Thursday, July 3, 2008

Game Industry Logistics

"About fifty percent of the human race is middle men and they don't take kindly to being eliminated." Malcolm Reynolds

I finally got a working copy of Visio on the laptop so I wanted to give it a test drive. While thinking about the Days of Wonder change, it reminded me that I had no idea how the game industry worked before I started learning about it to open a store. Most of the rancor nowadays is about how the system works, or should work. As a customer, you want you stuff, which is understandable. How you get it is debated endlessly. If you were curious how it got to you, here's how it works:

The most direct route to your hands is from the publisher (pink lines). The publisher cuts out all the middlemen, you order directly from them to your door, and happiness is maximized. Most retailers have no problem with this, provided the publisher maintains their own MSRP on the item. When they discount to the customer at the expense of the retailer, there is trouble.

Without going direct to the customer, some publishers cut out the distribution tier and sell directly to the retailer (green lines). Retailers are usually happy with this, provided the game is popular enough to warrant special orders and the margins are good. Ironically, most companies who ship direct to retailers, reduce the discount to retailers, a kind of double dipping, since they charge more to the retailer compared to distribution while cutting out the distribution costs. Games Workshop is a prime example of this (they use every method).

Most publishers sell through distribution (red lines). Distributors estimate orders based on retailer pre-orders, place orders with publishers, and publishers send product. Wash, rinse, repeat. It can be an infuriating process, due mostly to lack of retailer pre-orders, the occasionally retarded distribution purchaser, and the tendency of distributors to be slow in paying their bills. It's the driving force that makes many publishers look for alternate avenues to get their product to market.

If distributors don't want your small quantity of product, you can go with a consolidator (blue lines). Say a distributor wants only 5 of your product, which is probably not worth the effort, but you think it's still worthy of selling through the distribution chain. A consolidator will charge you a percentage to "rep" your product and efficiently ship it to the distributors. Distributors now get a big shipment of 20 different things instead of 20 shipments of a small number of items. Everyone is happy. Folks like Goodman Games use consolidators to get their product to market.

Most companies use two or more methods. Some swear off one method or another. For example, Wizards of the Coast sells direct to retailers and through distribution, but they don't sell direct to customers. Games Workshop sells direct to customers, direct to stores, and through distribution. A company like Days of Wonder sells direct to customers and through distribution, but hopes to maximize the value of the distribution tier by focusing on one distributor. Rather than shipping their product to ten distributors and waiting and wondering, the advantage of one distributor is lots of feedback and information and the ability to identify and market to retailers who have their product. In exchange, they pass some savings onto the retailer, to assuage their concerns and hopefully have a more predictable revenue stream.

There are other options, like "flooring" or making one distributor the "master" distributor. For example, say I'm sitting at home and come up with an idea for a cool widget. I have some guy in China make me a prototype and then find a factory there to get it made, also paying a quality control company to ensure it's properly manufactured. Now I've got 10,000 widgets. Where do I put them, my garage? Heck no. I "floor" the product with a distributor using a flooring agreement. Product is shipped directly from the factory in China to the distributor. They take an additional percentage for warehousing my goods and shipping them around to other distributors. I could even have them fulfill my Internet online orders, shipping directly from the distributor. Everyone is a middle-man and you can do amazing things if you're willing to share the wealth.

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