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CASE STUDY

Sony Broadcast And


Professional Europe (R):
becoming a virtual
company
In April 1997, senior management at
Sony Broadcast and Professional
Europe (BPE) was focused on making
the “virtual company” concept a reality.
BPE was moving away from a confe-
deration of national sales companies
towards a number of geographically
The case was prepared by dispersed business teams serving all
Professor Robert S. Collins of Europe. The case is its suitability The unabridged case won the
IMD Lausanne Supply Chain Management Award
for use as a vehicle to discuss the
and Research Associate in the 2000 European Case Writing
transformation of bricks and mortar
Kimberly A. Bechler Competition organized by the
as a basis for class discussion rather than to distribution systems to those needed
European Foundation for
illustrate either effective or ineffective to support-e-business. Management Development
handling of a business situation.

Miles Flint, Deputy Managing Director - Western Europe, lenges he and his colleagues faced in realising improve-
paused for effect before delivering his concluding mes- ments in supply chain flexibility, adaptability and res-
sage to the members of his management team attending ponsiveness to market demand.
the Sony Broadcast and Professional Europe “Kick-off
Conference” held at Reading in April, 1997. This event As Flint had remarked earlier,
marked the beginning of the 1997 fiscal year.
For many of our customers, Sony is still too difficult to
When we meet for the 1998 Kick-off Conference in do business with. That was OK when the customer had
about a year’s time, we shall be able to confirm to our- no choice other than to buy from us. It simply will not
selves that the way we are working, and the issues we do in today’s competitive world. As margins are squee-
are challenging, truly reflect BPE’s mission of being a zed, pressures on supply chain performance, inventory
virtual company. A year from now we shall be living reduction and the need to eliminate duplication of
this mission, not just aspiring to it as is the case today. processes and costs will continue to intensify.
Our mission, as we see it, will have become more of a As management, we are in a race to accelerate our
reflection of reality than a statement of intent. capacity to change.

Flint had been a vocal champion and driving force Sony Broadcast and Professional Europe
behind the virtual company concept since its inception.
It encompassed his own strongly held beliefs about how Sony BPE, with headquarters in Basingstoke some 45
Sony Broadcast and Professional Europe (Sony BPE) minutes drive from London’s Heathrow Airport, served
should be structured and managed. His vision was of a markets in 116 countries in Western Europe, Eastern and
number of business teams working across the European Central Europe, the Middle East and Africa. In fiscal 1996
zone rather than in each country. The teams would not it accounted for a commensurate proportion of Sony
operate out of the headquarters - rather, team leaders Corp’s European sales of DM 17.6 billion. It employed
and indeed team members would be geographically dis- some 1500 people operating out of 23 locations, the
persed throughout the zone. Support functions, e.g., majority of which were in Western Europe.
information systems/management, human resources,
supply chain and finance would be organised in such a Sony BPE comprised two major business groups:
way as to provide the necessary infrastructure and sup- Broadcast (BC) and Business & Industrial (B&I).
port for the teams. Broadcast served both state and private radio and TV
stations, production houses and music recording stu-
For Derry Newman, Divisional Director Information dios. The market channel was direct – business-to-busi-
Systems and Supply Chain, Flint’s comments only ness. On the other hand, the Business & Industrial group
underscored the operational opportunities and chal- relied on indirect selling through dealers who handled a

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SONY BROADCAST AND PROFESSIONAL EUROPE (R): BECOMING A VIRTUAL COMPANY

broad range of products, e.g., closed circuit television viders. Vianen, originally built for inter-warehouse ope-
security systems, projectors, camcorders, etc., as well rations, acted as a staging area to serve the 14 national
as specialised equipment for video conferencing, medi- sales company warehouses. Shipments between Vianen
cal and educational applications and giant screen dis- and the NSC warehouses were scheduled on a regular
plays. With the exception of the Nordic countries, which basis. Some warehouses (France, Germany, Italy, Spain
operated regionally, each of the Western European coun- and the UK) were served every 2-3 days, while smaller
tries had their own National Sales Company (NSC) and country operations were served only weekly.
warehousing operations. Procurement was a two-stage process. It was initiated at
the NSC level through the submission of a 7-month rol-
ling forecast of demand by product to the supply chain
The issues we are challenging, administration teams. The monthly forecasts were
truly reflect BPE’s mission based on both historic data and market intelligence,
with equal attention being paid to all products. Given
of being a virtual company the forecasts of demand, replenishment orders were
determined based on on-hand inventory, anticipated
receipts, and a desired target stock level (TSL). The
Sony BPE Supply Chain – April 1997 replenishment cycle was weekly from stock held at
Vianen.
As of April 1997, the vast majority of products sold by
Sony BPE were manufactured in Japan and imported At Basingstoke and Vianen, supply chain administration
into one of two distribution centres. The Basingstoke teams consolidated the forecasts and orders received
distribution centre was dedicated to BC products while from the NSCs to assess projected supply/demand
B&I products were distributed through Sony Logistics balance. In placing monthly orders on the Japanese fac-
Europe’s (SLE) hub at Vianen, The Netherlands, an tory, consideration was given to aggregate demand and
hour’s drive from Schiphol Airport. In terms of BPE the accuracy of the forecasts, on-hand inventory, antici-
stock-keeping units (SKUs), Vianen handled 10 times pated receipts, and a desired TSL. The TSL was to cover
more than Basingstoke. demand both during the manufacturing lead time and
the length of the procurement cycle. It also included
Broadcast products were shipped to Basingstoke by air some safety stock. For B&I products, the TSLs varied
freight, the elapsed time from factory to Basingstoke from 60-90 days. Order-delivery cycles were of 4-5
being typically 5 days. At Basingstoke, the BC products months’ duration depending on the product.
went through a customer-specific configuration and tes-
ting process before being shipped via Vianen for ultima-
te distribution from a NSC warehouse to the customer. In
some instances, products were re-checked and re-confi- As management, we are in a race to
gured at the NSC warehouse before shipment. Transport
from Basingstoke to Vianen took one week. This inclu- accelerate our capacity to change
ded preparation and despatching of the physical goods
together with appropriate shipping documents, alloca-
ting space on a truck making daily deliveries to Vianen,
then receipt and cross-docking procedures on arrival. Opportunities for Virtual Logistics
Only a small percentage of BC products were shipped
directly from Basingstoke to the customer. In January 1997, Derry Newman had commissioned an
internal study of the B&I supply chain with the express
Unfortunately the system was prone to error due to inef- purpose of increasing its flexibility, adaptability and res-
ficiencies in both material and information handling pro- ponsiveness. Newman believed,
cesses, which resulted in partial shipments and late deli- The factory to customer logistics process can be repre-
veries. sented by a ‘virtual warehouse,’ where the majority of
physical activities from factory gate to customer pre-
All B&I products were distributed through SLE at mises can be outsourced to a global logistics vendor(s).
Vianen. Some 83% of B&I products were shipped from The manufacturer should not be concerned with the
Japan by sea. The elapsed time from factory to distribu- physical location of product within the virtual warehou-
tion centre amounted to some 40 days, which included 2 se provided that product is delivered to the customer at
days for container unloading, customs clearance and the agreed time and place thereby meeting an agreed
local delivery. Sony BPE had DM 40 million-worth of and demonstrable service level.
goods on the water at any one time. In those instances
in which air freight was used, the elapsed time was redu- The creation of a “virtual warehouse” would require the
ced to 5 days. re-evaluation of BPE inventory holding policies and the
use of Sony’s SAP system R/3 to integrate suppliers, ven-
SLE undertook all material handling, distribution and dors and internal divisions.
transportation activities. It invoiced the Sony product
divisions accordingly. Transport was provided by a com-
bination of owned vehicles and third party logistics pro-

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SONY BROADCAST AND PROFESSIONAL EUROPE (R): BECOMING A VIRTUAL COMPANY

Use of Air Freight The Choice of a Third Party Logistics Provider

The report recommended that a significant proportion TNT, Danzas, UPS and Euro Express were four compa-
of B&I products should be shipped by air freight. The nies short-listed by Newman as potential third party
increased cost of air freight would be offset by the bene- logistics providers. In making a final selection, Newman
fits of reducing overall transit time from 40 days to 5 considered the following to be of critical importance.
days. These included:
1. Geographic Reach and Capacity
1. Overall reduction in inventory investment, i.e. safety The preferred supplier would have pan-European opera-
and transit stocks. tions with an ability to provide next day/48-hour service
2. Improved responsiveness. anywhere in Europe at competitive rates. The supplier
3. Reduced planning horizons giving rise to increased should be capable of expanding to match the growth in
forecasting accuracy and potential reduction in slow- Sony BPE volumes and be flexible in meeting changing
moving inventory. market requirements. The supplier would be expected
4. Reduction in space requirements at warehouses. to dedicate full-time resources to the Sony account.
5. Reduced time to market.
6. Increased reliability of air freight versus sea freight. 2. Customer Interface and IT Focus
The Centralisation of Inventory and As the supplier would be Sony’s representative in inter-
Direct Delivery acting with the customer, an ability to project Sony’s
image locally was critical. To this end the supplier
On the basis of a detailed cost analysis, it was recom- should have a local presence rather than sub-contract
mended that BPE products should be distributed direct- to a local carrier. The supplier would also be expected to
ly from Vianen to customers and that the actual delive- commit to and demonstrate a high level of delivery ser-
ries, in most cases, be undertaken by a third party logis- vice. Criteria would include on-time delivery reporting,
tics provider. Tangible savings were to be achieved same-day reporting of proof of delivery and the resolu-
through the elimination of cycle stocks at the NSC ware- tion of non-deliveries within 24 hours. A pan-European
houses and the reduction in the level of safety stocks for tracking system would be essential.
individual products. Such safety stocks proliferated as
the number of national sales company warehouses 3. Rewards and Penalties
increased. Intangible benefits were also cited. These A bonus/penalty system would apply and be based on
included: service levels achieved against targets. In the event of
damage, the service provider would be expected to
1. Increased responsiveness to customer demand. issue a credit note covering the service charge for the
2. Increased levels of customer satisfaction. complete consignment.
3. The opportunity to undertake forecasting on a pan-
European basis and, as a result, improve forecasting Getting Started
accuracy.
4. Facilitation of product life cycle management, Re-engineering the supply chain to support the virtual
particularly at the end of the life cycle where obsoles- company meant that Newman needed to address the
cence risk through overstocking was high. challenges posed by the centralisation of inventory,
5. The holding of inventory at a lower value-added direct delivery and the selection of an appropriate third
position in the supply chain. party logistics provider. How should he go about addres-
sing the concerns of dealers, national sales companies
Additionally, it was shown under what conditions the and BPE employees in order to ensure that the “virtual
costs of a third party logistics provider would be less warehouse” might be realised? Newman was also
than the combined transportation and handling costs if conscious of the imperative to safeguard Sony’s reputa-
products were shipped from Vianen to the customer via tion for customer care and thereby its brand image.
the NSC warehouse. Under the circumstances, was the timing of the change
to the centralisation of inventory and direct delivery too
ambitious?

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SONY BROADCAST AND PROFESSIONAL EUROPE (R): BECOMING A VIRTUAL COMPANY

COMMENTS ON THE CASE STUDY

Olivier MAIGRET 2/ To solidify his vision, he put together his own


ESENCIA, Organisational Development concept of which processes should be targeted,
acting with support from his IS and Supply Chain
The present case study is a good example of the type Director, Derry Newman.
of challenges being faced by today’s organisations. The
overall environment is in constant mutation, and fac- 3/ He ensured that his staff remained forward-looking
tors such as competitors, customer requirements, tech- (and focused on the successfulness of his Vision) by
nologies and subcontractor services are constantly highlighting flexibility, adaptability and responsive-
changing. Within this context, an organisation has to ness to market demand.
change if it is to continue to satisfy its clients by offe-
ring a higher level of service than its competitors. He fully assumed his Leader’s role, setting the tone by
There is no other solution. defining a PROJECT that was clear, consistent and sha-
How does a company come to understand that the pro- red; by more or less setting up the PROCESSES that
ducts or services that it has been providing are out-of- could support this project; and by motivating PEOPLE
date? Usually this occurs when its Key Performance to carry it out.
Indicators turn to red: stock levels and costs are too
high; the manufacturing and product development Here we have the 3 key components of an efficient
cycles are too long; staffing numbers rise; and all the organisational development project. Moreover, as
while turnover remains stable, or even drops. soon as one of them is missing, the project cannot be
100% fulfilled.
Customary ways of meeting these challenges
The staff is perfectly aware of the ambitious targets it
A typical reaction is to cut stocks of finished products. has to reach. It sees the credibility of the underlying
Inventory usually accumulates when the provider and theoretical processes; understands the importance of
customer cycles do not mesh (the provider/client tan- the whole endeavour; and is looking towards the futu-
dem can either be internal or external). In Sony’s case, re. Moreover, with his staff concentrating solely on
compare the 7-month rolling forecasts and consolida- what it has to gain from the change (rather than on
tion measures, or the 4-5 months cycle, with the fact what it has to lose), Miles Flint has minimised the risks
that deliveries to customers are made on a daily or of failing in his change management drive. His team is
weekly basis. These cycles do not mesh at all, and this now ready to modify its paradigm(s) and to consider
decoupling leads to a build-up of inventory. However, new ideas. People are ready to forget their own area
a company is a complex system that has its own equili- of responsibility; to lend their energy to a global pro-
brium. If you only modify one of its constituents, such ject; and to build an INTERDEPENDENT organisation.
as its inventory levels, you will create an imbalance in
other areas, thus incurring the risk of creating supply
Interdependence vs. Independence
chain shortages: late deliveries, partial shipments, etc.
A similar reaction is the drive to cut delivery costs.
Interdependence (as opposed to independence) is a
What happens when a company concentrates on its
key word in efficient organisations, especially with
delivery systems alone? It might focus on its fleet of
supply chain projects.
trucks or warehouse, and try to make cuts in one
and/or the other area. By so doing it can lower its cost
To characterise independence-based organisations, we
base somewhat– but it will also incur quality-related
can say that every entity in the organisation is respon-
risks such as late deliveries.
sible for one part of its total performance, yet has its
own role and mission working towards this end.
Reactions like these are driven by business paradigms.
Performance is measured by the way in which each
One example is the notion, “This is how we have been
entity fulfils this role. Every department
running our business for several years now, so we (Manufacturing, Procurement, Logistics, Quality,
know what we are doing and are experts”. These sorts Maintenance, etc.) is responsible for its own costs, but
of paradigms are a kind of “mental prison”, depriving does not consider itself to be responsible for the ove-
the company of other ways of visualising how their rall cost. Indicators might not be consistent with global
business can be run. performance – for example, by reducing purchasing
costs there may be a decrease in productivity, a rise in
How Sony Broadcast and Professional Europe the number of defects, etc. Bonus systems are also
met these challenges involved (i.e. volume-based bonuses for the
Manufacturing staff may impact quality levels; reve-
Faced with a challenging business situation, Miles Flint nue-related bonuses for the Sales staff may impact
acted in a variety of manners: forecasting accuracy) or on customer orders changes in
planning “frozen zone”.
1/ With an eye on market and customer needs, he
devised a long-term vision for Sony BPE and shared For many companies, the corporate culture revolves
it with the whole management team, giving them a around the concept of independence.
fixed but ambitious target.

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SONY BROADCAST AND PROFESSIONAL EUROPE (R): BECOMING A VIRTUAL COMPANY

In an interdependence-based accuracy; avoiding the delivery of change by providing a clear idea


organisation, every entity feels any obsolescent products; and of what each and every person
responsible for total performance greater responsiveness to market involved is going to gain from it is
yet understands that it is “only” demand. Lastly, the relationship key to getting everyone to move
one link in a chain. This chain that is built up with an outside in the same direction. National
derives from customer demand provider can begin to resemble a Sales Companies have to be invol-
rather than the Company products real partnership, one which is ved in the project as an interde-
supply. In this type of organisation, based on trust, service quality and pendent link of supply chain, even
airfreight becomes possible becau- complete respect for the brand. if they are not under Miles Flint’s
se the only real priorities are the
responsibility. Will Miles get sup-
firm’s overall costs; customer satis- To summarise Interdependence, I port from Sony Europe’s senior
faction; and added value (via grea- would say that in this kind of orga- management? In the affirmative,
ter responsiveness, shorter plan- nisation, 1+1=3 or 5 or 20 or….
ning horizons, a lesser need of the answer to the last question
space in the warehouses, overall will be No: the change’s timing, in
reduction in investments in inven- Ensuring the fulfilment of terms of the inventory centralisa-
tory, etc.). It is also possible to Sony’s project tion and direct delivery processes
envisage Inventory Centralisation it implies, is not overly ambitious.
inasmuch as the only priorities are How should students answer the There is a great deal of staff inter-
to achieve customer satisfaction last two questions Bob Collins asks dependence, and process re-engi-
through improved forecasting of them? The idea of managing neering will be easier and faster.

Serge BEKAERT pressure on supply chain manage- logistics is no longer necessary.


serge.bekaert@celerant.cc ment performance, and stock Logistics costs can be reduced
Monique FRANT reduction are shared throughout while total control is maintained
monique.frant@celerant.cc the world. The old borders – com- over the process.
Henk DE JONG petitive, geographic, between
henk.dejong@celerant.cc markets and industries – are blur- Another possibility is to use mar-
red, and keep moving. Partners ket or product segmentation to
CELERANT Consulting from the past are now our compe- differentiate between urgent and
titors and vice versa. Information less urgent deliveries. This opens
can be shared throughout the the way to becoming truly virtual
The Sony BPE case paints a picture world in a simple and efficient for some clients or products, by eli-
that applies to many organisations manner, at relatively low cost. minating all warehouse activities
throughout Europe. Mr Flint’s sta- Distance is much less significant. and delivering to the customer
tement of the problem – “Sony is directly from the factory. This
still too difficult to do business Where distance does matter, of solution has the advantage of
with” – lists a number of areas for course, is in transport. In the Sony making some more of the logistics
improvement, but gives no clear case, emphasis is placed on the operation obselete, and reducing
sense of what the problem actual- reduction of transport time by the amount of stocks being held,
ly is. Is Sony worried about custo- without jeopardising the desired
making more use of air transport.
mer satisfaction levels? Is the cost customer service levels.
This is expected to reduce the cost
of service disproportionate to that of work in progress, and also the
in the rest of the market? The costs of operating distribution
The virtual warehouse approach
improvement programme centres centres such as the national sales
The virtual warehouse approach
on the establishment of a virtual company warehouses in each
preferred by Sony management
warehouse model. What other country.
has its own advantages and disad-
alternatives were considered? The question should be raised: Is a vantages. On the plus side, Sony
With a firm grasp of the problem, ‘virtual’ warehouse, and the re- can focus itself on its core business
it would be possible to identify design of the logistics process, the (rather than worrying about ware-
and evaluate a number of diffe- right answer for all the challenges housing and its associated issues,
rent ways for Sony to move for- listed? Can other solutions contri- which are not considered core). By
ward. Whatever the solution cho- bute to better customer service, entering into partnership with a
sen, care and attention are needed greater flexibility and the reduc- logistics company, Sony can also
to resolve the people and IT issues tion of costs? improve its geographical network.
that will be major factors in bloc- This can only be advantageous for
king or accelerating implementa- One possible alternative is a re- customer service and OTIF (on time,
tion. design of the production process, in full) delivery. It can also deliver
producing some of the products operational benefits where short
Assessing alternative solutions for the European market locally. lead times and high delivery reliabi-
This solution has several advan- lity are essential. A financial advan-
Mr Flint’s concerns about increa- tages. It allows production of cus- tage can be found in the lower
sing competition, low margins, tomised products. Re-testing after warehouse and transport costs.

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SONY BROADCAST AND PROFESSIONAL EUROPE (R): BECOMING A VIRTUAL COMPANY

However, each of these advan- Sustainable improvement – If these four aspects of the change
tages has disadvantages associated making it work programme are implemented well,
with it. An approach that has delivered the organisation can change its
successful outcomes at many of behaviour, and the desired results
At a strategic level, a disadvantage Celerant’s clients could also be the – better customer service, greater
lies in the time needed to set up a route to success for Sony BPE. It is flexibility, and reduced costs – can
coordinated effort between Sony based on the philosophy that sus- be achieved for Sony BPE within
and its partner(s). Moreover, Sony tainable results can only be achie- the allowed timespan of a year.
may not gain real insight into the ved by changing the way the orga-
performance of its partner(s) for nisation behaves. And to achieve In taking on the challenge, howe-
some time. With a partner presen- this behavioural change, work is ver, management at every level
ting the ‘face of Sony’ to custo- needed on four aspects of the needs to be fully committed to
mers, lower quality levels at deli- organisation: the processes, the supporting the organisation as it
very will damage Sony’s image. systems, the people and the infor- introduces the agreed changes
mation technology (IT). while maintaining ‘business as
At an operational level, Sony may usual’. New capabilities may need
be disadvantaged by becoming to be brought in to the organisa-
Sony needs to understand how its
dependent on a third party. What tion (e.g. IT or project manage-
new logistic process will function.
happens if the partner does not ment skills). Communications with
That means mapping out the new
abide by the contractual agree- employees, partners, and other
process, and the other processes it
ment? stakeholders (such as unions and
will affect, and communicating
and validating these mappings customs) will require considerable
From a financial point of view, and consistent attention and
there are extra costs involved in throughout the whole organisa-
tion. It is important that everyone effort. As a result, there should be
creating the kind of coordination an acceptance that costs may rise
needed to make the partnership(s) has the same vision.
during implementation. And a
work. Extra costs may arise if a
Systems are needed to continuous- reliable and committed partner
decision is taken to change part-
ly support the logistics process. will be important to support the
ner, or if a partner does not live up
With the help of business perfor- change process through the tight
to the required standards.
mance indicators, appropriate schedule envisaged.
An additional, and not insignifi- management systems will enable
cant, set of costs can be incurred in the measurement and manage- Conclusion
making employees redundant ment of process efficiency, as well
when a virtual warehouse is set as ensuring clarity about who is The Sony case provides a clear
up. It may be possible to reach an responsible for what. Possible example of the ‘virtual warehouse’
agreement with the logistics part- indicators in the Sony case could approach to supply chain manage-
ner, such that the Sony employees be customer satisfaction, OTIF deli- ment. More and more companies
affected become part of the part- veries, required lead-time, trans- are doing exactly what Sony did:
ner’s workforce; but this is not a port time, stock costs, and so on. going back to their core business
given. and questioning their secondary
People are usually the key to suc- activities. In terms of Porter’s
Taking into consideration the cess for a change project such as value chain, companies are focu-
advantages and disadvantages of this. Therefore extra attention sing on their primary processes
the virtual warehouse solution, should be giving to making people and seeking partners for the
several other questions need to be aware of the need for change at secondary processes who can pro-
addressed: Who carries the res- Sony, and coaching them to work vide added value.
ponsibility for the Sony product in the new environment. New
during handling by a partner? opportunities should be created, IT outsourcing has been around
How will the partner be assessed so that people can see a ‘win-win’ for a long time and has yielded
in terms of customer satisfaction? situation ahead. If people have to mixed results. ‘Logistics outsour-
What if something happens to the be let go, e.g. those working at cing’ is another way of looking for
customer, e.g. financially? Is there the national sales companies, then added value, gaining popularity.
a fall-back position? personal support services such as Whatever the challenge, manage-
outplacement must be provided. ment should make a sound study
Clearly, there is much more invol- of the wide-ranging options open
ved in setting up a ‘virtual’ ware- IT is an essential ingredient in to the company, and look out for
house than first meets the eye. ensuring the virtual warehouse all the possible advantages and
Management needs to understand concept can work. Several disadvantages. Once a solution
all the implications of its chosen changes will be entailed: in the has been reached, the two prere-
solution, both positive and negati- communication between the sales quisites for successful implementa-
ve. At the very least, if the virtual organisations, the warehouse and tion are a detailed and realistic
warehouse plan is to proceed, a the production locations; and also plan, and full management com-
sound service level agreement is in the interfaces with the logistics mitment.
required; and a solid project partner(s), customs and other
management approach needs to external players.
be implemented at Sony.

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