Supply Chain Close-Up: The Video Vault

Supply Chain Close-Up: The video Vault

1. There should be room for an independent video rental store and a large chain such as blockbuster in the market in Westborough. However, the room for independent video will not be very large (say 1-2 stores), and one large chain store may already be enough to saturate the entire market in Westborough.

There is still room for independent video rental because they have different competitive advantages over the large chain. Taking Value Vault as an example, they have an advantage over Blockbuster by:

(1) Providing personal customer service and locating nearer to the community; Value Vault can gain customer loyalty by treating customers as friends and by giving recommendation based on customers' pervious renting habits.

(2) Keeping old classics movies and by renting VHS as its core renting type; This helps them to target different customer group (e.g. Value Vault may get larger market share on the elderly's market who prefer classic movies and low-income group who cannot afford a DVD player yet in early 2000).

(3) Not putting New Releases as its primary focus; Two-third of Value Vault's rental are from new releases, adult videos and video games (the $4 price products), but the co-owner of Value Vault claims that they do not over-order new release movie just for satisfying the high demand in the first week. Although there is not enough data provided for us to calculate the sales proportion, we can still interpret that the source of income of Value Vault actually comes more from adult video and video games, but not new releases (the new release demand drops sharply after one week due to the popularity of revenue-sharing contract in the industry). This further proves that Value Vault is focusing on different market from Blockbuster.

Therefore at the time of 2002, there should be still room for both an independent video rental store and a large chain as long as they have different target customers and possess different competitive edge over each other.

2. Looking back at the renting record, one critical factor on the popularity of a movie is the Ebert Rating of the film. Those with low rating (2 star or below) will usually have lower demand on renting market (e.g. Along Came a Spider and I Still Know What You did Last Summer), hence for Zoolander, with only 1 star, we should only stock a small amount of it, say 3 VHS (as there is a reduced price) plus 1 DVD.

For Heist, it is a 3.5 star film but with a rather low Box Office Receipt, the case is similar to Elizabeth. Being ranked as a Type B movie for large rental chain that adopts revenue sharing, theses chain will keep less copies for this movie, hence it can be expected that film will have certain popularity over the time. In addition, the VHS is set at a sell-through price, which is rather cheap, hence we should stock certain amount of this film, say 5 VHS and 1 DVD.

For A.I., it is a popular film, Blockbuster will stocked more than 25 copies of it. It is not sure how much discount we can get from the VHS package (buy 4 get 4 at reduced price), however it seems that it will not be as low as purchasing a DVD. In addition, looking at the most recently renting record of Jurassic Park III, which is also a Sci-Fi film, it seems Value Vault over-stock VHS type while DVD type is quite popular, one reason maybe customers who rent Sci-Fi film has higher expectation on image quality and will prefer a DVD. Hence base on the stocking strategy of the competitor and the previous renting record of Jurassic Park III, we should stock more DVD and less VHS, for example, 4 DVD and 2 VHS.

3. The stocking policy is different because the business strategy of the 2 companies is different. Value Vault is a small shop, its strategy is to provide high quality and distinct renting services to customer around the community. Blockbuster is a large chain, its strategy is to capture market share and most of the customers by providing large amount of new release and service warranty (get your video free next time if you cannot find it this time).

For Blockbuster, customer base is larger and they have more shops. By economies of scales and with large amount of capital they are able to buy large amount of new releases to capture the market for the first week. Also with their size of business they have higher bargaining power to the studios, this make revenue-sharing contract, and high new releases stocking strategy more favorable to them.

As a small business, Value Vault has less space to house its movies and it has to manage cash flow issues more carefully. Therefore, Value Vault will not buy a large pile of new releases, this will cause huge pressure on cash

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