Online Video Rental – White Paper
Applying Lean Six Sigma to Online Queuing Management
Froileo Parado, PMP, LSS, ITIL
V3
INTRODUCTION
The advent of online video rental system introduced a new era in how rented videos or
movies are delivered to your home screens. It allows a person to rent DVD’s, Blu-ray discs, and
video games online for delivery by mail. All interaction between the renter and the rental company
takes place through the company’s website.
Examples of online rental companies are Netflix, Blockbuster Video Online, and
LOVEFILM. Variations exist between these companies in the type of products or services they
offer which makes one unique from the other.
How it works
1. The customer selects one of the companies mentioned above and joins the
online service by creating an online account and providing all billing and shipping
information.
2. The customer creates a list of movie titles they wish to watch by selecting each
title and moving them to the “Rental Queue” page.
3. Titles from the “Rental Queue” list are mailed to the customer in sequence and
based on availability.
4. The customer watches or keeps the movie for as long as needed with no late
fees.
5. When the movie is received by the company, the next one on the Rental Queue
list will be mailed to the customer.
The Battle Summary
As demand and profitability grew, so does the desire to be the top provider with the
largest market-share. And when greed enters a company, focus gets skewed and customer
service falters. The current top two online video rental providers in the U.S. are Netflix and
Blockbuster Video Online. Each has its own weaknesses and strength.
Netflix
Established in 1997 and headquartered in Los Gatos, California, it has amassed a
collection of 100,000 titles and approximately 10 million subscribers. The company has more than
55 million discs and, on average, ships 1.9 million DVDs to customer each day. It claimed to
spend about $300 million a year on postage. In April 2009, the company announced that it had
mailed its two billionth DVD delivery, and awarded the recipient with a complimentary lifetime
membership. It earned a score of 86 from the American Customer Satisfaction Index which is well
over the industry average score of 75. Netflix is currently the number one online video rental
provider in the U.S.2
Model (unique to Netflix)
 Online-only video rental provider
 Free and fast DVD delivery in about 1 business day
 Free movies to watch streamed instantly over the internet to your PC, Mac, or TV
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
Movies streamed via internet are available anytime and as often as you want
Blockbuster Video Online
Blockbuster is the world’s largest DVD in-store video rental chain in the world based in
Dallas, Texas. It was established in 1985 and from then started opening stores every seventeen
hours. They entered the online market in August 2004 with a flat rate fee of $19.95 monthly
subscription service. This sparked a price war with Netflix. Both have undercut each other until an
agreed identical price model is reached. Its success in online subscription was probably due to its
aggressive marketing drive to gain online subscribers such as two free in-store rental coupon,
unlimited in-store exchanges, in-store exchanges not counted as on Queue shipment, and fast
turn around time in shipping videos in Queue. Overtime, blockbuster started removing or
changing these offers in the hopes that subscribers would pay little attention to them. The twofree in-store rental coupon had been removed, unlimited in-store exchange becomes per-plan
limit that starts from 1-a-month, in-store exchange are now considered as part of the At-Home
movie received so until the in-store rental has been returned the next movie on queue will not be
shipped, and finally, the average turn around time to receive the DVD from Queue is now up to 7
days. Not all stores participated in this Total Access program so depending on your location, instore exchanges may not apply to you. In the first quarter of 2007, Blockbuster reported a net loss
of $46.4 million and continued this trend throughout 2009. Lawsuits started landing on
Blockbuster’s camp coming from competitor - Netflix for infringement of patent, followed by late
fee lawsuits from customers, and internally from one of their largest franchise operators –
Southern Stores Inc for undercutting the group’s franchise agreement. Blockbuster settled the
lawsuits for an undisclosed amount. From 2007 to 2009, Blockbuster started closing 285 stores
and some internationally and hired a new CEO changing the business model to focus more on instore rentals.1
Model (unique to Blockbuster)



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In-store exchange and in-store rental
In-store discount coupon for DVD or game rental
Movie downloads starting at $1.99 each
Video game purchase
Lean Six Sigma Application
Lean Six Sigma is a methodology for improving quality through a continuous effort to
eliminate defect and improve process by making it better, faster, and more cost effective. The
purpose of this white paper is to apply Lean Six Sigma to define the opportunity for improvement,
confirm with statistical certainty the identity of the problem, find the root cause of the problem, find
ways to fix it, and employ a program for continuous improvement in an online video rental
program.
DEFINE
The define phase clarifies what to look for and how it will be found. Problem identification
could be based on using a process map, quality metric, customer surveys, or determining Critical
to Quality (CTQ).
In an Online video rental program, customer and rental issues could be identified as:
 Customer email surveys or phone calls to rate the experience
 Customer email survey requesting shipping information such as mail date
 Conducting public contest on ways to improve Queue logics or algorithms
 Brainstorming on creating new and innovative ways to improve customer experience
 Reviewing competitor historical data to be used as competitive benchmarking
Netflix has successfully identified all issues surrounding Blockbuster’s failed attempts to innovate
and used that information as part of their risk-avoidance technique to improve their existing
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process. Blockbuster has enticed customers to join their online program by offering free in-store
rental coupons that are later on removed and giving the illusion of unlimited online rental. One of
Blockbusters model is 1-at-time online rental with 5 in-store rental exchange per month. The trick
is how you will get 5 in-store rental exchanges when it takes up to seven days to receive movies
so logically, you only get a maximum of 4 movies in the mail per month that can be exchange in
stores. On the other hand, Netflix ships the next movie on queue the same day the movie is
received. Blockbuster doesn’t seem to know how to do this as was answered during my interview
with one of their online customer service.
MEASURE
This task should lead to input into the problem evaluation process. In an online rental
program, tools such as control charts, a detailed process map, balanced score card,
benchmarking, Pareto chart, and a good data collection plan can be used some of which is to
measure the problem by converting them into quantifiable items.
 Blockbuster should have used a control chart to create control limits to decide if all
outliers are due to internal process and whether it is actionable or not. 3-5 days
processing is just unacceptable.
 A Pareto chart is an effective tool in determining what 20% sources are causing 80% of
the problems and where should the focus be to achieve the greatest improvements.
 The balanced score card can be used to align the business and customer needs.
Blockbuster should have been smarter by not cancelling the free coupons and other
promos that makes the customer happy.
ANALYSE
In this phase, we have the opportunity to confirm that the problem is real and to
determine its root cause. Blockbuster needs to consider all potential issues that could have
revealed the apparent need to re-evaluate their marketing decision strategies. Pulling out the
beloved free coupons and changing the in-store exchanges will gradually create a strong distaste
for the customers.
 Blockbuster needs to conduct a full review of their shipping system and Queue logic in
place.
 Blockbuster needs to research the root cause of the problem through the assessment of
input and opinions from each department that is responsible for the shipping and
receiving of each DVD. Why is it that when the customer returns the DVD on a Monday at
a store and Blockbuster receives it on Wednesday, the next DVD doesn’t get shipped out
until Friday. The customer is considered lucky to receive the DVD on Saturday which
often times arrives on a Monday. That’s 7 days later from the time the DVD is returned.
Clearly there is a processing problem here either deliberately to limit the number of
DVD’s received by the customer or Blockbuster just doesn’t give a damn about what’s
going on in their shipping and receiving department.
IMPROVE
Once the cause of the problem is finally and fully understood and a selection criterion has
been established for a particular solution, the Improve task is engaged to implement the approved
solution by piloting it first on a controlled environment and then pursuing the change by rolling out
the solution if the pilot stage is successful. A new shipping and receiving software should be
implemented to speed up the process from 3-5 days to 1-2 days DVD turn around time.
CONTROL
Control is the phase where we maintain the implemented solution, document the
procedures to standardize, verify the benefits realized, and close the project after transition.
Blockbuster needs to enforce the new shipping and receiving software and process in place to
make sure that it is working based on a new standard of 1-2 days. The results can be observed
and analyzed using a control chart with a set control limits. If shipping and receiving starts to slip
and goes outside the limits then a review should be initiated. A new customer satisfaction survey
and new customer subscription documentation should be logged and evaluated to calculate the
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return on investment. A faster DVD turn around time and the return of free coupons should make
the existing customers happy and stay while attracting new customers.
CONCLUSION
Service providers often times underestimate the customer’s ability to asses a service
being provided by a business or maybe they just ignore it all together. Some businesses are so
driven with greed that once they have amassed a targeted customer base, they think they can
just trick the customers by slowly pulling out benefits of subscription membership and confidently
hope that customers will not care about it. This is why Blockbuster loses their customer faster
than they make one. In my opinion, Blockbuster’s online DVD rental model is so bad that you will
at one point call customer service and complain with passion. I should know, I’ve been a
subscriber for over three years; I was satisfied with their service at first but gradually started to
hate them. I cancelled my Blockbuster online account, tried Netflix, and I’ve been a satisfied
subscriber for over 6 months now. The Netflix business model is more customer service driven
and honorable. For only $8.99 the subscription benefits such as movie streaming are permanent
and not a teaser promo like Blockbusters. I particularly enjoy Netflix’s shipping and receiving
model; for example, if I return the DVD on a Monday, Netflix receives it Tuesday and ships the
next one on Queue the same day so I would receive it on Wednesday. Within the same time
period, Netflix sends an email survey asking when I shipped the movie and that the next one is
already being shipped. This tells me that Netflix cares and has a system in placed for their
shipping and receiving processing. Although Blockbuster has a store that one can go and make
in-store exchanges, their business model will leave a bad taste in your mouth that the only reason
one would keep their Blockbuster account is maybe because they enjoy going to the stores. But
at this day and age, who really drive to the store anyways when you can get it delivered to you
either by mail or online. Overall, if you are looking for an online DVD rental provider, I recommend
Netflix.
REFERENCES:
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5.
Blockbuster on Wikipedia, See http://en.wikipedia.org/wiki/Blockbuster_Inc.
Netflix on Wikipedia, See http://en.wikipedia.org/wiki/Netflix
Online video rental, See http://en.wikipedia.org/wiki/Online_video_rental
http://www.blockbuster.com/
http://www.netflix.com/
ACKNOWLEDGMENTS:
1.
A Blockbuster customer service representative I interviewed
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