Netflix's Supply Chain Strategy, after 2011
In retrospect, all the problems listed earlier stemmed from the fact that Netflix's traditional supply chain tied the delivery of an intangible service (information content) to a tangible item (a DVD or Blu-ray disc). With this in mind, starting in 2007 Netflix made a conscious effort to take advantage of advances in information technology and move to a truly virtual supply chain that uses the Internet to both manage subscriber's accounts and stream content directly to them. Such a supply chain has numerous advantages, including:
• Subscribers can receive content immediately.
• Netflix no longer needs to manage an expensive network of distribution centers. In addition to cutting costs, this also allows Netflix to quickly expand into any market that has Internet access.
• Netflix no longer needs to make decisions regarding how many DVDs or Blu-ray discs to order or where to stock them.
But this new supply chain solution is not without its risks:
• Upstream supplier risks. Netflix depends on entertainment companies to provide the content subscribers want, yet many of these companies have concerns about having their content-particularly newer shows and movies-delivered in electronic format.16.t7 If entertainment companies refuse to license their products or provide only limited access to their "best" content, this could undermine the quality and range of Netflix's offerings.
• Downstream distributor risks. Instead of having the U.S. Postal Service deliver discs, Netflix's new supply chain strategy depends on Internet service providers (ISPs), such as cable companies and satellite network providers, to deliver the content. Many of these providers have been arguing that Netflix or its subscribers should pay higher fees due to the higher levels of traffic they generate. And even if these issues are resolved, higher traffic levels could result in overloaded networks and service interruptions.
• Competitive risks. Today, Netflix faces a new set of competitors, including Amazon, Google, and Hulu, and possibly new companies that have not yet entered the market.
Nevertheless, Netflix provides an excellent example of how supply chain strategies can provide firms with a distinctive competitive advantage and how these strategies need to adapt to changes in technology and the marketplace.
Questions
1. What were some of the key structural and infrastructural elements that defined Netflix's supply chain strategy before 2011? After 2011?
2. How have the customers' order winners for Netflix's customers changed over time? Would today's customer be satisfied by the delivery performance or selection of Netflix's "old" supply chain?
3. At the end of 2013, Netflix still had 39 distribution centers mailing DV Ds to seven million subscribers, although the latter number had fallen by half from the prior year. Should Netflix abandon its physical distribution system al-together? Why or why not?