Here's how Mike Dreese, CEO of music retailer Newbury Comics, came to realize that the sales information he shared with his industry was putting his company at a disadvantage.
Company Secrets
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Of all the people Mike Dreese met at 1997's Gavin in the Pines convention--a big recording-industry show held in New Hampshire that year--it was the rep from rackjobber Handleman Co. that made the biggest impression. Dreese recalls watching this guy strut, practically beating his chest as he boasted about the fantastic information his company was getting on regional sales of CDs. Now Handleman, the largest buyer of music in the country, knew exactly what genres of music were selling where and when, the rep gloated. The data helped the company know exactly what to stock in the record bins it serviced in giant mass-market retailers like Wal-Mart and Kmart. By combining these new data with its own figures, Handleman could determine just how many units of, say, Korn's debut album or the latest from 2 Skinnee J's it should place in the racks at the Wal-Mart on Route 1A in Lynn, Mass. And this new bounty of information came from one source: SoundScan Inc., a private company that electronically tracks and tallies every single record sold by some 85% of music retailers in the country. SoundScan then crunches the numbers and sells reports to the record labels, promoters, and managers.
Mike Dreese couldn't believe it. He knew where some of the information was coming from. It was coming from him. Every Sunday night for the past six years, he'd steadfastly reported, direct from his IBM AS/400 minicomputer, the sales of his now-20-store record chain, Newbury Comics--location by location, label by label, artist by artist--to SoundScan's powerful server in Hartsdale, N.Y.
From the start, Dreese had concerns about releasing his numbers electronically through a third party, even though he says that SoundScan founders Mike Shalett and Mike Fine had assured him that his figures would go to the record labels only in aggregate form. But now he'd heard a Handleman rep say that the information Newbury Comics was giving to SoundScan was helping the giant retailers that it competes with every day. "The rep indicated that Handleman had this wonderful way of getting information to help them program Wal-Mart's CD bins," says Dreese, leaning across his battered metal desk, which he bought used in the late 1980s for 30 bucks. "It made me realize to what an extent a company like Wal-Mart was benefiting from the precise regional data that it could never compile on its own."
Dreese had to act--but not too hastily. After 19 years in the business, he knew better than to casually risk the promotional support--the price-and-position dollars, the artist appearances, the cooperative advertising--that the labels bestowed on retailers that reported to SoundScan. And he wasn't about to do himself in on an impulse. So he waited and thought and reconsidered. But, Dreese says, about three months after he'd returned from the Gavin convention in Holderness, N.H., he picked up the phone and called SoundScan. "I asked them if they had in fact ever engaged in consulting arrangements with retailers," he says, "and they said in fact that they had."
Dreese knew what he had to do. "The letter I sent was your basic bombshell letter," he says. "It just said, 'As per our contract, as of June 1998, we will no longer be a SoundScan reporter."
Mike Dreese had pulled the plug.
This was not the way it was supposed to be. Sharing information, the conventional wisdom goes, gives your business a competitive edge--no matter what industry you're in and no matter where you fall in the supply chain. And any technology that can facilitate that sharing (be it point-of-sale systems linked to modems, as in the case of the music industry, or radio-frequency transponders connected to PCs, as in the case of the beef industry) only sharpens your chances for success.
It just makes sense: to run an efficient business--whether you're a manufacturer, a distributor, a wholesaler, or a retailer--you must know what the end consumer wants. If the manufacturer doesn't have that information, it will fall prey to what's known as the bullwhip effect--increasingly larger distortions in the signal from the end-consumer market as it travels up the supply stream. (Just knowing what orders are coming in isn't enough, as orders necessarily include a fudge factor.) Without up-to-date sales figures from the retailer, the manufacturer can't accurately predict demand. So the retailer then runs the risk of either overordering product (to be sure it has enough) or running out of stock.
"A small fluctuation in end-consumer demand can lead to wide fluctuations upstream in the channel," says Ananth Raman, an associate professor at Harvard Business School who specializes in supply-chain management and retail operations. "The distortions add up, and variability always costs money. So channels have become extremely inefficient. They carry lots of inventory to cover against this kind of fluctuation. And what is weird is that we've started playing games to overcome some of this fluctuation--people anticipate shortages, manufacturers lie about how much is in inventory. And all of these exacerbate the fluctuations."
Sharing information prevents the distortions from ever slipping into the supply-chain waters. And when the distortions are gone, businesses can read consumer demand more accurately. Supply and demand begin to align. The manufacturer stops responding to phantom orders and its own (mistaken) linear predictions for more product. The retailer reduces its inventory investment (often by as much as 25%, says Raman) and runs out of stock less often (increasing sales by 4% or 5%, he says), because a manufacturer that can predict demand needs less lead time to get product to the retailer.
The music industry is no exception. And given its hit-driven nature, the benefits of sharing information are even more pronounced. If the record labels are aware of how many of which records are selling where, they can identify breakout artists and breakout markets and know where to concentrate their marketing and promotional efforts (in which regions to lobby for radio play of a particular band, for instance, or to push a new CD). For the retailers--the suppliers of the raw material upon which the labels base those decisions--the benefits are twofold. They get promotional dollars from the record labels as well as boxes of free CDs, and they help propel the artists they believe in up the Billboard music charts, because SoundScan sells its figures to the charts' compiler, Billboard magazine, in addition to the labels. "SoundScan is the best thing that's happened to this industry, labels and retailers alike," says Jordan Katz, vice-president of sales for Arista Records.
