Executive Briefings

Blockbuster Repackages Its Supply Chain to Compete With Growing Retail Market

These are tough times for movie and video-game rental services. But Dallas-based Blockbuster Inc. has worked hard to keep pace with changes in the business in its 20 years of existence.

In the early days of video, the release process was fairly straightforward. A movie would play in theaters for six months or more. Eventually, after a stint on cable or airplanes, it would show up on videotape in stores and rental outlets. The initial purchase price would be too high for most consumers to afford, so the tape would be geared largely toward the rental market. When the demand for rentals subsided, the distributor would drop the price and offer the movie for sale. That gave rental outfits like Blockbuster a window of near-exclusive access to customers.

With the advent of movies on DVD, everything changed. Today, rental and retail DVDs are released simultaneously, so Blockbuster must compete with a burgeoning ownership market. What's more, the retail side has a simpler supply chain. DVDs for sale go through a standard pick, pack and ship process before reaching store shelves. Rentals, by contrast, involve several additional steps, including the printing of a store-specific insert, placement of the insert into the outer sleeve of a separately produced, lockable case, and transfer of the DVD from its original packaging into the new case. The whole process must be tightly scheduled, to make sure that each of Blockbuster's 4,800 U.S. stores gets product in time to meet release dates.

Demand volatility gives Blockbuster additional challenges. Depending on the number and popularity of new DVD titles in a given month, the company's labor needs at its distribution center can vary sharply. Up to now, it has solved that problem with temporary workers, who are expensive to train on short notice.

Blockbuster is responding to these problems with a new approach to DVD packaging. Beginning this year, the company jettisoned its familiar blue-and-white rental boxes and replaced them with lockable cases that look just like rental units, complete with factory artwork. A plastic backer card remains on the shelf when all units of a particular DVD are rented.

Extra work is still required to place the disks into these new cases, but Blockbuster has turned to technology to cut costs. Five high-speed machines, located at the company's sole distribution center near Dallas, automate the process of opening an empty case, inserting the disk, printing and applying store-specific labels to the cover, inserting additional coupons or disks, and placing each order into totes on conveyors. As a result, work at the D.C. can be completed in less than half the time, with 75 percent less labor. That adds up to savings in excess of several million dollars a year, Blockbuster says.

The project's success hinged on cooperation with suppliers. Blockbuster convinced its distributors to ship DVDs without cases, on spindles in stacks of 100. That eliminated the need to remove them from retail packaging. Artwork, which must be cured for two days to prevent warping, is shipped separately as well. Tight collaboration with vendors was also required to determine the right kind of plastic mold for the cases, and sticker for the cover.

To keep distribution costs down, Blockbuster divided the U.S. and its surrounding territories into 50 regions, or pool points. The D.C. keeps a close watch on pickup schedules, so that it can expedite shipments if a movie is in danger of missing an in-store date. All of these measures have helped the company to stay competitive in an industry that is roiled by constant change, with an ever-growing number of options for consumers.

These are tough times for movie and video-game rental services. But Dallas-based Blockbuster Inc. has worked hard to keep pace with changes in the business in its 20 years of existence.

In the early days of video, the release process was fairly straightforward. A movie would play in theaters for six months or more. Eventually, after a stint on cable or airplanes, it would show up on videotape in stores and rental outlets. The initial purchase price would be too high for most consumers to afford, so the tape would be geared largely toward the rental market. When the demand for rentals subsided, the distributor would drop the price and offer the movie for sale. That gave rental outfits like Blockbuster a window of near-exclusive access to customers.

With the advent of movies on DVD, everything changed. Today, rental and retail DVDs are released simultaneously, so Blockbuster must compete with a burgeoning ownership market. What's more, the retail side has a simpler supply chain. DVDs for sale go through a standard pick, pack and ship process before reaching store shelves. Rentals, by contrast, involve several additional steps, including the printing of a store-specific insert, placement of the insert into the outer sleeve of a separately produced, lockable case, and transfer of the DVD from its original packaging into the new case. The whole process must be tightly scheduled, to make sure that each of Blockbuster's 4,800 U.S. stores gets product in time to meet release dates.

Demand volatility gives Blockbuster additional challenges. Depending on the number and popularity of new DVD titles in a given month, the company's labor needs at its distribution center can vary sharply. Up to now, it has solved that problem with temporary workers, who are expensive to train on short notice.

Blockbuster is responding to these problems with a new approach to DVD packaging. Beginning this year, the company jettisoned its familiar blue-and-white rental boxes and replaced them with lockable cases that look just like rental units, complete with factory artwork. A plastic backer card remains on the shelf when all units of a particular DVD are rented.

Extra work is still required to place the disks into these new cases, but Blockbuster has turned to technology to cut costs. Five high-speed machines, located at the company's sole distribution center near Dallas, automate the process of opening an empty case, inserting the disk, printing and applying store-specific labels to the cover, inserting additional coupons or disks, and placing each order into totes on conveyors. As a result, work at the D.C. can be completed in less than half the time, with 75 percent less labor. That adds up to savings in excess of several million dollars a year, Blockbuster says.

The project's success hinged on cooperation with suppliers. Blockbuster convinced its distributors to ship DVDs without cases, on spindles in stacks of 100. That eliminated the need to remove them from retail packaging. Artwork, which must be cured for two days to prevent warping, is shipped separately as well. Tight collaboration with vendors was also required to determine the right kind of plastic mold for the cases, and sticker for the cover.

To keep distribution costs down, Blockbuster divided the U.S. and its surrounding territories into 50 regions, or pool points. The D.C. keeps a close watch on pickup schedules, so that it can expedite shipments if a movie is in danger of missing an in-store date. All of these measures have helped the company to stay competitive in an industry that is roiled by constant change, with an ever-growing number of options for consumers.