10 May WHY ARE THE LARGE NATIONAL RETAILERS MOVING TOWARD A DIRECT SHIPMENT MODEL?
Audio Duplication Services Inc. (ADS)Audio Duplication Services is a compact disc and cassette duplication and distribution company. Its major customers the big record companies use ADS to duplicate and distribute CDs and cassettes. ADS stores the master tapes and when a customer requests it makes a certain number of copies and delivers them to its customers’ customers music stores and other points of sale such as the department stores Wal-Mart and Kmart and electronics stores such as Circuit City and Best Buy. ADS is one of six big players in the audio duplication market. ADS has about 20 percent of the $5 billion market while its two biggest competitors share another 40 percent. Managers at ADS are currently trying to understand and react to some difficult supply chain-related issues.• Some of the big national retailers are putting pressure on ADS’s customers the record companies to manage inventory in the following way known as a vendor-managed inventory or VMI agreement. The record companies will be put in charge of deciding how much of each album CD and cassette title is delivered to each store and when each delivery is made. To help with these decisions the record companies will be provided with continuously updated point-of-sale (POS) data from each of the stores. Also the record companies will own the inventory until it is sold at which pint payment will be transferred from the retailers to the record companies. Since ADS provides the record companies with duplication and distribution services the record companies have asked ADS to help with the logistics of the VMI agreement.• In the past ADS has shipped to the distribution centers of large national retailers and the retailers have arranged for distribution to the individual stores. Now the retailers are providing strong incentives to ship directly to individual stores. Of course this means higher expenses for ADS.• In general ADS’s shipping costs are increasing. Currently ADS has a shipping manager who arranges with different shippers to make deliveries on a shipment-by-shipment basis. Perhaps there is a better way to manage these deliveries either by purchasing a fleet of trucks and doing the shipping in house or by outsourcing the entire shipping function to a third party. Maybe something between the two extremes will be best.Of course ADS is facing even bigger issues such as the future of the audio duplication industry as online audio distribution technologies become more prevalent. In any event each record company periodically reviews its contract with its audio duplication service so management must address each of the above issues effectively for the company to remain successful.1. Why are ADS’s customers’ customers moving toward VMI arrangements?2. How will this impact ADS’s business? How can ADS management take advantage of this situation?3. How should ADS manage logistics? 4. Why are the large national retailers moving toward a direct shipment model?
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