lead in providing simplicity for retailer: distribution strategies based on keeping the slowest moving stock in one central international depot, with the fastest moving, which make up the bulk of sales, closer to the end consumer. For example: – half the call-outs of computer maintenance engineers involve 0.1% of stock items. 5% of total stock value is kept by the engineer. A single international centre holds 60% of the inventory value, shipping to order when requested. Similar models exist in the car maintenance sector Location of stock No of SKU‟s held % stock value % service events 200 5% 50% – – – – consolidated source of supply for large part of retailer‟s requirements some early actions from wholesalers to provide store friendly deliveries independent retailers are increasingly relying on the wholesalers to provide the full range of requirements, including slow moving tail wholesalers fulfilling customer orders for some larger chains Regional depot 10,000 15% 30% National depot 30,000 20% 12% International depot Internet and mail order booksellers charge for P+P Some publishers considering charging for freight and premium for faster service 150,000 60% 8% Store friendly delivery: British Shoe Corporation made significant savings through store friendly picking – orders picked by line, in size sequence – sequence of lines correspond to stockroom layout Benefits – 10-15% reduction in store delivery labour hours – improved stock availablity D. Distribution Efficiencies - Trends and comparisons a5490 - 58 - FINAL CONFIDENTIAL Economies of scale are delivering major efficiency gains in warehousing, shipping and transaction processing Book industry trends Examples from other industries Strategies to integrate distributors and wholesalers: the More publishers outsourcing distribution to third parties Two models of outsourcing developing – – consolidation to one-stop distribution solution provider retention of customer service and transaction processing in-house and outsourcing of physical distribution electronics components industry has developed strategies to serve different sizes of account either through distributors or through wholesalers, depending on the cost-to-serve that channel Large Manufacturers (Few) Global Distributors Large Oem‟s (Few) Academic and professional sectors preparing for consolidation as a result of asset swaps and increased market concentration Some overlap developing in services offered by distributors & wholesalers, especially consolidation and payment Growth of those distributors & wholesalers offering wider range and faster customer service Larger operators investing in warehouse technology to improve performance and reduce costs Main industry carrier achieving economics of scale through consolidated high street delivery including pick-up of returns (Few) Small/Medium Manufactures Small (Many) - Niche Oem‟s Local (Many) Components Wholesalers (Many) End Major Wholesalers User (Many) (Few) – large customers deal direct with manufacturers or via global distributors and avoid dealing with the tail of smaller suppliers – large manufacturers avoid dealing with the end-user tail, and sell via intermediaries – low margin distributors compete on price; high margin wholesalers compete on service D. Distribution Efficiencies - Benefits and implications a5490 - 59 - FINAL CONFIDENTIAL Publishers Printers Distributors Reduced operating cost from more efficient supply chain Different models of „control‟ required from ownership to key performance indicators and partnership Simplification through consolidation of client base Improved cooperation with distributors leading to reduced cost and opportunities for value-added activities Consolidation delivering major economies of scale in distribution Understanding cost-toserve better will allow pricing to be aligned with agreed service requirements Reduction in returns handling costs Changed order pattern can achieve volume economics Store friendly delivery will improve customer service levels and real lead times Wholesalers/RDC/ Library Supply Retailers Opportunities for growth as premium service provider or as one-stop shop May need to pay for different service level requirements Consolidation of supplier base leads to simpler ordering and payments Reduction in complexity and opportunity to reduce store non-value adding activities Carry only faster moving inventory Investment requirements in automated warehouse management systems and other process/IT improvements Carry major burden of slow moving inventory Understanding cost-tobe-served will drive supply strategies and requirements Store friendly deliveries improve goods-in and customer service staff productivity D. Distribution Efficiencies - Estimated financial benefits a5490 - 60 - FINAL CONFIDENTIAL Reducing the cost-to-serve different channels, and their respective costto-be-served could lead to benefits of £40 to £60m Benefits are derived from a combination of: – – – – – reduction of in-store customer service costs as a result of store friendly deliveries reduction in distribution costs by incentivising better ordering patterns and pricing for premium service lower transport costs as the trend for consolidation of distribution operations reduces the complexity of the distributor-transporter hub clearer definition of the roles of distributor, wholesaler and regional distribution centre improving efficiency and cost economies of scale in distribution continuing to deliver lower logistics costs - there being as yet no sign of an end to such economies Our assumptions are based on: – – – store friendly deliveries reducing in-store customer service staff costs by 5% a halving of returns handling costs through improved processes and consolidation reducing publishers‟ logistics costs from 13% to 11% of sales through improved processes and further economies of scale D. Distribution Efficiencies - Actions a5490 - 61 - FINAL CONFIDENTIAL The industry should focus on actions which will reduce the complexity of both serving and being served, and improve service levels as well as reducing cost Quick Wins Study into the segmentation of the supply chain to meet the differing needs of different categories of books, including the use of wholesale versus distributor supply Recommended projects Develop distribution strategies informed by the cost-to-serve and the cost-to-be-served – consumer research to ascertain service levels expected and perceived – agree real service needs – establish supply strategies based on service needs – locate stock in supply chain at optimal points (eg slow moving upstream in the supply chain) Joint initiative to improve returns handling Develop and implement store friendly delivery systems Establish cost-to-serve by channel and develop new trading arrangements Retailers to evaluate supply from smaller publishers and develop consolidation preferences Publishers to identify cost and service benefits from further consolidation – evaluate outsourcing or pooling options – evaluate industry-wide consolidation options – implement preferred consolidation options E. Returns a5490 - 62 - FINAL CONFIDENTIAL Partnership trading arrangements in list and demand management Improved stock management & better use of printing & distribution capacity As Is / Current Reduction in the level and cost of returns To be / Vision Improvements in transaction processes Distribution efficiencies E. Returns - Changes proposed a5490 - 63 - FINAL CONFIDENTIAL Returns have become a major driver and distorter of both buying and selling behaviour From: To: Current accountability for stock and decision making processes and inefficiencies in supply cause excess returns (7-15% of volumes) Alignment of accountability and decision making processes, together with more efficient supply, reduce overall returns level Returns processing unacceptably complex, inefficient and high cost Simplified and standardised returns agreements and processes Systems for physical handling of returns are varied and expensive and impact efficiency of outbound supply chain Handling and destruction of returns at optimal points in supply chain E. Returns - Trend and comparisons a5490 - 64 - FINAL CONFIDENTIAL Returns cost the UK book industry around £100m The price of a return Assume a retailer buys a £5 book at 45% discount: Illustrations Using a retail distribution centre (RDC) Centralised buying in one retailer with the use of RDC has reduced stock levels in store through increased trust in the certainty of next day supply. However this has had no impact in reducing the overall returns rates Consistency of behaviour One publisher reports that acting consistently with customers reduces returns rates, e.g. through „open returns‟ policies operating in the context of agreed limits Continental comparison In Holland, Centraal Boekhuis‟ returns are less than 5% of gross sales. Certainty and speed of supply reduces the need for risky buffer stock, and activity based charging disciplines purchasing behaviours If the book is sold: -the publisher makes a contribution of £1.94 -the retailer makes a contribution of £2.08 If the book is returned: -the publisher makes a loss of £1.01 -the retailer makes a loss of £0.49 (Publisher‟s contribution is before author, sales and marketing costs, and retailers contribution before customer service, marketing and overheads) Comparison with music industry Firm sales are common, and standard on bestselling, established chart artists. Returns range from 8-20%, depending on category. Restricted remaindering avoids undermining long term product value E. Returns - Benefits and implications a5490 - 65 - FINAL CONFIDENTIAL Publishers Printers Distributors Wholesalers/RDC/ Library Supply Retailers Reduction in volume related production costs Reduction in print volumes Greater number of smaller batch quantities Reduction in both outbound and returns volumes Reduction in destruction activities Reduction in returns processing costs Reduction in queries arising from returns Reduction in processing burden on sales force Avoidance of „pushing‟ risky stock into chain without clear understanding of costs Trade-off of print run size with certainty of demand Develop returns agreements in context of cost-toserve different retail channels Reduction in outbound & returns volumes Reduction in destruction activities Reduction in returns processing activities Reduction in „buffer‟ stock holding to reduce risk of obsolete stock and thus need to return Reduction of in-store physical handling and processing activities More accountability for purchases, particularly where certainty of demand is greater Development of returns handling strategies which do not involve moving stock back up the chain Opportunities for returns consolidation activities Reduced subscription quantities E. Returns - Estimated financial benefits a5490 - 66 - FINAL CONFIDENTIAL A concerted and co-ordinated programme to substantially drive down the costs of returns to the industry could deliver benefits of £36m Benefits are derived from a combination of: – reduced logistics costs – reduction in the cost of stock returned – simplified monitoring and authorisation procedures Our assumptions are based on: – improved forecasting, planning and supply strategies reducing returns by one third from current level of 54m units – redesigned processing and handling costs being reduced by 25% Reduce logistics costs at £1.02 outbound and returns cost for 18m units Eliminate financing cost on 18m units Avoid cost of stock (assuming marginal cost of production of £0.50) Reduced processing costs on remaining 36m units by 25% Reduce sales and marketing administration cost by 25% £18.4m £0.5m £9.0m £4.6m £3.5m £36m In addition, improved certainty of sale brings other, less tangible benefits to publishing and bookselling management, e.g. in title acquisition decisions E. Returns - Actions a5490 - 67 - FINAL CONFIDENTIAL An industry pressure group will provide the momentum and focus for a coordinated action plan to reduce the value lost to the industry from returns Quick Wins Simplify and rationalise returns processes Recommendations for the returns pressure group Changes to current returns policies Ability to dispose of stock at end of chain Sign off on work from other workstreams, e.g. – standard forms & processes for transaction processes – – – production planning/forecasting process and its impact on returns impact of sales and inventory data sharing on returns cost-to-serve analysis and supply strategies Contents a5490 - 68 - FINAL CONFIDENTIAL Summary of main conclusions and recommendations Introduction Objectives and scope Approach Participants Analysis of current situation 5 areas of change – – – – – transaction processes partnership in demand and list management management of stock and capacity distribution efficiencies returns Our recommendations – quick wins – – strategic change programme: benefits priority projects longer term projects Obstacles to change The case for change Next steps Our recommendations a5490 - 69 - FINAL CONFIDENTIAL We have identified a number of quick wins that industry players can initiate immediately, that could have material impact within one year Simplify and rationalise returns processes Standardise current debit notes procedures through agreements on how to handle discrepancies Develop penalties for the non-use of electronic commerce BIC benchmarking review of electronic commerce usage Strengthen current use of EDI through in-store training Eliminate distortions of both sales and returns driven by accounting or cash pressures Commitment to resourcing the supply of accurate and timely bibliographic data and the development of the role of bibliographic agencies Publishers to agree with printers standard sizes for common formats of books to reduce print set-up costs and improve use of capacity Study into the segmentation of the supply chain to meet the differing needs of different categories of books, including the use of wholesale versus distributor supply Our recommendations a5490 - 70 - FINAL CONFIDENTIAL A strategic change programme for the book industry supply chain would include the following projects A. Transaction processes B. Partnership in list and demand management C. Management of stock and capacity D. Distribution efficiencies E. Returns A1 Priority projects Debit notes and returns processing simplified 5 months Forecasting based on list/category lifecycles B1 and demand characteristics D1 3 months Develop use of EPOS C1 in decision making 9 months Consumer research into service expectations 4 months D2 5 months B2 Bibliographic best practice defined and dummy stock options evaluated 3-14 months D3 Service and distribution strategy defined 5 months Develop low cost A2 transaction processes for low value orders Returns handling optimised 9 months Full implementation of A3 electronic commerce in 12 months transaction processes D4 Cost to serve established and new trading arrangements implemented 9 months B3 Implement partnership in list and demand management 21 months Supply chain C2 management systems implemented 22months D5 Store friendly systems established 18 months Longerterm projects C3 Integrate printing into supply chain 18 months management processes D6 Distribution of smaller publishers consolidated 10 months D7 Distribution options evaluated and preferred options implemented 24 months Our recommendations - Benefits a5490 - 71 - FINAL CONFIDENTIAL Benefits to be realised from a collaborative strategic change programme could exceed £150m Estimated financial benefits Improvements in transaction processes Partnership trading arrangements in list and demand management Improved stock management and better use of printing and distribution capacity £20 to £25m £30 to £35m £20 to £30m Distribution efficiencies Returns £40 to £60m £36m £145 to £185m Each area is interdependent with others, particular in the area of returns The greatest impact of these programmes will be felt in distribution and transport costs Maximum benefits in any one area will only be achieved by tackling all five Contents a5490 - 72 - FINAL CONFIDENTIAL Summary of main conclusions and recommendations Introduction Objectives and scope Approach Participants Analysis of current situation 5 areas of change – – – – – transaction processes partnership in demand and list management management of stock and capacity distribution efficiencies returns Our recommendations – quick wins – – strategic change programme: benefits priority projects longer term projects Obstacles to change The case for change Next steps Obstacles to change a5490 - 73 - FINAL CONFIDENTIAL Phase I of the Book Industry supply chain project has highlighted a number of obstacles to change . . . Mistrust of trading partners motives Complacency Property commitments Difficulty of funding industry-wide initiatives and needs Difficulty of balancing requirements for individual versus industry-wide benefits Lack of solidarity and industry commitment Short-termism Ability to manage and control major change programmes . . . and action is needed within the change programme to remove these obstacles. a5490 - 74 - FINAL CONFIDENTIAL KPMG recommends a high level industry pressure group be appointed to drive forward the change programme The Booksellers and Publishers Associations should also create formal liaison mechanisms to reflect a common supply chain Contents a5490 - 75 - FINAL CONFIDENTIAL Summary of main conclusions and recommendations Introduction Objectives and scope Approach Participants Analysis of current situation 5 areas of change – – – – – transaction processes partnership in demand and list management management of stock and capacity distribution efficiencies returns Our recommendations – quick wins – – strategic change programme: benefits priority projects longer term projects Obstacles to change The case for change Next steps The case for change a5490 - 76 - FINAL CONFIDENTIAL There is a pressing need for action by all players in the industry Real growth in consumer and leisure spending has been strong in the late 1990‟s, yet books have struggled to maintain share of spend Fundamental lack of adequate profitability at publishers and retailers Increased pressure to meet financial expectations of shareholders and other stakeholders Competitive pressure from non-retail channels The need to compete in global export markets Contents a5490 - 77 - FINAL CONFIDENTIAL Summary of main conclusions and recommendations Introduction Objectives and scope Approach Participants Analysis of current situation 5 areas of change – – – – – transaction processes partnership in demand and list management management of stock and capacity distribution efficiencies returns Our recommendations – quick wins – – strategic change programme: benefits priority projects longer term projects Obstacles to change The case for change Next steps Next steps a5490 - 78 - FINAL CONFIDENTIAL To unlock the supply chain‟s hidden prize, the industry must commit to action, recognising that the greatest gains can only be made through collaborative action Communicate and promote Phase I findings to industry Implementation Define and scope priority projects Industry pressure group Individual and bi-partisan company actions
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