My core operations class has finally reached the supply chain module and we get to talk about one of my favorite topics, the newsvendor problem. (I hope some day my kids realize that they only have a roof over their heads because I have been able to do fun things with a simple inventory problem.) The basic story of the newsvendor problem is that you have to choose a stocking quantity before knowing what demand will be. To make matters worse, you only get to order inventory once. Among other things, this simple setting drives home that variability cuts into profits. A product that could be profitable if you knew exactly what to produce to meet demand can be unprofitable if demand is sufficiently uncertain.
With that background, I was intrigued by an article in the Economist on on-demand printing (Just press print, Feb 27). Apparently, improving technology has made it possible to produce a high-quality paperback book after seeing demand:
About 6% of books in America are now printed on toner-based or inkjet machines—a rough proxy for print-on-demand (POD)—as opposed to on offset presses, estimates InterQuest, a market-research firm. Over the next five years, it predicts, this figure will increase to 15%. In 2008, the latest year for which data are available, about 285,000 titles were printed on demand or in short runs—132% more than in 2007 and for the first time more than in the conventional way. Amazon, the world’s biggest online bookseller, uses POD machines, although it does not reveal how often.
The driver of this is classic newsvendor economics: 30% of books in the US don’t sell and eventually get returned to the publisher. If you can wait till you have an order on hand to print the book, that all goes away.
So when should this technology get used? As the article points out, traditional printing has serious economies of scale; the average cost keeps falling as you print more. If you are making a boat load of books, it’s hard to beat. The cost of printing on demand, in contrast, is basically linear so doubling the order size doubles the costs. Thus on-demand printing favors the long tale, titles for which demand is low and sporadic. Which is to say, HELLO academia:
University presses, with their thousands of slow sellers, have been among [the world’s biggest on-demand printer] Lightning Source’s first customers. About 10% of Cambridge University Press’s sales of academic and professional titles are generated by books printed on demand—compared with 3% five years ago. Before POD, if sales of one of the publisher’s books dropped below 50 copies a year, it was taken out of print. Now a publisher can keep titles available forever.
Apparently, on-demand printing has also been a boon for self-publishing. To put this all in perspective, Lightning Source produced 20 million books last year but its average print run per title was less than two.
It is also worth noting that this isn’t just happening in books. Check out the Warner Archive. Warner Brothers has a huge back catalog of old movies, many of which were never put on VHS let alone DVD. Their Archive service let’s movie lovers order individually burned DVDs of titles. The product is fairly bare-bones. No subtitles. No second audio option. Not even scene-by-scene chaptering. According to Slate (Robert Altman Made a Movie About a Lunar Landing?, Apr 21, 2009), all that fancy stuff costs 75 to 100 grand and it’s not clear that films like this Ronald Reagan vehicle:
can support such overhead.