Oz TV Corey Baker, a senior executive at one of Kansas's premier television service providers, Oz Television, took another sip of coffee. He had been vigorously preparing all day for next week's board meeting. Despite steady demand, this year's financial figures were troubling. Baker had to clearly address Oz's financial situation and offer a comprehensive solution in his presentation to the board. Oz Overview With headquarters in Topeka, the Kansas state capital, Oz was a dominant TV service provider for Shawnee, Jackson, Jefferson, Osage, and Wabaunsee counties. Oz's primary revenues came from monthly subscriptions, and primary variable costs came from fees paid to cable networks, such as ESPN, MTV, and HBO. Monthly fees varied across networks. ESPN, for example, cost $4.69 per subscriber, while MTV2 cost only a few cents.? Oz's average variable costs were $0.25 per channel per subscriber per month. Subscriber Ordering Process Subscribers chose among Oz's Bronze, Silver, and Gold plans (see Figure 1). Programming Plan Bronze Figure 1 Oz TV Subscription Plans and Fees Features 200 Channels (50 in High Definition, 50 Music) 300 Channels (70 in High Definition, 50 Music) 400 Channels (100 in High Definition, 50 Music, Some Premium Movie and Sports Channels) Monthly Fee $70 Silver $85 Gold $110 Typically, 50% of subscribers chose Oz's Bronze package, 30% Silver, and 20% Gold. All subscribers signed a six-month minimum contract and, on average, kept their subscriptions active for 40 weeks. Set-Top Box Ordering Process As part of their programming plan, all subscribers rented a set-top box called an Oz Box that converted digital information into viewable content on the TV. All plans used the same box model, which was supplied by Wizard Electronic Hardware. Wizard sold the boxes to Oz for 5208 each, while Oz rented out the boxes for $10 per month. After subscribers placed their box order, an Oz technician visited their home, installed the box, and answered any questions. The visit usually took 1.5 hours and cost Oz $40 per hour in labor. Subscribers could keep their Oz Box for as long as they had an active subscription. Reasons for deactivation included switching to a competitor, relocation, and financial difficulty. The company typically activated 2,000 boxes and deactivated another 2,000 each week. Customers could return deactivated boxes in one of three ways: 1) Bring the box to an Oz store (20%, on average, chose this option); 2) Bring it to a UPS Store, which charged Oz $25 for handling each box (40% chose this option); or 3) Arrange for Oz to pick up the box. The visit cost subscribers $25, while Oz spent an average of $30 in labor (40% chose this option). Unless subscribers returned their Oz Box within four weeks of deactivation, they incurred a $20 per day penalty fee. Deactivated boxes were returned within three weeks on average, and it took an additional week for the box to arrive at the centralized box service center. Oz Box Service Center Operations All boxes returned to the service center first arrived at the Receiving Center (RC). RC boxes waited in a storage room until an administrative assistant was available. Assistants retrieved the boxes and logged their serial numbers into a database. Each week, approximately 2,000 boxes arrived at the RC, and 10,000 boxes could be observed in the RC at any given time. Received boxes were then moved to the Clean and Screen Center (C&S). Each box spent an average of three weeks in C&S, but most of that time was spent in a C&S Waiting Area, Technicians extensively evaluated each box's hardware to determine what service each box needed. Boxes either required the Serviceable Devices process (for boxes with no hardware defects) or the Unserviceable Devices process (for boxes with hardware defects). Approximately 70% of boxes went to Serviceable Devices (SD) storage, while the other 30% went to Unserviceable Devices (UD) storage. Serviceable Devices Process In the SD process, technicians first moved boxes from SD storage to the Software Update Center. Here, technicians typically found 20% of boxes had undiagnosed hardware defects. The defective boxes were redirected to UD storage to begin the UD process. The remaining boxes needed only to be updated with the latest software. Afterward they were sent to the Shipping Center. Unserviceable Devices Process In the UD process, technicians first moved boxes from UD storage to the Technical Evaluation Center. Technicians recorded the repair parts each box needed. They then faxed a parts order form to the vendor Wizard. It commonly took Wizard three weeks to fulfill orders. During that time, boxes were stored in a room called Waiting for Parts from Wizard (WW). When repair parts arrived, an assistant retrieved the corresponding box from Ww, taped the parts in a bag to the top of the box, and moved the unit to the Repair Station (RS). Most boxes spent two weeks in RS, but the majority of that time was spent in Waiting for Repair (WFR) storage. Available technicians repaired the boxes and updated their software. Boxes were then moved to the Shipping Center. UD boxes cost an average of $50 per box in repair parts and labor, while SD boxes cost $5 per box in labor. Shipping Center Once the boxes arrived at the Shipping Center a packaging assistant recorded the refurbishments in the inventory database, and assigned them to one of five warehouses based on customer demand. The assistant printed shipping labels and order forms. The boxes were then packaged, placed on Oz vans, and distributed to warehouses. Soon after, technicians delivered them to subscribers' homes. Key Performance Indicator: Utilization Oz was under heavy pressure to rapidly generate revenue from each box, Managers therefore focused on box utilization as a key performance indicator. Managers received a daily "Ozilation" e-mail with the latest utilization figures. Management's main goal was to keep utilization above 60%. (Oz managers operated under the assumption that if 60% of boxes were on rent, then Oz was generating profit.) Boxes had high depreciation costs. As stated previously, Oz paid $208 per box. Oz followed straight line depreciation over four years--the average box's useful life. Outdated boxes had minimal salvage value and were returned to Wizard to be recycled. Last Year's Operations Last year's Oz Operations Report noted the following information: The number of units waiting in Serviceable Devices storage was 2,800. The number of units waiting in Unserviceable Devices storage was 1,760. Company policy required three weeks' of box demand to be in the Shipping Center at all times. This Year's Operations This year, managers were anxious about Flying Monkey TV, a new competitor known for being small but ruthless. Flying Monkey invested heavily in advertising, using flashy billboards that featured celebrity Glinda Goodwitch. The competitor was rapidly luring customers by offering no-contract plans. Oz managers were alarmed about the potential damage to demand and utilization, but were divided on how to respond. The marketing team encouraged Oz to match the no-contract model. Analysts anticipated that while this model would increase Oz's new subscribers from 2,000 to 3,200 per week, the average subscription time would decrease from 40 to 25 weeks. Corey Baker was skeptical. He proposed that Oz keep its plans the same. Analysts estimated that under Baker's plan demand would wane 50%, given the competition, lowering new subscribers from 2,000 per week to 1,000. With both proposals, fixed advertising costs would stay constant, because Oz could generate awareness through existing advertising contracts. Oz would either promote the no-contract model or its long-term competitive advantage-superior picture quality. Baker sighed as he started making another pot of coffee. This would likely be another sleepless night. Study Questions 1. Draw an overall process map of the Oz Box rental and servicing process. 2. What was the average time spent by a box in each buffer last year? 3. What utilization did Oz achieve last year? (Utilization = number of boxes on rent / number of units owned by Oz.) 4. What was Oz's weekly profit last year? (Profit = revenues - variable costs - depreciation, and all fixed costs are ignored. One month is equal to four weeks.) 5. What do you think about the marketing team's proposal? Corey Baker's proposal? Be prepared to defend your