Netflix
Customers browse through the DVD selections on Netflix’s website and add the DVDs they’d like to rent
in their list, and wait for their selections to arrive – through postal service. After watching the movie,
they return the DVD using postage-paid envelope. As soon as Netflix receives a DVD back from a
customer, it sends them the next movie from the customer’s list. There are no late fees, and customers
can keep maximum of three DVDs at a time for a subscription price of $20/month.
At the NetFlix processing center, each returned DVD is scanned and tested. 70% of the DVDs are found
to be ‘good’ and transferred to ‘Available to Rent’ inventory. The other 30% are taken to a ‘Bad’ buffer
in the Disk Recovery area in-house. 90% of the DVDs can be recovered in-house at a cost of $3 per disk.
The other 10%, however, must be sent out to an outside repair shop (after going through inhouse
recovery process). The shop charges $9 per disk for recovery, and it takes 10 days to send and receive a
DVD back from the shop (assume 100% recovery rate at the shop). After recovery, DVDs are transferred
to the ‘Available to Rent’ inventory from which desired DVDs are sent out. Shipping time is 2 days each
way to and from the customer; a customer on average keeps a movie for 7 days; the active subscriber
base is 300,000; the mailing cost is $0.37 cents per DVD and Netflix bears all mailing costs to and from
the customers. On average 80,000 DVDs are received daily, and an equal number is shipped out.
Assume the following inventory levels on average: Total number of DVDs owned by Netflix: 3,300,000;
Average inventory in ‘Available to Rent’ buffer: 2,000,000; and Average inventory in ‘bad’ buffer:
180,000
(a) Draw a process flow diagram for Netflix’s Operations Center
(b) Apply Little’s Law to determine average inventory and flow times at different points in the system.
(c) Assume the subscriber base remains constant. Does the business generate positive cash flows?
(d) The newly hired marketing manager suggested giving $5 off the monthly subscription price to any
customer who returned their movies within 4 days. Analyze the impact of such a campaign on Netflix’s
cash flows assuming the following: all customers chose the new price, average time a customer kept a
movie dropped to 4 days, the subscriber base remained constant at 300,000, and the total number of
movies with the customers at any given time remained the same.