Supply Chain Analysis of the CU Book Store



Supply Chain Analysis of the CU Book Store

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MBAX6865: Supply Chain Systems

Anne Chang

Jason Lunn

Charkapong Osangthamnont

Blossom Tichenor

Presented: November 10, 2005

Executive Summary

The advent of the digital era has ushered in unimaginable new possibilities in the realm of textbook publishing. This relatively recent development has revolutionized the way that information is compiled and exchanged. Publishers can now digitally combine certain chapters from various textbooks to create custom publications at a reasonable cost. In addition, students are able to access publications through a variety of methods, whether it is purchasing printed textbooks online or downloading material in digital format. Furthermore, technological advances in the printing industry are allowing companies to custom print material at a reasonable cost.

The University of Colorado Book Store is seeking to take advantage of these new technologies and apply them to its existing operations. Specifically, the CU Book Store is investigating if printing solutions provided by the IBM Printing Systems Division can help the bookstore increase convenience and decreases costs for its custom printing needs. Currently, the CU Book Store fulfills these custom needs either through its internal printing and copying center or through textbook publishers.

IBM’s Printing System Division is headquartered in Boulder, and the division consists of approximately 3,000 employees. IBM Printing System’s offerings include printers, software, consultation, systems integration, supplies, service and support. The company sells a variety of printers with different capabilities and price points.

Our team has analyzed the current supply chain management system being used at the CU Book Store. In the first part of the project, we researched the processes and identified potential problems within the supply chain. In addition, we outlined the key players within the supply chain and their primary objectives, and highlighted possible conflicts between these entities. During the next few weeks, we will continue our analysis by determining if there are any inefficiencies that exist within the CU Book Store’s supply chain. Finally, we will evaluate IBM’s custom printing solutions to conclude if any of them would be both beneficial and cost-effective for the CU Book Store.

Introduction of the CU Book Store

According to the bookstore’s mission, “The CU Book Store is a self-supporting, auxiliary enterprise, owned and operated by the University of Colorado.” Furthermore, “The CU Book Store exists to serve the university community by delivering service, products and educational opportunities in an environment that reflects the excellence of the University of Colorado and supports its mission in a financially responsible manner.” Although the CU Book Store is not a for-profit business, it aims to improve the current system with increases in their service, products, and educational opportunities for the benefit of students. This also includes augmenting student benefits by decreasing costs, thereby increasing customer satisfaction.

The following diagram explains the basic economics of the bookstore, where the money goes, and the buyback cycle.

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Source: textbooks/Textbook-Dollar.pdf

The CU Book Store offers new and used textbooks, custom materials, required course supplies, CU merchandise, general books, office and school supplies, and computer equipment. The bookstore has been in the University Memorial Center since its completion in 1954, and its current location in the UMC in 1962. In 1993, the bookstore was remodeled to increase the retail space and improve the store environment.

The store has 5,000 square feet of space on the upper level of the UMC and another 30,000 square feet on the lower level. A large percentage of the area is devoted to textbooks, although the textbook purchasing season is rather short each semester. This space includes the sales floor, office, warehouse, and processing functions. The printing of custom textbooks and course packets on campus takes place at the Imaging Services space in the stadium.

The CU Book Store keeps relatively current in their information technology, installing the first modules of the RATEX management information system in 1981. They also have an online store, which utilizes inventory at the bookstore. Also, they are currently undergoing a round of server upgrades to help usher in a new era of data management. The main area currently in need of introspection and upgrading relates to its supply chain, much of which has been built as an “art form” as opposed to a technical system.

The Players

In order to completely understand the current supply chain, we must look at the major players and the motives behind their business models and decisions. Not surprisingly, tensions in business objectives, risk aversion, and other conflicting motivations exist throughout the model.

Publishers – Publishers’ main motives include lowering costs and creating profits. Currently, the secondary market of used books does not regenerate profits for the publishers, and therefore, sales reps urge professors to require new adoptions and editions for upcoming classes. Most standard editions have return policies, while custom order books have none or a limited return policy.

Bookstore – The CU Book Store aims to meet everyone’s needs, primarily offering cheap solutions to students’ textbook needs. Historically, the CU Book Store has seen only one major competitor, the Colorado Bookstore, on the Hill. Otherwise, a small secondary market exists where students holding used books choose to sell them during the next term for slightly higher prices than they were offered during the textbook buy-back period, but lower than the used retail prices. The increasing online presence in the market space is bringing more competition to the CU Book Store. All in all, the CU Book Store is a reactionary player that errs on overstocking a product rather than turning a student away with a stockout. It waits for professors to submit book requirements, use historical data and enrollment figures to create forecasts, and place orders in hopes of satisfying demand. In the event of a stockout, the bookstore will order books Fed-Ex for students and professors.

Professors – Many professors meet with publisher reps and decide to use new adoptions or used books for the upcoming term. Some professors are cognizant of book prices and keeping student costs low, so they reuse current editions for the next semester. Other professors choose to support the publishers, authors, and the researching community in general by requiring newest editions even though older ones are essentially identical. Since professors make the decision, publisher reps deal directly with them.

Students – Students look for the best education (or best grade) for the price, given a certain range of flexibility. Students tend to search for used editions if possible because of the lower prices. Some students opt to share books with roommates or friends, but if the lack of flexibility impedes on the ability to study (problem sets, exams, readings, etc due the same days), then the student will look for the next cheaper opportunity. With the advent of online bookstores selling textbooks, a larger marketplace presents greater consumerism based on price (not content) for the students. Many times, these online bookstores offer soft back (international) versions of new textbooks at used prices. These books are generally less durable, but they are lighter and less burdensome to carry, along with being cheaper.

IBM – Looking to sell or lease a solution to the CU Book Store in the event that an opportunity exists. IBM will also look to service and support the on-demand printing needs.

Current CU Book Store Process for Book Purchasing

Unlike other traditional bookstores, where the main challenge is to manage inventory levels, the CU Book Store has more complicated processes. First, the CU Book Store must deal with several issues that cause demand uncertainty. From professors placing orders for new textbooks after the onset of the semester to errors in the estimated number of student enrollment in certain classes, the uncertainty in order quantities can swing widely. In addition, the bookstore must determine how many books it needs to purchase from many different sources to meet student demand. Depending on whether a professor adopts a new edition for a class or elects to require books that were previously used, the process for book purchasing is described by the following process.

1. Professors select titles – The process starts with publishers’ sales reps aiming to convince professors to adopt new textbooks. After meeting with these representatives, professors consequently decide which books they will require for the next semester. Once the decisions are made, professors relay the information to the bookstore including the titles, authors, and editions of the books they will use for the upcoming semester. This process starts as early as four months before the semester begins and continues into semester.

2. Book forecasting – After receiving book titles from professors, the CU Book Store must determine whether they are new books or currently used textbooks. If orders are new books, the bookstore forecasts the quantity of books it will carry and sends “wish lists” to publishers. On the other hand, if professors choose to use old editions currently in stock, the bookstore will first try to match the demand by checking its inventory and buying used books back from students using them last semester. Then, it attempts to buy the used books from other vendors, and lastly, it orders new versions from publishers.

With regard to the forecasting process, the bookstore normally keeps historical sales data for nine semesters. However, it generally only uses the previous six semesters to estimate demand forecasts. Decisions are based on several factors including:

▪ The number of students who are enrolled in the course

▪ Sales history – percentage of sales to the number of students

▪ The number of buyback books from students

▪ Number of books on hand

▪ Return policy of the publisher

3. Purchasing books – The buyback process is completed by the final week of the previous semester, and the bookstore normally obtains 1,000 to 2,000 titles on the used list. After this, the bookstore fills out the remaining quantity from three external sources. First, it contacts used-book wholesalers and determine the number of used books they have on hand. The bookstore’s general strategy is to buy as many used books as possible. If the number of books falls short of projected levels, the CU Book Store will place orders to major bookstores. Finally, it will purchase the remaining textbooks from publishers. Typically, the bookstore takes up to one month to finish the process of purchasing books from external sources.

4. Books delivered – Books are delivered roughly two weeks before semester starts. At that time, the bookstore starts placing books on shelves in order to prepare for students.

5. Additional shipments – As mentioned earlier, the bookstore has encountered some issues that create uncertainty in demand including:

▪ Number of students is more/fewer than the bookstore expected

▪ Percentage of students enrolled that buy books at the CU Book Store is more/fewer than expected

▪ Professors require additional books

These uncertainties create urgencies in that the bookstore will realize these problems after school commences. The bookstore generally responds to increases in demand by placing orders to the publishers at once. These orders usually are small in size and are delivered by either UPS (one week) or Fed-Ex (approximately two to three days). Often, the bookstore eats the delivery costs for students at the rate of $7.50 per book. Nonetheless, late into the semester, the bookstore might charge the student for shipping costs, or in the event of late professor notices, the department will be charged 40% to 50% of these costs.

6. Returning books – While the bookstore can return many textbooks to publishers, some customized and imported books, which account for roughly 5% of business, have no return policy. This creates and additional forecasting pressures for the bookstore.

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Figure 1: CU Bookstore process for book purchasing

Current Management Challenges

The CU Book Store textbook department faces a multitude of supply chain challenges. Many of the problems stem from demand forecasting and inventory management difficulties. Some of these inherent challenges are operational in nature, while others are typical of the retail textbook industry as a whole. In addition, increased competition in the industry and the threat of intellectual property piracy are emerging concerns.

Demand Forecasting – The operational concerns create difficulties in demand forecasting. Although the CU Book Store requests that professors submit their textbook requests by April 15th for the fall semester, only 60% of the requests are received by this deadline. Often times, professors will request new editions of a textbook. In this case, the CU Book Store staff will usually contact the professor to find out if there are significant changes in the new edition, and also if it is permissible for students to purchase the older version instead. All of this must be done in time for the used book buyback period, which takes place in early May before the end of the school year. If professors do not submit their requests on time, the CU Book Store cannot predict which titles should be purchased from students, which cuts off a significant source for used textbooks.

In addition, the demand forecasting problems are exacerbated by the late add/drop deadline. The CU Bookstore relies mostly on historic data and current enrollment figures to determine demand for textbook titles. For most classes, with the exception of the higher demand courses, students have no incentive to finalize their class schedules early. Therefore, it is difficult for the CU Book Store to accurately forecast textbook demand.

Finally, there is a considerable amount of human interaction involved in the demand forecasting process. The CU Book Store staff members must maintain constant contact with professors, students, and suppliers. Although much of the ordering process has been automated, the method of demand forecasting is still largely a manual one. A significant amount of personal interaction is required between the CU Book Store and professors. The CU Book Store staff must determine if a professor’s request is valid and if it can be fulfilled on time. This is often difficult when professors require supplemental or new books after the start of the semester. Furthermore, if new editions are requested, an attempt must be made to understand if there are substantial changes in the new edition or if the previous version can be used instead. Finally, historical data, such as past enrollment compared with textbook sales must be personally analyzed.

Inventory Management – Textbook retailers encounter a variety of difficulties in managing inventory. Most importantly, they sell products that are highly susceptible to obsolescence. Textbook publishers are constantly introducing new editions of their products, in order to maintain profits. Used editions of textbooks have almost no intrinsic value and are often recycled. In addition, the CU Book Store has the challenge of monitoring a high number of products, with an average of 5,000-6,000 different textbook titles per semester. Because of the limited floor space, titles must be replenished multiple times per day during the rush period of the first few weeks of classes. Additionally, many of these titles include various bundling options, which must be taken into account when forecasting inventory and demand. Finally, the CU Book Store has many different suppliers including student buybacks, used book warehouses, and the publishers. All of these various sources have different prices, margins, lead times, shipping policies, and return penalties. This makes it difficult for the CU Book Store to determine the optimal inventory levels and order quantities for each textbook and supply source.

Transportation and Lead Time Considerations – The CU Book Store interacts with a number of different used book warehouses and publishers, and each of these sources has different lead times, shipping practices, and return policies. Lead times tend to be longer for books purchased from publishers, because the publishers wait until they have full truckloads before shipping. Although rush delivery is usually available from all suppliers, this option is expensive and only used for small orders. Furthermore, the CU Book Store must pay for shipping on returned items, as well as consider the deadlines and penalties associated with textbooks returns. Due to the geographic location of the University, the CU Book Store can take advantage of discounted shipping for distributors who have less than a truckload. Most of the publishers are located on the East Coast, and the CU Book Store can often negotiate special shipping rates to accommodate shipping services looking to fill up a truckload.

Emerging Industry Trends – The advent of the Internet and electronic publishing is changing the dynamics of the textbook industry. The most significant change is the emergence of online textbook retailers, for both new and used book titles. Students are increasingly purchasing their textbooks online through retailers or auction websites. Also, publishers are taking advantage of new technologies to create custom textbooks. Finally, the ease of electronic data transmission and easy access to copiers make intellectual property piracy a high concern. Students are copying course packets and other material freely, or illegally downloading electronic versions of textbooks online for use.

The Unique Situation

In most consumer products, the end-user has some “pull”, or at least the interests are somehow in line with the producer’s. Generally, as markets mature, supply chains evolve from a push to more of a pull system, where the end-user has more influence on what is produced and sent through the system. In this particular situation, the end-user has no pull, but rather can only choose where to purchase, if at all. In many ways, the producer is completely out of touch with the needs of both the students and the professors. For instance, publishers produce books with impeccable print quality and robust binding, suggesting that the books are built for a long life. On the other hand, they introduce new editions with minimal changes in problems and questions to force the older models into obsolescence. Why create a product with such longevity only to make it “out of date” in the short run? Alongside this point, some students want certain textbooks for reference material in the future and will benefit from a long-lasting publication, but the majority of students need the book for a semester or two before either selling it to another student (in the event that the professor decides to reuse the book) or using it as a doorstop. In most cases, the textbook is read only within a couple years of publication and rendered useless (well, useful in stopping doors) thereafter.

Additionally, in creating actual demand for a publication, publisher sales reps approach professors urging them to adopt new textbooks or newer editions of current books. Professors have the final voice in what is eventually required. More and more, professors are personalizing their course material by creating course packets with more recent articles, case studies, and additional material that will enhance the learning experience of the class. Many professors do not require the students to read the entire book, or they opt to have certain chapters taught from other textbooks. Personalizing a course packet in the form of a textbook might serve publishers or printing companies well in that a larger value per page can be created. Rather than solely seeking cost-cuts, the supply chain can look at building more value per page per copy, possibly reducing costs to students while enhancing the professors’ abilities to teach the material. Again, the major problem in determining these issues lies in the fact that professors essentially force the demand on the end-user without regard to students’ needs.

In many respects, this project could be seen as a marketing, versioning problem. Are professors generally satisfied with the textbooks they require, or would a more personalized textbook improve their teaching abilities? At what price-points are students willing to purchase hardback books to soft backs? What is the value of premium print quality to lower quality? Would select chapters be better than the entire textbook? Answering these questions will help find where value can be created, dictating the methods by which to produce and meet demand.

An additional concern relates to our role in this project. Delving into most supply chain issues faced by firms generally reveals inefficiencies whereby enhancing communication across all parties helps create a “global optimization.” In this, manufacturers, distributors, retailers, and consumers come together for more efficient results. At first glance, our job appears to be trying to “locally optimize” the CU Book Store. For most applications, digital printing is cheaper for runs of less than 500 – 1000 copies, depending on page numbers and such. However, when copy numbers are large, traditional printing is roughly ten times cheaper than digital ($.40 - $.50 compared to $4 or $5 per book). Weighing shipping costs, inventory holding costs, and capital expenditures for digital printers can shed light on whether an IBM printing solution will help the CU Book Store. This is a local optimization in that it disregards the several other bookstores the publishers supply. Considering merely CU’s demand and variability is only a small piece in a larger puzzle. While demand varies greatly among classes at CU, aggregate demand for certain textbooks, chapters, or publications is generally much more stable. Leveraging this risk pooling effect, streamlining distribution channels, and creating a way to meet the flexible needs of each bookstore (not just one) should be the goal of the complete supply chain.

Next steps

The second half of this project will center primarily on a cost-benefit analysis for viable improvements in the CU Book Store textbook supply chain. In order to do this, we must complete the following steps:

1) Gather additional general information from CU Book Store, to include:

a. Copyright clearing process

b. Printing and copying course packet volume

2) Gather financial information from CU Book Store, to include:

a. All costs associated with purchasing and returning textbooks

b. All costs associated with printing custom textbooks, including clearing copyrights

c. A breakdown of revenue received from textbook sales

3) Get prices and options from IBM for on-demand printing, and evaluate business model feasibility for a variety of options, especially in regards to:

a. Large printer(s) to greatly expand the bookstore’s printing capabilities, geared towards replacing a large portion or all of the bookstore’s current new textbook purchases

b. Small printer(s) to increase the current capacity for custom textbooks, course packets, and small runs of regular textbooks

c. Printing runs at the IBM facility

d. If an on-demand printing system is determined to be a worthwhile prospect, assess the possibility of implementing a more comprehensive system for clearing copyrights

4) Evaluate other opportunities for improving the supply chain and complete costs to implement, such as:

a. Decision support system for textbook buying

b. Integrate supply chain system with used textbook suppliers and publishers

5) Determine non-financial barriers to implementing any option

6) Assess the information gained and make clear recommendations based on a cost-benefit analysis for the book store

It is clear that there is a great deal of room for improvement in the CU Book Store’s supply chain, and our goal is to find ways to reduce the overall costs such that the benefits can be passed down to the students. The broader goal is to transform the textbook supply chain’s art form into a more logical system.

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Sales

Representatives

Professors

Bookstore

Forecasts

Bookstore

Forecasts

New

Publisher

Bookstore Inventory

Students

t

Used books

Sellers

Major

Bookstores

Publishers

Students

t + 1

Next Semester

Sell

Sell

Pitch

Yes, New adoption

No, Use old books

Wish List

Wish List

Wish List

Wish List

Ship

Return

Ship

Return

Ship

Ship

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