Wednesday, May 23, 2012

Book Publishers Facing Tough Tradeoffs Managing Inventory

I’ve recently worked on inventory projects for book publishers and wanted to share some keyobseravtions that warrant blogging.

  • Success in controlling inventory in book publishing now should be defined as having inventory levels dropping more rapidly than book sales, while still meeting service level targets. Since print book sales are declining, successfully managing inventory means being able to anticipate/forecast declining patterns, yet still maintain high in-stock rates to maxmize existing demand. More working capital can then be used to invest in the digital side of the business.
  • Decreasing inventory levels increases the number of transactions (like printings) that are required to resupply inventory. Obviously, printing for shorter supply timeframes means that you might, for example, print a title twice a year instead of once. Over a large title base, this can mean a huge percentage increase in reprint transactions that have to be processed.
  • Increased numbers of transactions put pressure on staff, processes, and systems for greater efficiency. Most publishers are very leanly staffed at this point, and may not have the bandwidth to absorb signficantly higher transactions without major problems. Investment in better processes and/or systems could save publishers from having to make difficult staffing tradeoffs and suffering supply disruptions.
  • Based on these observations and assuming continuing declines for print sales, book publishers will increasingly face tough tradeoffs between managing their inventory relative to sales, managing their transaction volumes, and covering staff overhead faced with diminishing print sales.

It seems counterintuitive during this digital transition away from the primacy of physical books, but book publishers that lack strong inventory systems and/or processes may need to invest soon for improved performance and sustainability. The risk of inventory ballooning while sales fall is one that can consume working capital and pollute a balance sheet, hampering a publisher’s flexibility to invest as needed in the digital business. A reasonable investment in improvements can save a lot of pain in the long term.

Tim Cooper

Toward A New Vision Of Sustainable Print Book Publishing In the 21st Century

If print book publishing is to survive in a rapidly digitizing world, traditional models for decision-making around print must evolve into models that better fit the times. Print book publishing has been driven by the vision of continuous growth in volume--which generally translated into selling more copies of more titles and (thus more printing). This older vision of growth--and the fear of unfilled demand (which jeopardizes growth)-- translated into a business model that sought profit primarily in economies of scale. Ever increasing print volume led to a focus on reducing the unit cost of each print book, driving up print quantities, which further drove efficiencies in offset printing, high volume finishing (i.e., jacketing, binding, etc) and mass logistics and distribution.The reality is that print book sales in the US peaked in 2007. The pinnacle was reached by the final Harry Potter title, and sales of print books have declined significantly each year since. At this point in the 21st century, preserving a model driven by print book volume growth is folly. Instead, a new vision through ensuring a sustainable eco-system around printed books should be the goal. Central to this new vision is a rethink of traditional print quantity decisions.

Fortunately, the conceptual model needed to replace the unit cost model is readily available for adaptation: "total cost of ownership" or TCO. Rather than using unit cost as the primary determinant of print quantity and profitability, TCO introduces additional inventory related carrying costs that act to constrain the attractiveness of lower unit costs that stem from higher print quantities.

What print decision-making strategies complement a TCO model? The most fundamental is that "less is more." Printing fewer copies more frequently is the basic premise. To do this involves finding a new balance between simple p & l cost analysis (unit cost is a key driver), and a more inclusive review of the implications of purchasing inventory (TCO). Reducing the size of inventory investment occurs transaction by transaction. TCO is an approach that requires consistency and discipline, as well as timely access to relevant demand and inventory data. Book publishers need to realign metrics, accounting, and incentives to reinforce the TCO vision.

The drawing below shows the extent of inventory carrying costs that are in addition to unit cost. As the shift to digital accelerates, capital, service, risk, and storage costs need to be considered with greater rigor rather than be treated as "external" to a print quantity decision (as was the case too often in the growth era). Of all of the cost factors shown below, the inventory risk costs, primarily the risk of obsolescence, are huge in a disrupted environment. Customer demand for print is rapidly changing, and is much less predictable than before.

tco carrying costs
non-unit cost inventory costs

Depending on the level of activity for the title, reducing print quantities typically triggers the need for short-run digital print solutions. Book printers need to increase their capabilities/capacity to make economical digital print books. Publishers and their printing partners need to utilize distributed print networks to enable printing closer to where the book is needed, saving shipping time and cost. As more print titles move towards being considered "long tail", print on demand services (combined with direct fulfillment) will comprise a larger piece of the pie. TCO also calls for better demand forecasting for titles where inventory must be held. The forecasts should be based on updated market models that reflect the new realities of the print book marketplace.

Additionally, given shrinking print revenues for the foreseeable future, publishers are also challenged to financially support the staff and systems required to manage the print side of the business. This could open the door to investments supporting more automated, streamlined print transactions. Pressure to reduce staff costs could lead to mutually advantageous transfer of staff and functional duties from publishers to printers or other 3rd parties. Whether this takes the form of limited business process outsourcing or more comprehensive vendor managed inventory programs, it's clear that there are many opportunities for creative solutions to the challenge of sustaining the print book ecosystem.

(Part 1 of a multi-part series) originally published 3/5/12 on 'From the Whiteboard"

The Power of Observation: Applying the Heisenberg Principle to Consulting

January 31st, 2012

I firmly believe in the power of external consulting to cause change in companies. I say that from experience, but can explain it with a scientific principle. It is the Heisenberg principle of the observer effect–the impact that an observer has on the observed.
According to Wikipedia, “The observer effect …, relates to the influence the observer has on a system… This means that the type of measurement that we do on the system affects the end state of the system.”
Consultants are obvious observers, newly and consciously introduced into the enterprise eco-system by management. Consultants have an immediate, sometimes visceral impact, on the organizations that deploy them . The question is, how can the impact be leveraged for best effect?
The best clients leverage the presence that consultants have to best effect. They communicate proactively about the pending engagement with the key players in their company. They show their organization that they are serious and willing to commit resources.
The best consultants harness their presence to get information and connect with the key players. They channel positive energy and try to use it to uncover barriers. As they absorb more information, they begin to test hypotheses about how to orchestrate the changes needed, whether process or organizational.
The best results bring the observed into a new state, one that is more cohesive, productive, and committed to achieving common goals. The strength of the Heisenberg principle, and consulting in general, is in leveraging the impact made to organizations by observers.

(first published on "From the Whiteboard" blog

Thursday, July 7, 2011

6 Months To Go in 2011

Summer's here and the time is right for ... evaluating your progress year to date. While vacationers hit the beaches, business people should hit their numbers and gauge how the year is shaping up. Whatever your key metrics are (probably revenue/sales, costs, profit), you should review the year to date thoroughly, update your projections for the rest of 2011, and make adjustments as needed. July is the right time to take stock and plan to finish strong.

  1. Review your key metrics year to date

  2. Update your projections/budgets for the rest of 2011

  3. Make necessary adjustments to operations

Wednesday, January 6, 2010

Top 5 for 2010--Book Publishing Predictions from Tim

  1. Continued extinction of the 20th Century book eco-system. More bookstores will close, less "trade" new titles will be published by fewer "acknowledged" trade publishers, less books will sell through traditional channels (whether retail or institutional), less people will be employed by book publishers, and less money will be spent overall by publishers.
  2. The existential crisis for traditional publishers will continue. There is no going back to the way it was, and the path forward is unclear at best. More content will be written defending the value of the traditional publisher and their traditional functions, and many still in publishing will be encouraged and share these pieces with colleagues. This will not change the problem. Dualism (e vs. p) in publishers will exacerbate this trend, with the "e" staff seen to be the favorites and sometimes mocking their primitive "p" colleagues.
  3. The best publishers will invest in operational improvements, so they can handle their "physical" business more efficiently. Areas like data warehousing/business intelligence and reports, sales forecasting and inventory management, and measuring sales force productivity will see increased focus to drive more ROI. Any savings will then be invested in digital infrastructure needs. The best publishers will create self-funding loops.
  4. On-demand print technologies will continue to evolve, particularly for full color, and the most innovative trade publishers will find ways to capitalize on new capabilities. Look for more personalization of book content (with pre-orders) as publishers try to find ways to charge more (for extra value) and build databases of interested readers. The best publishers will make this a long-term strategic priority.
  5. On the digital side, now that eBooks are finally hot (after 10 years of anticipation), the growing focus for publishers will be on understanding and managing the digital supply chain. Publishers will need to understand (and spin) the advantages that their digital supply chain brings to the table versus other competitors, whether those are traditional publishers or other players.

Monday, September 21, 2009

More legal problems for the book industry are a precursor to the next suit to come

I'm not surprised by the news that the Justice Department has recommended that the proposed Google settlement be rejected as written. Given the complex issues involved, more work needs to be done to achieve a fair settlement for all parties involved, one that does not lock in an unfair advantage for Google over its competitors. Clearly, this is just the latest example of litigation playing a critical role in shaping the industry's business models.

Recall that in 2001, just 8 years ago, the ABA (American Booksellers Association) settled its antitrust case against Barnes & Noble and Borders for $4.7 million. The 1994 lawsuit and its accompanying evidence exposed many discriminatory deals made by the two bookstore chains with the major publishers. Many commentators at the time noted that the deals helped to financially feed the 1990's superstore expansion, while at the same time crippling the ability of independent bookstores to compete on the same playing field. By the time the lawsuit impacted the industry enough for publishers to offer fairer terms to independent bookstores in the late 90's, the damage had been done. The industry was left with the 2 chains as the increasingly dominant booksellers.

At about the same time, the internet and Google emerged to become the next new challenge for the industry. In this latest case, Google's behavior in digitizing entire library collections, initially without regard to copyright issues, was the core of the problem. While the publishers and the AAP sued to stop the library program, a negotiated settlement became the vehicle to resolve the dispute.

As the industry continues to struggle with digitization in general, the almost arcane focus in the settlement on "orphan works", those out of print or rare works without a clear and identified rights holder currently, can be seen as a microcosm of a larger dispute that will eventually be settled in the courts. Since Google's strategy could be characterized as digitize first, then negotiate, they were able to attain the competitive advantage early on, and have leveraged that to steer the proposed settlement. Their major argument is that digitization is in the public good, giving wide access to these rare works. Of course, that access is through Google's book search. And parties wanting to claim their orphan works and opt out of Google must do so actively, the onus is on them to navigate through the structures defined in the proposal. It will be interesting to see how this all turns out in the end.

But I think this particular legal action is the precursor to another one. It is my guess that the future dispute will be whether the major publishers' individual and confidential agreements with Google, Amazon, etc, violate Robinson Patman, or the Sherman Act, and give those companies an unfair advantage over their competitors. Whether it is about ebook terms, book search terms, or terms about any income derived from scanning and digitization of works, more litigation is the only certainty.

Tuesday, September 15, 2009

Dan Brown and Publishing Pricing in 2009

In the article (see link above) in UK's Independent, DJ Taylor bemoans the fact that Uk retail cutthroat discounting on major bestsellers like "Lost Symbol" and Harry Potter, etc are a lost opportunity for struggling book retailers to realize profitable revenue. With UK chains selling the title at 50% discount or half price, Mr Taylor notes that selling a copy is either a loss leader to drive traffic, or a break even proposition at best. Mr Taylor neglects to note the major cash flow advantage that retailers will see in selling many copies quickly to consumers, collecting that cast, then paying their suppliers with extended dating.
He writes, "All this renders the book's publication horribly symbolic. For all the bright-eyed talk about 'diversity' in the nation's bookshops, the over-riding tendency in publishing is for more discounted copies to be sold of fewer, similar books. Some might argue that putting Dan Brown on sale at half-price is a thoroughly democratic way of making literature more accessible to a mass public. In the end, though, price-cutting simply devalues the allure of what remains. "
Mr Taylor may not have noticed, but a sort of consumer price deflation has hit many physical media products in the last year or so. I would propose that the revenue dampening impact of the global recession, combined with the emergence of digital media, the increased visibility of used products (via eBay and, and the corresponding weakening in physical media product sales and retailer performance has driven this phenomena. Lost in many industry blogs and trade articles about eBook pricing and the $9.99 Kindle consumer price target is the fact that in 2009, the price of physical book product matters much more to publisher's top and bottom line results.
The industry is in an almost existential juggling act, trying to find the balance of consumer value vs publisher profitability while many of the primary factors that influence both are changing. What is indisputable in 2009 is that the industry needs more consumers to buy books, whether in the US or UK, whether in chains or indie bookstores.