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Monday Mornings with Madison

MADISON COMMERCIAL REAL ESTATE SERVICES MADISON COMMERCIAL REAL ESTATE SERVICES
#91

THE SECRET OF NETFLIX

You’ve probably heard of Netflix, the online DVD rental-by-mail service.  If you’re one of their ten million subscribers, you’ve probably enjoyed a couple of the two billion videos they’ve mailed out in the past 10 years. It’s a brilliant business concept that has almost single-handedly wiped out video stores in the U.S. (You remember video stores, don’t you? Those were the businesses you supported with all the late fees you accumulated when you forgot to return “Big Bird Goes to China” on time.) Netflix’s genius idea was to let subscribers keep a rented movie as long as they desired, with only a limit on the number of movies that each subscriber can have on loan simultaneously.

Here’s how it works.  The company offers a monthly flat-fee service, with the number of movies that members can rent determined by the subscription level they choose. Members create an order list, called a rental queue, of movies they wish to rent and the movies are then delivered via the United States Postal Service from an array of regional warehouses. To rent a new movie, the subscriber must mail a previous one back to Netflix in a prepaid mailing envelope. Upon receipt of the disc, Netflix ships the next available disc in the subscriber's rental queue. Subscribers get unlimited rentals without any per-title rental fees, shipping or handling fees, due dates, or late fees.

Queuing up for success
Most people think of Netflix as a video rental company but in reality, it’s a logistics management company that just happens to rent videos by mail. The secret to the company’s success lies in its warehouse management system — Netflix would probably be successful selling or renting any product it chose. Currently, Netflix has more than 100 shipping points located throughout the U.S. It has amassed a collection of 100,000 titles, with more than 55 million discs and it ships, on average, 1.9 million DVDs to customers each day. Employees process a minimum of 650 envelopes per hour, which means opening the envelope; checking the title of the DVD to make sure it matches the cover; cleaning the DVD and sorting it in a large box. The entire inventory is checked daily to make sure that it is up to date.

Netflix’s success can be measured by its latest financial statement, which shows a 21% increase in revenue, despite the sagging economy. It also topped the ForeSee Results’ Online Retail Satisfaction Index with a customer satisfaction index score of 86, well over the industry average of 75. Since Netflix has figured out how to sort and distribute millions of envelopes daily, some experts have even suggested that it take over the U.S. Postal Service, which can’t seem to figure out how to efficiently process the mail. But the lesson to learn from Netflix is that time and energy invested in creating a great system can allow any business to deliver reasonably priced products in great quantity, with low overhead and excellent profits.

The problem, of course, is that most companies do not have in place the basic systems needed to run their operations. This is a guaranteed drain on profits, with employees working inefficiently and management then having to spend time fixing the damages caused by employees who don’t have an appropriate system to follow. It takes time and energy to create efficient systems in a company, but it’s always worth the investment. Here are a few points to consider:

What do you really do?   Before you start devising any system, consider what your business must provide in order to be successful and then make sure your system delivers on those needs. You might be surprised to discover that these are not what you might expect.

List the steps   Once you’ve determined what your business must provide in order to be successful, you can start listing the individual steps involved in providing that service or product. Any task contains any number of components and each one needs to be identified and described to make sure that nothing falls through the cracks. Figure out how these steps are now being handled and see where the glitches occur in your current systems.

Make it better  Then you can start to look for ways to improve your system. Can you automate certain functions? Can you eliminate redundant operations? Can you streamline your ordering or delivery process?  Look at other companies, both inside and outside of your industry, to see whether there are systems you can adopt to increase efficiency and reduce costs. Once you have a system in place, keep monitoring it to see whether and where it needs to be tweaked or modified. Remember, you may not be mailing out millions of DVDs every day, but the successful delivery of your own product or service depends on developing a high-quality system.

QUOTE OF THE WEEK
“The person who moves a mountain begins by carrying small stones.”   Ancient Chinese proverb

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