The UK Book Industry Unlocking the Supply Chain’s Hidden Prize

The UK Book IndustryUnlocking the Supply Chain’s Hidden Prize 16th February 1998 Working together for a more profitable industry Management report

Contents • Summary of main conclusions and recommendations • Introduction • Objectives and scope • Approach • Participants • Analysis of current situation • 5 areas of change • transaction processes • partnership in demand and list management • management of stock and capacity • distribution efficiencies • returns • Our recommendations • quick wins • strategic change programme: priority projects longer term projects • benefits • Obstacles to change • The case for change • Next steps

The structure is the legacy of an age of large batch sizes and infrequent orders and is not relevant to today’s little-and-often ordering patterns The long tail of slow moving titles is responsible for a disproportionate share of costs and wastage The very high number of new titles is dealt with inefficiently and cause lost sales, high costs and wastage Little-and-often ordering has reduced returns somewhat, but sales are being lost in the process Category management and demand planning are not properly understood or applied in the book industry Opportunities for electronic commerce are not being seized There is an inevitable tension between the creative processes in publishing and bookselling and the technical disciplines of supply chain management There is little exploitation of opportunities for economies of scale in physical distribution and transaction processing Trading relationships are complex, largely adversarial, with little partnership activity There is little joint planning across the supply chain The competition for retail exposure causes Publishers to push stock into the supply chain, accepting the risk of returns this creates. Partly this is due to: dependency on new titles shortcomings in the responsiveness and efficiency of the supply chain perceived limitation of retailers’ re-ordering policies retailers not incentivised to resist because they carry little stock risk Book Industry Supply Chain Project Phase 1 - Conclusions The current book industry supply chain structure is complex and costly, characterised by high fragmentation, few economies of scale, and many-to-many trading relationships At root are fundamental issues about the nature of the publishing and bookselling process • There are a number of obstacles to change to be overcome for the industry to reap all the benefits available • These include mistrust of trading partners’ motives, complacency, the difficulty of balancing requirements for individual versus industry-wide benefits, and short-termism • There is a pressing need for action, as financial returns are low, and there is major competition for consumer attention and spending

Phase I has identified a number of quick wins that industry players can initiate by themselves These will have a material impact on the supply chain within one year The industry needs to take co-ordinated action in five interrelated areas to move from high cost trading conditions to more effective and efficient trading relationships Improvements in transaction processes Partnership trading arrangements in list and demand management Improved stock management and better use of printing and distribution capacity Distribution efficiencies Reduction in the level and cost of returns We recommend a number of priority and longer term projects that form a strategic change programme to unlock the benefits available An industry pressure group of senior executives should be appointed to overcome existing obstacles, drive through the change programme, and co-ordinate industry action KPMG also recommends that the industry establish formal liaison mechanisms between the Booksellers and the Publishers Associations to reflect their common supply chain Book Industry Supply Chain Project Phase 1 - Recommendations

Book Industry Supply Chain Project Phase 1 - Description Project description Identify the opportunities available to the book industry to reduce operating costs and increase service levels through improved supply chain management • Project objectives • Analyse the cost of the common processes in the supply chain • Size the prize by analysis of the scope for cost reduction and improvements in customer service by comparison with best practice in other sectors/markets • Identify quick wins achievable and outline scenarios for alternative solutions Project scope The focus is on the UK retail book trade, and encompasses publishers, printers, distributors, wholesalers and retailers • Project deliverables • Costs involved in the common supply chain processes and the potential benefits available to the industry • Where the major benefits might lie, and what options are available for action • What benefits there are for individual sectors in the industry • What quick wins are available immediately

Book Industry Supply Chain Project Phase 1 - Summary of Findings • Book industry spend on the UK retail supply chain is £3/4 billion per annum • The industry is more costly and wasteful than other consumer goods sectors • publishers’ logistics costs are 13% of sales, amongst the highest in industry (average costs to a typical consumer goods manufacturer are 6%) • Returns alone cost about £100 million per annum, each return typically costing a Publisher £1 and a Retailer 50p • Inventory management through the supply chain is uncoordinated. The result is more than 60 weeks stock in the system. • There is substantial stock wastage which is inflated by inappropriate supply chain processes (up to 20% of total production) • Real service level requirements are unclear and show wide disparity both in delivery and perception • 3% of titles sold make up 50% of unit sales in traditional bookshops yet there is no differentiation in the supply chain between major and minor titles • Consolidation of distribution is still comparatively low, leaving an industry characterised by many-to-many trading relationships and limited economies of scale • booksellers can source 80% of their requirements from 29 distributors, yet individual stores still deal direct with a multitude of smaller suppliers • Benefits available from an industry-wide change programme could exceed £150 million per annum

Introduction The supply chain has become a much quoted phrase and its importance was highlighted at the 1997 Booksellers Association conference in Dublin. There is a substantial prize for all players if the industry can move towards a more efficient supply chain model • The book industry's supply chain is particularly complex and has to handle a large number and wide variety of products. It involves many different players (publishers, printers, distributors, wholesalers, retailers) and many common processes and related information flows (e.g. buying, distribution, sales, customer service, returns) • The key to achieving the benefits available from improved supply chain management is to simplify and standardise these common processes by co-operation between trading partners. All players can benefit from lower operating costs, improvements in customer service and a reduction in lost sales • To achieve change requires industry focus. In order to address the challenge, the PA and the BA together set up a steering committee to identify the size of the benefits locked within the supply chain and how to release them in ways which bring mutual benefit to all players • This management report summarises phase 1 of the study

Objectives and Scope The scope of the study focused on the core components of the UK retail supply chain Supply chain Institutions Library and school supplier Printer Wholesaler Retailer Publisher Distributor Consumer/reader Author/ illustrator Book Club Scope definition Flow in scope Flow out of scope Exportchannels In scope Out of scope

Approach Our study focused on those processes which were common to participants in the chain Buying Distributing Selling Customer Returns Informations service flows Publisher           Printer     Distributor       Wholesaler Process shared across industry       Retailer Process not shared by player

Approach The process for change was phased with clear objectives and deliverables at each stage • Phase 2: Design an optimal supply • chain model and recommend a • procedure for realising benefits • identified in Phase 1 including: • Description of alternative models and scenarios for future management of supply chain, and analysis of their strengths, weaknesses and benefits • Recommendations for optimal design and performance methodologies for industry • Recommendation of procedures for attaining the identified benefits • Clear and implementable action plan showing ease and cost ofimplementing each element • Phase 1: Assess the scope for • improvements in supply chain • management within the industry • Analyse the cost of common processes in the supply chain • ‘Size the prize’ by analysis of the scope for cost reduction and improvements in customer service by comparison with best practice in other sectors/markets • Identify ‘quick wins’ achievable and outline scenarios for alternative solutions Phase 3: Implementation of recommendations from Phases 1 and 2 through multiple projects

Approach During phase 1, the emphasis has been on collecting and analysing high level data in order to develop options and approaches to change and build commitment for phase 2 Step 1:Planning Step 2:Data collection Step 3:Data analysis and option development Conduct discussions with management of participantsand other industry players Identify opportunities and potential barriers to change Agreeinformationrequirements Develop options and approachesto change Validateinformationrequest Agreeparticipationcriteria Validate and analyse information Mobilisation Identifypotentialbenefits Roll out to participants Compare with best practiceparameters Agreeparticipants

Participants Leadership for the project was provided by a steering committee comprising 14 senior industry figures Project structure BA Council Steering Committee Iain Burns (Aspen Group) - Chairman Ian Taylor (Publishers Association) - Secretary Charles Ashford (Marston Book Services) Sydney Davies (Booksellers Association) Toby Faber (Faber & Faber) Alan Giles (Waterstone’s) Brian Green (BIC) Les Higgins (HarperCollins) Terry King (THE) Michael Johnson (Devizes Books) Shirley Noakes (W.H. Smith Retail) David Pemberton (TBS) Joe Sinyor (Dillons) David Young (Little, Brown) PA Council Participating companies BIC Supply Chain Focus Group KPMG Core Team Sarah Charles: lead partner Gary McIlraith: supply chain partner Alan Newman: engagement director Kirti Thanki : engagement manager Andrew Hodder-Williams: publishing specialist Andrew Tidey: wholesaling/retail specialist Chris Stanley: distribution specialist Simon Hay: supply chain analyst Tim Harwood: supply chain analyst Other KPMG Resources Global supply chain practice Global book industry network Other industry expertise

Participants Quantitative and qualitative data was gathered from a representative sample of the industry Publishers • Random House • Macmillan Press • HarperCollins • Little, Brown • Wiley • Faber & Faber • Kogan Page Data providers • Interviewees (from data providers except as specified) • Printers • Clays (St Ives) • Bath Press • Distributors • TBS • Macmillan Distribution • Marston • Biblios • Wholesalers/RDC/Library Supply • Bertrams • THE • WHS Swindon • Thomas Cork • Retailers • WHS Retail • Waterstone’s • Dillons • Tesco • Devizes • Independents ‘panel’ Publishers Printers Distributors Wholesalers/ RDC/ Library Supply Retailers • David Pemberton • David Smith • Charles Ashford • Tony Wagstaff • Desmond Clarke (ITPS) • Alan Martin (IBD) • Julian Rivers • Richard Tucker • Jeff Prince • Ian Walker • Simon Master • Adrian Soar, Dominic Knight & Liz Warner • Les Higgins • David Young • Peter Ferris • Toby Faber • Philip Kogan & Gordan Watts • Mark Barty-King (Transworld) • Anthony Forbes Watson & Andrew Welham (Penguin) • Gary Iceton • Peter Palframon & Chris White • Beverley Hodson • Alan Giles & Martin Lee • Joe Sinyor • Fiona Kennedy • Michael Johnson • Mark Wait (Heffers) • Mark Clutterback (Johns Booksellers) • Matthew Huntley (P&G Wells) • Malcolm Gibson (Volume One) Others: Tony Ferratro (Securicor) Mike Barnard (PIRA/Macmillan) Shaun Plunkett (EMI) Cees Hagenbeek & Henk Geer (Centraal Boekhuis) Paul Pounsford (Teleordering) Richard Knight & Jeremy Neate (BookTrack) Dennis Bennett (VISTA Computer Services) Iain Burns (Aspen Group) Ian Taylor (Publishers Association) Sydney Davies (Booksellers Association) Frank Fishwick (Cranfield Business School) Brian Green (BIC) BIC Supply Chain Focus Group

Analysis of current situation The study focused on the one third of UK publishers’ revenues derived from the UK retail channel Publishers invoiced sales (1996) Mark up UK total consumer and institutional expenditure on books (1996) UK via retail channel c £0.95 bn UK via non retail channel* c £0.95 bn Export £0.9 bn Total £2.8 bn £0.55bn £0.25bn Via retail £1.5 bn Via non retail* £1.2 bn UK expenditure £2.7 bn * non retail defined as direct, institutional, bookclub and other non retail channels • UK publishers’ revenues are derived broadly 1/3 from UK retailers, 1/3 from overseas, and 1/3 from other UK sources (including institutional and direct supply) • The UK component of distribution costs incurred by publishers from wholly owned or outsourced operations was estimated at £215 million • Revenues of trade and merchandising wholesalers were estimated at £260m invoiced value Source: PA, BA, Book Marketing Ltd, Participant Data, KPMG

There is a low concentration ratio in the UK industry the market share of the leading publisher is less than 9% by value The difficulty of controlling information about titles grows year on year Almost 17,000 “imprints” published titles between 1994 and 1996 % titles published by larger imprints Number of imprints publishing in year Number of titles published Larger imprints 1996 9,188 108,625 1,436 84% 1995 8,844 102,703 1,409 84% 1994 8,509 97,494 1,378 83% Analysis of current situation The UK book industry is characterised by the huge range of publishers selling through the retail channel Publisher Sales The size of the publisher tail % of sales 56% 33% • Larger imprints are those publishing more than 10 titles in a year • Large publishers may own many imprints • Not all imprints publish each year (16,742 different imprints have published in the last three years) • 48,000 imprints are recorded on Whitakers Bookbank Notes: > 15,000 10 39 No. of Publishers Source: P.A. KPMG, Book Marketing Ltd, retail participant Source: Whitakers

With a few notable exceptions, localised store buying and direct delivery to store is the norm EPOS system penetration is not complete, but initiatives by chains should see major gains in 1998 Small deliveries are required for both smaller and larger retail customers % of sales 70% 42% 3,312 * 25 5 Number of Retailers Source: B.A. KPMG (* 3,312 = B.A. membership) Analysis of current situation The retail base is more concentrated than the publishing community, but there is still a long tail of smaller accounts Retailer Sales

The remaining 50% of volume is derived from a long tail of slower moving product The “tail” includes titles aimed principally at the non retail market, or whose economics depend on international co-editions These figures do not include those titles for which no sale was recorded! Analysis of current situation 3% of titles sold make up 50% of the total volume Sales analysis by title 50000 40000 30000 Number copies sold 20000 10000 0 1 51 101 151 201 251 301 351 401 451 501 Ranking of title Source: Booktrack, based on data from their “£600m” high street bookshop segment, which excludes supermarkets, multiples, academic and religious bookshops, over three month period

Consolidation of distribution is still comparatively low leaving an industry characterised by many-to-many trading relationships Analysis of current situation Booksellers can source 80% of their requirements from 29 distributors and 53 publishers, yet individual stores still deal directly with a multitude of smaller suppliers Source: Booktrack, again based on data from ‘high street bookseller’ segment

The print decision is still often dependent on achieving target unit costs, not on actual forecasted demand Average paperback print runs are half their levels ten years ago but many more titles are printed annually Minimum print quantities can only be further substantially reduced by implementation of digital and on-demand technologies Experts suggest that within 5 to 10 years, printing on demand will be cost effective for books currently printed in batches of 5,000 to 10,000 Analysis of current situation Industry stock levels are driven up by the tendency to focus on unit print costs rather than title life cycle costs Source: KPMG sample data, fully illustrated titles excluded

Analysis of current situation The UK book supply chain is more costly and wasteful than most other consumer goods sectors • FMCG manufacturer logistics costs • Stock holding in consumer products % of sales No of weeks Sources: KPMG Supply Chain Excellence Awards 1997 KPMG participant data 1996 calendar year

Industry feedback suggests that 64 weeks inventory may be understated Whilst the bulk of stock is held at the distributor, 16 weeks of stock at retailers is high for the retail sector These ‘average’ figures distort individual companies’ performance academic publishers would typically have substantially more than 41 weeks inventory for large booksellers, stock levels of between 20 and 40 weeks are more frequent Analysis of current situation Despite the reduction in print run sizes, there remains at least 60 weeks of inventory in the book supply chain Retailer Distributor 559m units 41 weeks 41.4m units 16 weeks W/saler 8m units 7 weeks Source KPMG participant data

Analysis of current situation There is a wide variation in processing efficiency across the industry Distributor Wholesaler Retailer sales orders* sales orders* purchase orders • Penetration of electronic commerce is mainly in the orders area • faxed and telephoned orders are common especially at peak seasons • some retailers report telephoned orders are processed quicker than EDI orders • publishers report examples of bad practice usage of EDI at retailers • Similar average processing costs per book mask the difference in efficiency between distributors and wholesalers • distributors' orders include a larger proportion of high volume export, bookclub and centrally shipped orders which are cheaper to process than orders from core bookshop business • wholesalers' consignment sizes to the retail channel are on average much larger than equivalent distributors' figures • Distributors report that the ‘small order problem’ is just as acute from major and medium sized chains as it is from smaller retailers • 60% of one major distributor’s invoices are for less than £60 Average order size 53 units 34 units 22 units Processing cost per order £20.35 £13.61 £2.18 Processing cost per book 38p 40p 10p % electronic orders 35% 78% 80% Source: KPMG participant data - *all orders received, home and export

Analysis of current situation Wastage in the book industry appears very high at up to 20% of total production Returns • Total returns reported at 9% of gross units for all home and export sales • Returns for UK retail trade reported in range of 14 to 20% • Total wastage is combination of overproduction and returns Returns units (as % total sales) Returns destroyed (as % total returns) at customer at distributor Returns back to stock (as % total returns) Publishers sample 7-14% 59-98% 2-44% Distributors sample 7-14% 6-10% 12-75% 25-88% Source: KPMG participant data - home & export Wastage Remainders Returns destroyed Total wastage As % of total production 5-8% 8-12% 13-20% Source: KPMG participant data - home & export

No real industry understanding of consumer service requirements Distributors are competing with wholesalers to offer next day delivery “Hotlines” are becoming more dominant at peak selling seasons Retailers report delivery ranges between 3 and 14 days One major chain reports that 30% of deliveries received are incorrect Analysis of current situation Service level requirements are unclear and show wide variation both in delivery and in perception of delivery. The difference in the roles of distributors and wholesalers in serving the retail channel is unclear Retailer (service received) Distributor (service provided) Consumer 10% 24 hr 59% 72 hr 31% > 3d 2 % 24 hr 12 % 72 hr 86 % > 3d ? W/saler (service provided) 49 % 24 hr 46% 72 hr 5% > 3d Source: KPMG participant data

Analysis of current situation Our analysis indicates that the cost of the “common processes” is almost 40% of sales The cost of the UK Book Industry Supply Chain (1996) 39 100 214 Figures in £ m 90 £m % Sales 80 Logistics Costs * 327 17 Sales & Marketing 153 8 In Store Customer Service** 202 11 Obsolescence from 57 3 returns and financing cost *** Total Cost of common 739 39 processes 161 70 60 % Total cost 50 258 40 * All costs excl. sales & marketing, retailers customer service cost, obsolescence and stock financing ** Balance of customer service costs, those incurred by distributors and wholesalers, included in logistics *** Financing cost of 10% assumed on inventory at printed cost 30 20 67 10 Returns handling & destruction Customer service Order Processing Distributing Selling Source: Participant data 1996 Calendar year

Analysis of current situation The cost of returns to the industry is circa £100 million The cost of returns to the UK book industry (1996) 39 100 Figures in £ m 90 80 £m 70 Outbound Logistics Inbound Logistics Sales & Marketing Obsolescence from returns and financing cost * Total cost of returns Returns cost = 12.9% of total cost 25.6 28.2 13.8 28.4 96.0 13 60 % Total cost 15 50 40 20 30 * Financing cost of 10% assumed on inventory at marginal cost of production 20 9 10 Returns handling & destruction Customer service Order Processing Distributing Selling Source: Participant data 1996 Calendar year

Analysis of current situation At root are fundamental issues about the nature of the publishing and bookselling process • There is an inevitable tension between the creative processes in publishing and bookselling and the technical disciplines of supply chain management • There is little exploitation of opportunities for economies of scale in physical distribution and transaction processing • Trading relationships are complex, largely adversarial, with little partnership activity • There is little joint planning across the supply chain • The competition for retail exposure causes Publishers to push stock into the supply chain, accepting the risk of returns this creates. Partly this is due to the following: • dependency on new titles • shortcomings in the responsivness and efficiency of the supply chain • perceived limitation of retailers’ re-ordering policies • retailers not incentivised to resist because they carry little stock risk

Analysis of current situation The current book industry supply chain structure is complex and costly, characterised by high fragmentation, few economies of scale, and many-to-many trading relationships • The structure is the legacy of an age of large batch sizes and infrequent orders and is not relevant to today’s little-and-often ordering patterns • The industry is dominated by the long tail of slow moving titles which is responsible for a disproportionate share of costs and wastage • The very high number of new titles is dealt with inefficiently, creating high sales and buying costs, and causing lost sales, high costs and wastage • Little-and-often ordering has reduced returns somewhat, but sales are being lost in the process • Category management and demand planning, techniques which have been developed and widely adopted in other areas of consumer retail, are not properly understood or applied in the book industry • Opportunities for electronic commerce are not being seized

Improved stock management & better use of printing & distribution capacity Partnership trading arrangements in list and demand management Reduction in the level and cost of returns Improvements in transaction processes Distribution efficiencies Areas of change The industry needs to take co-ordinated action in five interrelated areas to improve industry performance . . . As Is / Current To be / Vision • Action in any one area will deliver significant benefits but maximum benefit will be achieved by addressing all 5 areas

Areas of change . . . and move from high cost trading conditions to more efficient and effective trading relationships From: To: Transaction processes • High transaction processing costs; partial use of electronic commerce; a high level of labour intensive query resolution • Simplified low cost transaction processing based on electronic commerce; reduced level of queries and cost of query resolution Partnership in list and demand management • Adversarial trading relationships; limited use of shared sales and stock data for marketing and planning; problems around ownership and integrity of bibliographic data • Cooperative trading relationships based on partnerships; differentiation between innovative and functional product types; marketing and planning based on common data sets; consistent and accurate bibliographic data Management of stock and capacity • Fragmented supply chain planning processes making limited use of EPOS; print runs dictated by conventional technology • Supply chain planned as an integrated process based on EPOS, stock and capacity data; flexible use of digital printing technologies Distribution efficiencies • Fragmented distribution operations, with excess capacity and stock; multiple stocking points, limited exploitation of economies of scale; and cost and performance poorly understood • Simpler, more consolidated distribution arrangements; exploitation of economies of scale; flexibility in supply strategies; trading terms reflecting cost-to-serve and performance Returns • Reduced level of returns by alignment of accountability and decision making and improvement in supply chain efficiency; simplified returns processing and handling systems • Lack of accountability coupled with supply chain inefficiencies generates excess returns; processing and handling of returns are complex and high cost

Improved stock management & better use of printing & distribution capacity Partnership trading arrangements in list and demand management Reduction in the level and cost of returns Improvements in transaction processes Distribution efficiencies A. Transaction processes As Is / Current As Is / Current To be / Vision To be / Vision

From: To: • Many unique processes between individual players adding complexity, delay and cost in order processing • Standardised, systematised processes supported by common procedures, forms and data sets • Unique and multiple arrangements between retailers and publishers for returns and debit notes • Standardised, systematised processes for returns and debit notes • A majority of small value transactions (e.g. <£60) incurring excessive administrative cost • Develop low cost processes and systems across the industry to reduce small order transaction cost • Partial application of EDI/e-commerce applications; standards and technologies largely in place; inconsistency in data management giving an excessive number of queries • Implementation of standardised message formats; agreed trading incentives for EDI use; revised data management guidelines A. Transaction Processes - Changes proposed Major benefits can be achieved by designing processes for ordering, paying and query resolution which increase standardisation, make use of the economies of scale available, and release the power of electronic commerce

Book industry trends • Electronic ordering has been in existence for many years, but its penetration is still low in comparison with other sectors (and countries) • Standards and systems are in place to allow other messages • Some players are developing ad hoc electronic commerce solutions with major trading partners (not always based on purest standards) • BookEasy initiative provides Internet based solution to customer queries and ordering • Slow take-up of electronic invoicing and payment; plans to automate Booksellers Clearing House • Securicor Omega introducing parcel tracking and electronic Proof of Delivery service • Wholesalers offer simple information and ordering system • Distributors are addressing some root causes of queries by • developing post-invoicing (matching to actual contents delivered) • improved labelling 98% 36 92% 7 13 2 Stockturn Delivery Accuracy Order lead times/days Source: Management Today, Nov 1996. Coca Cola Research Group 1994 A. Transaction Processes - Trends and comparisons Despite early availability of electronic ordering and agreed standards, there are substantial benefits available from full implementation of electronic commerce across the range of transaction processes Examples from other industries • Retail productivity: Tesco reports a step change in productivity through the introduction of technologies such as EDI, EPOS and bar coding • Purchase cards: are proving beneficial for transactions under £1000, and being used in many large corporations. • big reduction in transaction processing costs by use of purchasing cards - up to 50% savings are being achieved. Major benefits come from including smaller suppliers/customers into automated payment systems • Fed Ex. launched an Internet shipment tracking service in 1994 • cost to handle tracking enquiry by Internet is $0.08 against over $1.00 through customer telephone centre

A. Transaction Processes - Benefits and implications • Publishers • Increase in operating margin flowing from lower distribution costs • Reduced burden to sales force from improvements in returns processing • Smaller publishers to benefit from improved ease of purchase through extended role of Booksellers Clearing House • Printers • Potential to be brought into “loop” of e-commerce particularly as printing-on-demand evolves • Distributors • Reduced administrative costs from increase in electronic commerce traffic • Reduction in error rate resulting from keying errors and “pre-invoicing” • Increased customer service levels through automated query procedures • Improved real lead times (warehouse to shelf) by reduction in invoice errors • Reduction in cost of invoice matching, checking, and settlement procedure • Agreement in debit note procedures improving debtors position and reducing costs and write offs • Reduction in cost of processing returns claims • Inclusion of smaller customers into electronic settlement of invoices through extended role of Booksellers Clearing House • Wholesalers/RDC/ • Library Supply • Reduced administrative costs of purchasing from suppliers • Improved ability to deal with smaller publishers through extended Booksellers Clearing House • Increased challenge from improved service levels from distributors • See also retailer and distributor • Retailers • Greater simplicity in buying and settling invoices, particularly from smaller suppliers • Improvement in accuracy of invoices increases speed of goods-in to shelf • Improvement in lead times available through best practice electronic ordering • Simplification and consolidation of payment processes to reduce administrative burden • Procedures for debit notes streamlined • Ordering from smaller suppliers simplified by extension of Booksellers Clearing House role

A. Transaction Processes - Estimated financial benefits Redesign of transaction processing and application of electronic commerce creates an opportunity for cost savings in the range of £20 to £25m • Benefits are derived from a combination of: • reduced purchasing and invoice process costs • reduced settlement costs, particularly through automatic invoice matching • reduced costs of small order transactions • elimination of distribution and stock wastage from incorrect keying • reduced returns and debit note processing costs • reduced query burden • Savings are based on the assumption of: • 38% reduction in processing costs • 25% reduction in order related queries

A. Transaction Processes - Actions Transaction processes offer a number of opportunities for quick wins and process redesign Quick Wins - actions which will have material impact within one year • Simplify and rationalise returns processes • Standardise current debit notes procedures through agreement on how to handle discrepancies • Develop penalties for the non-use of electronic commerce • BIC benchmarking review of electronic commerce usage • Strengthen current use of EDI by retailers through in-store training Recommended projects • Map and redesign all transaction processes e.g. • returns processing • invoicing and settlement • debit notes • Low cost transaction processes for low value orders • Address root causes of query burden, e.g. • post invoicing • Integrated change programme to develop electronic commerce

Improved stock management & better use of printing & distribution capacity Partnership trading arrangements in list and demand management Reduction in the level and cost of returns Improvements in transaction processes Distribution efficiencies B. Partnership in List and Demand Management As Is / Current To be / Vision

To: From: • Fragmented data sets leading to limited analytical and forecasting capabilities • Data sharing between key trading partners to allow the whole supply chain to understand customer demand patterns and to build analytical and forecasting capabilities • Inconsistencies and inaccuracies in bibliographic databases leading to excess queries and administrative costs • Consistent and accurate bibliographic data providing a foundation for simplified trading and marketing based on electronic commerce • Adversarial trading relationships with value destroyed and complexity introduced by lack of communication and accounting behaviour • Co-operative trading relationships between major players based on cross functional communication and reduction in value destroying behaviours • Production planning in publishers, distributors and wholesalers based on sales in to retailers • Production planning based on actual title retail sales and list segmentation into functional and innovative products; category demand patterns understood leading to improved forecast accuracy and reduced returns B. Partnership in List and Demand Management - Changes proposed Cooperative planning between retailers and publishers can improve sales and profitability for all parties

Under/Over Production Cost Model 6 Demand Models Production Planning Model Consolidated Demand Model Source: Harvard Business Review, March-April 1997 Transaction Processes B. Partnership in List and Demand Management - Trends and comparisons Book industry trends Examples from other industries The increasing availability of EPOS data provides opportunities to improve planning processes by trading partners working co-operatively • Investment in EPOS and use of BookTrack to enable better demand tracking • Retailers increasingly delaying firm orders for new titles until very close to publication date, while demanding more product/marketing information earlier • Sales reps incentives shifting to achieve “selling to plan” rather than exceed short term sales revenue or subscription targets • Some publishers reducing their ‘tail’, and focusing effort on fewer titles with improved financial results • Increased number of specific line item negotiations causing increase in publisher selling costs and retailer buying costs • Some publishers tracking sales & profitability for new titles over the whole life cycle • Some retailers moving to, others moving away from, firm sales deals • Increasing reliance on bibliographic database providers • Understanding of segmentation of product into functional and innovative categories based on the relative certainty of demand. This is then used as a basis for developing a more effective and responsive supply chain • Sport Obermeyer: design and manufacture of ski-ware, for sale through 800 retailers. 95% of products are new each year, producing uncertain demand profile. Sport Obermeyer developed an effective production planning model to manage the uncertainty by working with key retail customers. Service levels increased from 80% to 99%, production wastage and underproduction was reduced by 50%, and profits rose by 60% • 2 Production forecasts • Pre season plan • Derived from actual orders • Mail order operators: a new order is placed on a supplier in two components, with a typical split of 50:50 • a firm order to meet initial stock requirement • an option over the remainder of the forcasted demand

B. Partnership in List and Demand Management - Benefits and implications • Printers • Potential reduction in print volumes through reduction in level of returns • Potential benefits for capacity planning if publishers have greater control of, and confidence in, forecasting • Distributors • Improved access to retail sales and stock data • Potential to move from ‘reactive’ to ‘proactive’ management through sharing forecasting information • Improvement in ability to plan capacity and stock • Reduced burden from returns • Opportunities for distributors to work more closely with retailers as part of more co-operative trading partnerships • Wholesalers/RDC/Library Supply • Improved access to retail sales and stock data • Opportunities for wholesalers to work more closely with publishers to serve agreed retail segments • Publishers • Finding the right balance between pull vs push marketing strategies • Improved ability to offer collaborative promotions • Reduced burden on field sales and administration function • Improved success rate in new product introduction • Reduction in level of returns • Implications for list management as result of improved understanding of retailers’ category management policies • Understanding of demand patterns and ability to manage certainty and uncertainty • Retailers • Reduction in buying and merchandise management burden because of improved communication with publishers and more focused offer • Improved ability to offer collaborative promotions • Reduction in level of returns • Reduction in working capital requirements through stock reductions • Requirement to identify shadow forecasts alongside initial purchases

B. Partnership in List and Demand Management - Estimated financial benefits The benefits of increased partnership between publishers and retailers could amount to £30-£50m • Benefits are derived from a combination of: • reduced stock wastage and improved stock turn from better forecasting • improved responsiveness to titles whose demand is inherently uncertain • greater efficiency of supply for titles where demand is more certain • ability to manage more titles more effectively • reduced administrative buying burden through information being available accurately and on time • opportunity to provide information which delivers better capacity planning at printers and distributors • increased potential to make the sale from information about a book rather than actual physical stock • Improved forecasting could lead to benefits of £15 to 25m • resulting from a 10% reduction in returns rates and associated reductions in stock, queries, transaction processing and distribution costs • Category management provides major component of benefits identified from “efficient consumer response” programmes • we have assumed a further £15 to £25m in benefit from increased sales as a result of better targeted marketing, list segmentation, category management and more focused list management as publishers and retailers co-operate strategically

B. Partnership in List and Demand Management - Actions Actions to be taken in co-operative demand management lie in improved use of EPOS data in forecasting, improved understanding of the nature of the demand of different titles and greater control of title information Quick Wins available from improved partnerships • Eliminate distortions of both sales and returns driven by accounting or cash pressures • Commitment to resourcing the supply of accurate and timely bibliographic data and the development of the role of bibliographic agencies Recommended projects • Develop joint forecasting based on list/category lifecycles and demand characteristics • evaluate current forecasting capabilities and use of shared EPOS data • develop industry scorecard to measure retailers EPOS system capabilities • segment lists according to title/category lifecycles and demand characteristics • optimise display quantities and stock location to meet demand patterns • Improve title information management and data integrity • define bibliographic and marketing information best practice and implement across industry • develop strategies for use of information about books as proxy for actual stock • Implement co-operative relationships between trading partners • minimise accounting based distortions to selling and returns behaviours • develop buying and selling strategies through joint planning • agree lead times for placing of estimated and confirmed pre-publication orders • align publishers’ lists more closely to retailers’ category management • integrate planning strategies with stock and capacity management systems • Develop industry-wide capabilities in data warehouse management, integrating with decision management processes

C. Management of Stock and Capacity Improved stock management & better use of printing & distribution capacity Partnership trading arrangements in list and demand management As Is / Current As Is / Current To be / Vision To be / Vision Reduction in the level and cost of returns Improvements in transaction processes Distribution efficiencies

To: From: • A few retailers using EPOS for their own stock management, with little sharing of sales & stock data • EPOS and stock data made available by both parties and routinely used in joint supply decisions • Separately managed functions & systems for forecasting, demand monitoring and stock replenishment • Supply chain managed as a complete process, using supply chain management systems and data shared between partners • Print runs dictated by conventional technology and batch economics, with few long term supply arrangements • Publishers and printers working in partnership, investing in and exploiting new short run technology C. Management of Stock and Capacity - Changes proposed Integrating supply chain management planning systems across the industry will improve the efficiency and responsiveness of supply to consumer demand through improved management of stock and use of available distribution and printing capacity

The UK Book Industry Unlocking the Supply Chain’s Hidden Prize