No doubt great movies have always been about top acting and directing, and about writing, composing and cinematography. Talent notwithstanding, at first what brought movies about was technology. The power of the moving picture was such, of course, that it drew people from their homes to the screens. Curiously, more technology, TV, reversed that somewhat in the 1950s as many stayed home to watch movies. Today's technology has turned the movie-watching model, at least as originally envisioned, on its head. Sure, you can still go to the theatres, but with video you can take the movies home with you.
The top Hollywood studios seek to capture viewers wherever they can, and increasingly video sales and rentals are seen as valuable contributors to the bottom line. MGM is no different from the other studios in that regard. Its MGM Home Entertainment division is focused on tweaking its business model to boost consumption of videos.
Utilizing space planning and replenishment technology from JDA Software, its staff is tasked with seeing that thousands of retailers in North America are stocked with the latest hits as soon as they are released on video, and can be replenished as shelves are emptied. Efforts to roll out the same vendor-managed inventory initiative are under way in Australia, France, Germany and the U.K.
It wasn't always like this. MGM, which now controls not only films of its own storied past but of United Artists, claims to have the largest film library in existence. Until 1999, however, distribution of its videos was handled by Warner Bros. In-house control was wanted, but the staff and system for it wasn't there at the time. Nicole Coleman, senior vice president of sales development for MGM Home Entertainment was practically a staff of one when she came on in 1999.
There was nothing inherently faulty about the Warners distribution model, she says, but MGM wanted direct contact with its own retail base - tens of thousands of retailers, including Wal-Mart, Target, and the giant video rental chains, such as Blockbuster and Hollywood Video.
There clearly had to be significant investment in systems and human resources. "MGM's strategy is definitely to stay on the leading edge of technology, to make sure we are on the latest version of the best software to stay competitive in the marketplace and be world class in sales, distribution and customer service," Coleman says. So, the willingness of senior management to make the investment was there. "Initially, the challenge was about what platform we wanted to use and then going forward with implementing whole new systems."
The one-woman show grew to six by the time MGM Home Entertainment went live with the VMI program in February 2000. Forty-plus report to Coleman today, though many are not involved in allocation-replenishment data analysis. Other endeavors include category management, customer service, merchandising and sales administration.
If the division's challenge in the late '90s was getting sufficiently organized to stand on its own, the daily hurdle now is to ensure that retailers have the product when officially released. Up to 50 percent of a video's sales come in the first week of release. Stores that aren't stocked, or have insufficient quantities of a movie in demand, cannot make up those sales, Coleman says.
DVDs Stimulate Sales
Interestingly, while the division tracks how a film performs at the box office, neither large grosses nor disappointingly small ones there dictate just how the video version will perform. In fact, Coleman says, when something underperforms at the box office, there is a propensity for it to do even better in video sales or rental, and technology plays a very important role in that.
"The marketplace is focused on home theatre systems and enjoying that experience, especially on DVDs," she says. "With the advent of DVDs, the home entertainment marketplace continues to grow incredibly. People are less apt to go see questionable films at the movie theatre, but will purchase or rent them to watch at home.
"In our forecasting model, box office is always a consideration and part of the equation, but is not necessarily a direct predictor of performance."
MGM Home Entertainment has two types of business, and sales (rather than rentals) is really the only place where the vendor-managed inventory program currently applies. On the retail side, however, there are sales of releases new to video and those that go into the company's extensive catalog. Clearly, the former is more volatile. It's critical to hit the right amount of the product at the right stores on the first week to capitalize on demand.
"The drop-off from week one to week two is huge, and if you miss that first week, you have missed a significant part of your business," Coleman says. "It's very important to be able to forecast correctly and be able to allocate properly down to the store level so that your not missing sales in that critical week."
There are any number of factors that can affect sales of new releases, and the quantities that need to be manufactured and on hand at a given retailer, according to industry observers. If box office isn't always a sure predictor, try genre, seasonality, or the sales policy of certain retailers. Action films may sell big with men, but not women. Some films sell better at certain times of the year. And some retailers may not allow certain movies, no matter how popular, to be sold in their stores - at least not in their original versions.
And once again technology is a factor. By the time a movie goes into video release, six-month-old box office receipts may have less bearing on its sales prospects than the fact that the DVD-owning public has grown so much in the meantime. "When you are looking at titles to predict your volume, it's difficult, because in the last six months there are so many more people that own DVD players, that looking at a movie that's six months old isn't overly relevant anymore," Coleman says.
Model is Unique
Forecasting may be the bread and butter of manufacturers and retailers, but there is something unique about trying to model how well one of Hollywood's products will do. Coleman, whose background is in consumer products, says motion pictures simply aren't like moving orange juice. "Typically, when you are selling orange juice, you have similar SKUs. Let's say you're launching a pulp-free. You look at your current existing business. The pulp-free may have regional differences, it may have a bigger demand or lesser demand, but you can take a sister SKU and model it after that and then tweak your forecast as you start to see sales come in. And it's not a huge opportunity lost if you miss the first week that you launch something in the marketplace. You can react and get things back in stock and the demand will still be there.
"In our category, first of all, you're limited to your own SKU base. So, for example, if we are releasing "Agent Cody Banks" on video - if MGM hasn't had any other family types of products in the marketplace for quite some time, you're not able to delve into your historical archive and take another like item and model after it. It's all forward thinking.
"And if you missed in your first week, you've basically lost half your sales. You can never recoup that because there are so many films coming out every week, that people don't go back and say, 'Oh, what did I miss?'
"Your first week is when you're on display, it's when the ads are hitting and when the pricing is very competitive, so it's absolutely critical to meet the demand that week."
Once the videos are in the stores, analysis of incoming point-of-sales data must be quick and accurate to guarantee immediate on-time replenishment, at the lowest cost to MGM.
Videos, typically, are released on Tuesdays. Sales information through the week indicates whether sufficient stocks are on hand, and crucial weekend sales data will determine if the following week threatens to kick off with stockouts.
For the most part, all POS data is forwarded by EDI; some smaller venues transmit Excel sheets. Replenishment can be made on a daily basis, even expedited via FedEx, but obviously cost containment is an issue. Allocation accuracy up front is an imperative. Later, "postmortems" are done to determine where mistakes were made.
"The hope is that we don't have to expedite freight and send small shipments," Coleman says. "We want to maximize our shipment, so we're not shipping envelopes."
Now, add special promotions to the mix of things that can determine quantities needed. When a retailer runs an ad for one or more titles, sales spikes need to be planned for. Even new theatrical releases have their effects on existing videos. For example, when MGM released "Legally Blonde 2" this summer, it brought a lift in sales of the original Reese Witherspoon film.
Many of the factors that affect new releases also boost sales in MGM's catalog, where sales activity is generally more stable. Romantic comedies may see sales boosts around Valentine's Day, for instance. Even price cuts and discounts have their affect. "As something becomes older you reduce the price, and each time you do, you see a lift in sales," Coleman says.
Finally, as with many consumer products, the fourth quarter is by far the heaviest season for MGM Home Entertainment, with the high season between Thanksgiving and Christmas.
Data is king as far as store sales go because so much rides on it. But MGM needs reliability at both ends of the information chain: accurate, timely POS data from retailers, and trained analysts on Coleman's staff knowing what adjustments need to be made. "Having exception reporting and edit checks and being able to validate the data coming in and making sure it looks clean and accurate is really important," she says.
For the technological expertise needed, the studio turned to E3 corp., now part of JDA Software of Scottsdale, Ariz. Aside from wanting control of its "own destiny," as Peter Charness, JDA senior vice president of marketing and chief product officer, puts it, MGM knew many retailers require that manufacturers have a VMI program in place. E3/JDA provided one and the training.
"So, you had an organization that had to bring technology up and also get their own people trained in how to run retail assortment and replenishment software," says Charness. "They ended up outsourcing the business process as well. Our predecessor company, E3, hired ex-retailers to help them or manage part of the business on their behalf. They went to an in-house-controlled outsourced business process and system."
The challenges were great and many, says John Phillips, director business development for Total Solutions Provider, an ASP business offered by JDA. "They used to manufacture product and turn it over to a distributor. Now they had to get into the entire business of determining how much product to send out, what the shelf space is in some respects in each of the locations, managing the logistics of product launches - just a massive challenge in forecasting - and get everything to the stores at exactly the right time."
The hurdles never stop popping up for Coleman's team of analysts. Once allocations are made, store-level feedback determines not only replenishment policy but whether new product has to be manufactured. "Based on early sales, they decide whether they will reprint DVDs," Charness says. "They have this huge gamble in terms of the artwork that gets printed and the DVDs that get packaged, because if they don't ship them out they end up destroying them to the greatest extent. So they have that challenge of reacting to early sales to determine not only how much more to ship but also how much more to build."
The decisions are totally those of the MGM Home Entertainment staff. While JDA is still hosting the application, Coleman's division is managing the business. Incidentally, implementation of the VMI software took between 18 and 22 months, according to the JDA officials, and training of new hires is ongoing through the Business Management Institute, something else JDA acquired when it took over E3. "It's a little unusual for a software provider," Charness says, "but we provide training in how to manage inventory and how to provide proper ROI with inventory investment management. There are not a lot of places where a manufacturer can go to learn how to actually do the job as opposed to just how to operate the software." Instruction is offered on-site at a customer's facility or at seminars periodically held around the country. An online tutorial is being developed, Phillips says.
As for the JDA product, called Vendor Managed Replenishment, here's how it works. Some customers not only must contend with thousands of stores or other outlets, they may have thousands of product titles or SKUs. "What the system does is allow you to set the background information and parameters about how you want to manage the inventory," Charness says. This is crucial in order to have satisfactory service levels. "That's the balancing act between how much inventory that I am going to invest in and how much probability there is of a stockout."
Other parameters include quantities that a shelf will hold and lead times in getting product to a location.
"Based on the forecast and parameters you set up, the system will generate the order, or in the case of MGM, how much product it needs to pick to send out to each location with a frequency that makes sense for optimizing the inventory."
MGM's SAP backbone receives the orders, which are then forwarded to the studio's VHS and DVD distributors in several cities in the U.S. and Canada.
Coleman's analysts meanwhile should be performing exception-based assessments to see if anything is out of the ordinary. At the same time, new video releases are added to the pipeline all the time. "In some cases they are going to be resetting the forecasts for things like new launches and chart titles, and probably will be dealing with things like promotional events, which are outside the normal run of the whole forecasting system," Phillips notes. "They are trying to determine what sort of uplift they are going to get from the promotion and ensure that the system is recognizing that and ordering appropriately."
Another allocation wrinkle, says Charness, concerns divvying up product when quantities are small. "Sometimes they're just isn't enough stock there to satisfy all their customers. While the system provides some support there, the analysts will have to make a decision as to whether Wal-Mart gets it, does Target, and how they divide it out in some equitable fashion among their customers."
Part of an analyst's responsibility is to work with a retailer to ensure that information is as accurate as it can be. Of course, the retailer often is a virtual stranger to the process. Third-party merchandisers often are the ones who provide cycle counts, manage the inventory once it is in the store, and send stockout information. They also are the eyes that need to determine if stock is being depleted through theft, something the allocation/replenishment system wouldn't necessarily find out about.
No matter how accurate MGM's forecasting crystal ball is, you can't stock more copies of a blockbuster than a shelf will hold, or that a store will let a vendor use. Space Planning by Intactix, another tool acquired by JDA in recent years, allows the studio to see diagrams of actual shelving in a given retail location. Appropriately used, the space management tool is designed to reduce out-of-stocks by ensuring that the right product quantities are on hand when needed. Further, it is intended to reduce markdowns and returns by better matching stocks to cluster and store demand. These so-called "planograms" should reduce inventory cots at all levels. "It really doesn't make sense to ship 36 copies of a movie if a shelf can only hold 14," Charness says. "Most stores don't have back rooms for storage anymore." In fact, many retailers won't allow a product in a store until a space management plan has been modeled.
"If you haven't measured that the product is going to fit in the store, you are leaving it up to the store manager to determine what goes where - or if it hits the store at all," Phillips says. "So most retailers and their manufacturing or wholesale partners do a fairly extensive job of modeling the store with software before the product gets there."
A recent report from AMR Research states that while VMI programs shift work and responsibility for inventory to suppliers or manufacturers, the monetary value they receive is sufficient to justify the investment. Turns are increased, inventory is slashed and sales are maximized. The precise percentages depend upon the vertical studied. Nevertheless, AMR says the evidence is too compelling to forego implementing such systems.
On the screen, it may seem that the movies are about great acting and directing and other talent, but behind the scenes something else is going on. It's about technology.
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