Netflix is a provider of on-demand media through the Internet. The company also offers movies through DVD-by-mail. Founded in 1997, the business has exploited opportunities in this market to become its leading player. Inventory management is at the core of this business. Inventory management at Netflix spans not just the DVDs offered through mail, but also other materials or tools used in the business. Effective inventory management ensures that the business thrives and maintains its leadership position in the industry. Effective and efficient inventory management also supports Netflix’s expansion to new markets.
Netflix’s success is due in part to the effective use of inventory management through the different types and roles of inventory. The company’s inventory management across its supply chain involves business-specific measures of inventory performance to ensure beneficial financial impact on Netflix.
Types and Roles of Inventory at Netflix
Netflix uses the types of inventory that are most appropriate to its business. Different types of inventory have different effects on business. The role of each type of inventory depends on how it is used in the business. At Netflix, the following inventory types are used:
- Just-in-time inventory
- Serialized inventory
Just-in-time Inventory. For the DVD-by-mail service, Netflix uses just-in-time inventory management. In just-in-time inventory management, videos are recoded onto DVDs upon customers’ requests. The DVDs are then shipped from the company to the location of the customers. This is called just-in-time inventory because the company records the movies onto the DVDs only when requested by the customers. The main role of this type of inventory is to allow Netflix to minimize the size of its inventory because DVDs are not pre-recorded before customers order.
Serialized Inventory. Netflix uses serialized inventory for its online streaming service. In serialized inventory, products are monitored based on their unique serial numbers or codes. For example, each movie has its own serial number. The role of this type of inventory is to ensure that Netflix efficiently monitors its products and services.
The combination of just-in-time inventory and serialized inventory is suitable for Netflix’s business. These types of inventory fulfill their roles of addressing the firm’s different types of business activity. Just-in-time inventory is applied to Netflix’s DVD-by-mail business, while serialized inventory is used for online streaming and DVD-by-mail activities.
Financial Impact of Inventory at Netflix
The financial impact of just-in-time inventory is cost savings. This type of inventory allows Netflix to minimize inventory cost. The firm does not store pre-recorded DVDs. The company only records onto DVDs when customers place their orders. Just-in-time inventory also involves minimal stock because the DVDs are shipped right after recording. Thus, Netflix increases financial efficiency through just-in-time inventory management.
The financial impact of serialized inventory is cost savings through organizational efficiency. This type of inventory enables Netflix to easily monitor its inventory. Bar code scanners and other technologies used for serialized inventory contribute to higher efficiency of inventory processes.
Netflix’s Measures of Inventory Performance
Inventory performance must be regularly or continually evaluated to support management decisions. Different measures apply to different areas or types of business. At Netflix, the measures of inventory performance are as follows:
- Inventory cost
- Inventory turnover
- Inventory adequacy
- Inventory accuracy
Inventory Cost. Inventory cost is the total financial resources Netflix spends to maintain the inventory. Ideally, lower inventory cost is a measure of better inventory management performance. Firms always try to minimize inventory cost to reduce overall spending. Netflix minimizes inventory cost by using just-in-time inventory management and serialized inventory.
Inventory Turnover. Inventory turnover shows the ability of the company to keep the inventory moving. Netflix aims to have higher inventory turnover because this means more revenues. For example, the company uses inventory turnover as a measure of demand for and revenues from its DVD-by-mail service.
Inventory Adequacy. Netflix ensures it has enough supply for its business. The amount of tools and material stocks must be enough to satisfy demand at all times. Thus, inventory adequacy is a measure of the capacity of the firm to satisfy demand, with consideration for demand fluctuations.
Inventory Accuracy. Netflix uses inventory accuracy as a measure of effectiveness of inventory management practices. High inventory accuracy means minimized cost linked to waste due to error. Accurate inventory records require effective monitoring to support decision-making in Netflix’s inventory management.
ABC Analysis. Netflix uses ABC analysis to manage its inventory. ABC analysis is a selective way of controlling the inventory. The firm’s inventory is divided into different categories. The A items include DVDs and movies streamed online, as well as IT tools and equipment. The B items include materials used for packaging. The C items include supplies used in Netflix’s office, such as paper and ink. Highest accuracy of records and tightest control are applied to the A items, while lowest control and accuracy of records are used on the C items.
Inventory Information Systems. Netflix has dedicated IT personnel for managing inventory information systems used for its streaming services. The company also has dedicated IT personnel for managing the inventory information systems used for DVD-by-mail service.
Managing Inventory across Netflix’s Supply Chain: Inventory Value & Bullwhip Effect
Inventory Value in the Supply Chain. Inventory value is maintained in Netflix’s supply chain by keeping the inventory up-to-date. Media content, such as movies, lose their value over time. Thus, to keep the high value of its inventory, Netflix must keep creating new agreements and transactions with content suppliers, such as movie producers.
Bullwhip Effect. Netflix addresses the bullwhip effect in the supply chain by using advanced inventory information systems. These systems process and update inventory records in real time. Inventory management at Netflix is comprehensive and set up to monitor and control inventory and the supply chain for online streaming and DVD-by-mail services.
- Abernathy, F., Dunlop. J., Hammond, J., & Weil, D. (2000). Control your inventory in a world of lean retailing. Harvard Business Review.
- Fung, B. (2015, May 28). Netflix now accounts for almost 37 percent of our Internet traffic. The Washington Post.
- Gensler, L. (2015, January 20). Netflix Soars On Subscriber Growth. Forbes.
- Netflix, Inc. (2015). Netflix’s Official Website.
- Netflix, Inc. (2015). Netflix, Inc. Form 10-K, 2014.
- Syntetos, A. A. (2014). Principles of Inventory Management. Journal of the Operational Research Society, 65(5), 798-798.
- Tayur, S., Ganeshan, R., & Magazine, M. (Eds.). (2012). Quantitative models for supply chain management (Vol. 17). Springer Science & Business Media.
- Toomey, J. (2012). Inventory management (Vol. 12). Springer Science & Business Media.
- U.S. Department of Commerce (2015). The Media & Entertainment Industry in the United States. Select USA.