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OM in the News: Netflix Streamlines its Old Business

July 26, 2015

The Netflix Fremont, CA. factory

The Netflix Fremont, CA. factory

It was just past sunrise at Netflix’s Fremont, CA., DVD operations hub, where metallic arms whirred in a giant glass box and rolling carts holding millions of DVDs lined the walls”, writes The New York Times (July 27, 2015). The company’s iconic red envelopes buzzed through an assembly line at the other end of the warehouse. The machine sucked a returned Netflix mailer into the system and then proceeded to slice open the envelope, identify and clean the disc inside, check that the DVD worked and reinsert it into the original sleeve. That disc was then returned to the storage carts or shipped out to another customer who had requested the title.

About 3,400 discs zip through the rental return machine each hour, 5 times as many as when teams of Netflix employees used to process the discs by hand. The machine symbolizes the way Netflix has managed to maintain a profitable physical DVD operation even as it transforms itself into a global streaming service. Netflix has 5.3 million DVD subscribers, a significant falloff from its peak of about 20 million in 2010; still, the division continues to churn out hundreds of millions of dollars in profit each year. And behind the scenes, OM analysts are trying to improve customer service and streamline the labor-intensive process of returning, sorting and shipping millions of DVDs each week.

Netflix has kept a core base of DVD customers, particularly in rural zones with lackluster Internet service and among people who want access to the breadth of its selection. To hold on to those profitable customers, Netflix continues to deploy state-of-the-art technologies that help trim costs as well as improve customer service. In Fremont, Netflix used to employ about 100 people to handle the returning, sorting and shipping of the DVDs. Today, about 25 employees work through the night, largely assisting the machines.  “Embrace change — that’s what I’ve learned here at Netflix,” says the general manager.

Classroom discussion questions:

1. Why does Netflix continue to invest in warehouse technology?

2. What OM tools discussed in Chapter 7 would be useful to Netflix?

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