Turning Supply Chain into a Revenue Chain

Covid-19 Pandemic had brought our business into the darkness side. It would takes several adjustments for businesses to recover. According to the experts, one of the important keys in making the business to recover is improving the supply chain into a revenue chain.

Agreeing to share sales revenue with suppliers allows companies to purchase goods for a lower price, increase revenue, and cope with fluctuations. This thought came when I read several books, articles and looked at some interesting cases in the industry. One of the interesting cases is the leader of the video rental market, Blockbuster, in the 1990s found itself frustated by never having enough copies of popular movies in stock to satisfy demand at peak times. The problem was that Hollywood studios charged $60 per video, while demand typically fell sharply a few week after release. Consequently, Blockbuster could not justify purchasing more than 10 copies of a movie, leaving many customers frustated at being unable to rent the latest video.

To solve this dilemma, Blockbuster proposed giving film companies a share of the revenue from rental sales to secure a lower up-front price for videos. Blockbuster was able to breakeven on a video more quickly, and able to purchase more copies to satisfy demand. The movie studios also benefited from increased tape sales and added revenue streams. By turning a supply chain into revenue chain, Blockbuster had satisfied the film companies, the customer base, and its own bottom line.

Here are some spesific insights for those idea(s) to work in practice, cited from Jeremy Kourdi.

First, the incremental revenue generated by additional units must be less than the cost of producing them.

Second, Administrative costs should be low so they do not use up the increased profits from the scheme.

Third, If there is high degree of price elastisity in your market, the lower up-front purchasing costs negotiated through revenue-sharing should be used to lower prices, to stimulate demand.

Then,use sharp negotiating skills when deciding how much revenue to share with the supplier. If production costs are low, a supplier may accept a lower revenue sahre than you anticipate.

Last, employ reliable market research to gauge consumer demand when deciding how many units to purchase, following revenue-sharing agreement. The new lower price can make it tempting to over-purchase.

“There is always a way to recover & bounceback. Every tunnel has their end with the light up. So does the crisis”, Anonym.

Dedicated to : Jeremy Kourdi & Erwin Michiels.