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