Redbox rents DVDs through unmanned kiosks in heavily trafficked areas like grocery stores. "In a normal week we send about 1.5 million disks to 260 distribution points and, ultimately, to 43,000 kiosks across the U.S., including Alaska, Hawaii and Puerto Rico," says James.

Unlike a traditional retailer, Redbox buys a new title once, about 10 each week in quantities of 200,000 to 600,000, and never replenishes those titles. Demand is very high for new titles in the first weeks after release, followed by a steep decay in demand, says James. The company has about 1,000 employees who service the kiosks like a vending machine. "They pull out the old disks and make sure the kiosk is clean and in good working order so consumers have a good experience," he says.

The key problem for Redbox is in keeping kiosks stocked with the right films. For the initial distribution of a new title, the company uses a custom algorithm to match allocation to each kiosk’s demographics and history. “Every kiosk gets a custom assortment each week,” James says. “Some may get only six to seven copies of a new title while a kiosk two miles away may get 20 to 25 copies of the same film. A certain genre of film may do well in some areas but not in others.”

This initial allocation quickly becomes skewed, however, because about half the people who rent disks return them to a different kiosk. “This is an important part of our value proposition,” says James. “We want to make it as easy as possible to rent and return a movie. But on the back end we have to deal with the problems that creates.”

In a network as large as Redbox’s, imbalances can become extreme very quickly, says James. “Let’s say two kiosks started with 15 disks of a particular DVD. After a week or two, one might be down to two disks and the other have 25 or 30 copies. The first one will probably stock out, which creates a bad customer experience, and the other will have a lot of disks sitting there and not being productive.”

The company worked on this problem for a couple of years, testing several ideas. “We first tried sending out dedicated people to physically move the disks, but that was just too expensive,” he says. “So we ended up rebuilding how the kiosks function. We changed how they sort disks and built more intelligence into the software.”

Now the company runs new algorithms every night that tells each kiosk to identify disks that are over supplied and also titles that are in short supply for current demand, James explains. This information is sorted and communicated back, so when the field employee shows up the next day the kiosk is able to tell him which titles to remove and where to relocate them on his route later in the day, as well as which titles need to be added.

“This doesn’t really cost us any extra time―maybe a minute per kiosk―and it allows us to move over 200,000 disks a week back into a productive spot,” says James. “The algorithms are constrained by the routes of each field rep, so they never have to backtrack or deviate from their normal route. It is a closed loop system so everything that gets taken out of one location gets put back in at another.”

This system is working well at smoothing imbalances, James says. “Our field reps visit between 10 and 20 kiosks a day and as many as 100 over a week in dense areas. In the example that I gave earlier, where one kiosk was down to two disks and another had 25, when they each started with 15, we see those equalize to within one or two disks within a week.”

Rolling out this new technology was a big capital investment, James says, but it costs very little to run it day to day. “We rolled it out nationwide in 2014 so we have been seeing the benefits for a while and it really is working pretty much like we planned.”

To view the video in its entirety, click here