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The Centralization of Decentralization: Increase Profitability While Preparing for Digital Conversion

Sun, 11/23/2008 - 7:00pm
Art Smuck, Vice President and General Manager, Operations, ATC Logistics & Electronics

In today’s extremely challenging economic environment, effective management of inventory assets is essential to the success of any business, regardless of industry.

Art Smuck
By Art Smuck

Fortunately, the upcoming digital conversion has created a watershed moment for the cable industry.  Preparation for this transition is an ideal time to consider the reconfiguration of supply chains to reduce costs and improve efficiencies.  For years, decentralized operations were perceived as the most effective way to reduce costs while improving services, allowing cable companies to evenly distribute resources.  However, in more instances than not, centralized supply chain operations lead to decreased costs, increased efficiencies, and therefore improved profits.

The cable industry is known for its regional focus (Figure 1), yet local operators have little to no control over the primary conduit for profits—the set top box (STB).  Since there is typically no unity across corporate operations this critical asset is relegated to disparate silos that cannot be adequately tracked and managed, thereby skyrocketing inventory costs.

CENTRALIZING THE SUPPLY CHAIN
The ability to account for STBs and provide a mechanism for delivery and maintenance is essential.   Malfunctioning devices must be replaced as soon as possible to maintain revenue streams.  To that end, supply chain operations must have the capacity for forward logistics (tracking and delivering inventory assets), as well as reverse logistics, (controlling the return, repair and refurbishment process).

Cable companies should look to establish a centralized system for delivering and tracking equipment to enable accurate inventory asset management.  While this change in operations does not happen overnight, an incremental shift would reap measurable benefits. 

One of the critical mistakes many companies make when trying to initiate asset control is to over- or under-stock inventory based on arbitrary information.  Ideally, all current assets should be utilized before making capital expenditures on new equipment.  A strategic balance of inventory is key to maintaining adequate supply and keeping costs down.  Centralization is the most efficient way to ascertain inventory status across the company to evaluate where new equipment is needed.

In an advanced centralized supply chain, when an existing STB becomes inoperable, a cable provider can forward a new unit on demand.  The customer receives a new STB with packaging to return the machine, which can streamline the reverse logistics process that typically disregards reclaiming the existing unit.  Everyone wins.  The end-user is never without an operable STB and the cable companies recover their valuable asset, avoiding the need to pro-rate any subscription fees. 

Basic Cable Subscribers (in millions) 2007:  64.9  Source: SNL Kagan

SUCCESFUL CONVERSION
It is well known that television broadcasts must be fully digital by February 2009 and many existing STBs will soon be obsolete.   Millions of consumers will be transitioning to digital boxes to ensure they can receive the new signal. 

According to SNL Kagan research, there were 37.1 digital cable customers by the end of 2007 (Figure 2).  With a total of 64.9 million basic subscribers, there are still a significant number of customers that remain to be converted.  This presents significant challenges for cable providers on two fronts.  First, updating equipment for new and existing customers, and second, disposing of the old, antiquated equipment.

Companies that have already established centralized logistics operations will be ahead of the pack and better prepared to handle this pending deluge.  Those that have not should look to logistics experts to help them work with their customers and prepare them for the transition. 

Along with a strategy to distribute digitally ready STBs as efficiently as possible, cable providers should also concentrate on recycling obsolete analog boxes.  This could be perceived as a value-add for an increasingly green-conscious customer base that appreciates the value of recycling and refurbishment, positioning companies as good “corporate citizens” with a commitment to the environment.

GOING FORWARD
It is clear that centralized supply chain processes will help improve cable providers’ operations by keeping assets in the hands of customers, thereby increasing profits.  Effective forward and reverse logistics will be paramount to maintaining adequate inventory levels and keeping capital expenditures low, while meeting customer commitments.

Further, a reliable centralized supply chain can also reduce the pain of the upcoming digital conversion.  This promises to be a significant burden requiring the distribution of an enormous amount of new equipment, along with an obligation for responsible recycling and disposal management.

Innovative companies that embrace the concept of supply chain centralization to facilitate forward and reverse logistics, including equipment repair and refurbishment, will be better prepared now and in the future.  These processes will allow for increased profitability now through efficient allocation of STBs, and in the future will establish a system to manage the onslaught of equipment as a result of the upcoming digital conversion.

Top 25 Cable Systems - As of April 2008

Rank System Location Operator Basic Cable Customers
1 Tempe, AZ Cox Cable Communications 892,306
2

Houston, TX 

Comcast Cable Communications 875,416
3 Hicksville, NY Cablevision Systems Corp 458,163
4 San Diego, CA Cox Cable Communications 420,408
5 Winter Park, FL Advance Newhouse Communications 416,225
6 Las Vegas, NV Cox Cable Communications 410,256
7 Denver, CO Comcast Cable Communications 375,080
8 Seattle, WA Comcast Cable Communications 333,445
9 Jacksonville, FL Comcast Cable Communications 318,102
10 San Antonio, TX Time Warner Cable 317,557
11 Nashville, TN Comcast Cable Communications 316,329
12 New York, NY Time Warner Cable 315,734
13 Warwick, RI Cox Cable Communications 302,860
14 Brooklyn, NY Cablevision Systems Corp. 299,226
15 Louisville, KY Insight Communications 282,606
16 Bronx, NY Cablevision Systems Corp 276,209
17 Verona, NJ Comcast Cable Communications 272,984
18 Honolulu, HI Time Warner Cable 259,567
19 Sacrament, CA Comcast Cable Communications 247,829
20 Falls Church, VA Cox Cable Communications 244,526
21 Salt Lake City, UT Comcast Cable Communications 241,315
22 Austin, TX Time Warner Cable 236,504
23 Oklahoma City, OK Cox Cable Communications 233,004
24 Elmhurst, IL Comcast Cable Communications 228,723
25 Oakland, NJ Cablevision Systems Corp 226,449

Source: Nielsen Media Research

Art Smuck is vice president and general manager of operations for ATC Logistics & Electronics (ATCLE), a provider of third party logistics (3PL) and supply chain services, specializing in forward logistics, reverse logistics, asset recovery, test & repair, kitting & packaging and value-added services for high-value, serialized devices in the wireless, broadband, electronics and automotive industries. 

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