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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

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 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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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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