HBR Musictoday

UV3539
Rev. Mar. 7, 2014
MUSICTODAY, LLC:
IMPLEMENTING A PERIODIC REVIEW INVENTORY SYSTEM
On a frosty morning in January 2004, Jack Murphy sat at his desk and thought about how
he could get his client, Night Train, back on track.1 Murphy was VP of operations for
Musictoday, a provider of e-commerce, ticketing, and merchandising services to the music
industry. For a wide variety of artists, Musictoday sold tickets to live events, built custom
Internet stores, and fulfilled orders for merchandise including CDs, T-shirts, hats, posters, and
stickers (Exhibit 1). Musictoday also packed and shipped those orders from an inventory that the
company stocked in its warehouse, located in Charlottesville, Virginia.
Although Night Train was a relatively small client for Musictoday, the company liked to
provide a high level of service for all of its clients. Over the previous few months, during the
peak of the holiday season, Musictoday had stocked out of Night Train inventory during critical
sales periods and had thus lost important revenue opportunities. At the same time, Murphy found
that the replenishment-order quantities had varied dramatically, oftentimes with small expedited
receipts from certain suppliers that probably cost Musictoday a premium to process. These wide
swings in ordering may have been due to the informal way that Musictoday buyers operated but
also might have been due to the involvement of the artists. Although Musictoday placed some
orders directly to the CD distributors and promotional products companies, at other times the
buyers simply forwarded a recommended order quantity to the artists, who then placed the order
with the supplier for shipment to Musictodays fulfillment center.
Although stockouts were terribly disappointing to clients, lost sales were even more
disappointing for Musictoday. While artists captured the majority of their value through CD sales
and touring, Musictodays main source of revenue was merchandise sales. Worse still, any extra
costs for receiving expedited orders directly hit Musictodays bottom line because the company
received a fixed percentage of merchandise sales revenue as its fee. Murphy realized that
improving his inventory-planning process was critical to Musictodays long-term success, and
that it was now time to tackle this problem.
Certain executive and artist data, including names, have been disguised.
This case was written by Jay Ashton and Vincent Gu under the supervision of Timothy M. Laseter, Professor of
Practice. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an
administrative situation. Copyright 2004 by the University of Virginia Darden School Foundation, Charlottesville,
VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this
publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by
any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Darden
School Foundation.
This document is authorized for use only by Carlos Culquichicon (CARLOS.CULQUICHICON@ME.COM). Copying or posting is an infringement of copyright. Please contact
customerservice@harvardbusiness.org or 800-988-0886 for additional copies.
-2-
UV3539
From One Band to Many

The roots of Musictoday trace back to the early days of the Dave Matthews Band, when
the bands manager began selling T-shirts at small venues in and around Charlottesville. As the
band grew into a successful national act, the merchandising operation grew into a multi-milliondollar business. Musictoday was formed in 1998, when the manager of the Dave Matthews Band
merged his web services company, Red Light Communications, with his merchandise-fulfillment
operation, MMF.
Once formed, Musictoday quickly began attracting the business of some of the bestknown and most successful artists in the music industry. As the company scaled up its operation,
it began to offer a comprehensive merchandising solution for its clients. Not only did the
company stock, handle, and manage inventory for clients, it also built custom commerce-enabled
Internet sites for the artists. Thus, from inventory management to the point-of-sale and finally to
the pick-pack-ship operation, Musictoday offered a compelling solution for any artist who
wanted to sell merchandise without the hassle of managing an online merchandising operation.
This value proposition helped Musictoday grow into a leading merchandise service and
sales operation for the music industry. Clients included a wide range of artists such as the
Rolling Stones, Eminem, Dave Matthews Band, Metallica, Dixie Chicks, the Grateful Dead,
O.A.R., Particle, and Jason Mraz, along with many smaller but promising artists such as David
Gray, DJ Logic, and Soundtribe Sector 9.
Musictoday stocked artist merchandise at its 50,000 square foot warehouse in
Charlottesville. Most of the merchandise was sold on consignment for clients, which meant that
the artists maintained ownership of the merchandise until it reached the consumer. When orders
were received from Musictodays e-commerce operation, Murphys fulfillment division was
responsible for the pick-pack-ship operation, picking the order items from inventory, packing the
order for delivery, and shipping the order via the selected carrier. Orders for items that were in
stock were normally shipped within 24 hours via the U.S. Postal Service (USPS). Express orders
received by 3:00 p.m. were shipped out the same day by expedited shipping. Each evening, large
USPS and United Parcel Service trucks pulled up to Musictodays docks to load the processed
orders.
The Problems of Success
Musictodays rapid growth into a full-service merchandise operation was spectacular by
any standard. Between 1998 and 2003, the number of clients for which Musictoday stocked and
sold merchandise grew by a compounded annual rate of 66% (see Exhibit 2 for data showing
company growth).2
2
All primary growth data was obtained during a telephone interview with a Musictoday executive on April 20,
2004. Certain data has been disguised.
-3-
UV3539
In addition to lining up an ever-expanding list of big-name clients, Musictoday also

experienced significant increases in both the number of merchandise items offered for sale and,
accordingly, sales revenues. Over the five-year period leading up to 2003, revenue from
Musictodays merchandising operation grew at a compounded annual rate of 52%. Moreover,
between 2001 and 2003, the number of merchandise orders that Murphys operation handled
grew at a compounded annual rate of 43%.
By 2003, Musictoday processed approximately 1,500 orders on an average day, and the
system it had built started to experience some growing pains. Although an average day saw
significant volume, it was the cycle peaks that truly strained the operation. Merchandise sales
experienced two major cycles. The first occurred during the holiday sales season, when orders
during the fourth quarter jumped fairly dramatically. While this holiday sales cycle was not
exclusive to the music industry, Musictodays other sales cycle was one not experienced by other
retailers. It occurred during the summer months when college students were on vacation and
many bands were touring, so merchandise sales experienced another significant increase.
Getting the Train Back on Track
Murphy wasnt quite sure how to begin tackling the stockout problem that had plagued
Night Train during the previous holiday season. He decided early on that his first goal should be
to determine a reorder point for every Night Train SKU3 stocked by Musictoday to avoid missing
sales revenue due to stockouts without incurring needless costs. Murphy wasnt quite sure what
would be an appropriate service level. He also wasnt convinced that the service level should be
the same across all product categories. As an initial target, however, Murphy believed that
Musictoday should have all Night Train merchandise in stock and available for sale at least 90%
of the time. After running his initial analysis, he decided that he could look at how adjustments
to the service level would affect his safety-stock levels and ultimately his costs.
Murphy next considered the most important factors that would influence his safety-stock
inventory levels. To get started, he gathered data on Night Train SKUs from the past 52 weeks
(Exhibit 3). This historical data showed that sales varied somewhat randomly from week to
week but picked up during the summer when college students were out of school and bands were
on tour. Sales dropped in the fall but really picked up again before Christmas. Murphy expected
to see a similar pattern in the coming year.
Currently, Musictoday had no formal order-cycle process. Whenever a warehouse
employee noticed that the stock of certain items was low, a report would be run on that bands
inventory, and Musictoday would send out the appropriate purchase orders, either to the artist or
directly to the supplier. Looking at the pattern of receipts and inventory for Night Train, it was
clear that Musictoday had been largely reactive in placing orders. Each buyer tried to avoid
stockouts but lacked any real tools for deciding how much or when to order. A CD that retailed
for $14.95 cost about $9 and came in case quantities of 100. The T-shirts and hats also offered on
3
SKU stands for stock-keeping unit, a term used by retailers to identify an individual item at the lowest level of
product detail.
-4-
UV3539
the Night Train website retailed at various price points with different margins and case quantities
(Exhibit 4). Partial cases could be ordered but incurred a broken-case charge that was usually
prohibitive, so the buyers generally ordered everything in multiples of full cases.
Night Train CDs were supplied by Alliance Entertainment Corporation (AEC),
headquartered in Coral Springs, Florida. To replenish its stock of Night Train CDs, Musictoday
would submit a purchase order first to the band, who would forward it on to AEC, usually within
two business days. Upon receiving an order, AEC would have the products shipped within five
business days, and transit time was approximately three business days. All other Night Train
merchandise came from a promotional-products company and would arrive, on average, four
weeks after Musictoday issued a purchase order.
Murphy realized that in order to improve the level of service Musictoday provided to its
clients, his division had to formalize its ordering procedures. Rather than wait for a warehouse
employee to notice inventory was low, he decided to put each client on a periodic review system.
That way, the buyers checked the inventory on a fixed cycle and set safety stocks to cover
demand over the review period and during the lead time of the replenishment order. Murphy
wasnt sure how frequently he should have buyers review their inventory status and place orders,
but he decided to experiment with a four-week period initially for Night Train. He estimated that,
with that frequency, his two buyers could handle all of the artists currently served without having
to add staff.
Murphy knew there was a tradeoff between a shorter review cycle and a longer one. With
a shorter review period, Musictoday would need less inventory but would incur more receiving
costs to handle the greater number of replenishment orders. He estimated that it cost $100 to
receive a shipment regardless of the size of the order (ignoring the cost of putting items away,
which would vary depending on the number of items). Murphy also estimated the carrying cost
of Musictoday inventory at 15% per year10% for the cost of capital, 3% for facility operating
costs, and 2% for obsolescence. Of course, when the inventory was held on consignment,
Musictoday only incurred the variable facility cost.
Train at the Crossing
Armed with greater insight into the factors driving inventory economics, Murphy
believed he could begin a pilot program to improve the service levels provided to Night Train.
He knew that this was going to be a big year for Night Train, as the band prepared for the release
of a major album and an extensive summer tour. Holding onto this client was critical to
Musictodays long-term success, and the best insurance policy against losing Night Train would
be to take control of the stockout situation. Murphy, however, wanted his department to
understand that improving its inventory-planning process would not eliminate stockouts
altogether, and it would not suffice as an end goal. Instead, Murphy realized that an improved
inventory-planning process simply went one step toward improving the overall operations
effectiveness of Musictoday.
UV3539
-5-
Exhibit 1
MUSICTODAY, LLC:
Sample Artist Merchandise Sold by Musictoday
Rolling Stones hat
Mike Doughty CD
Moby T-shirt
Evanescence Guitar tablature book
Blue Man Group keychain
Source: Company files. Used with permission.
UV3539
-6-
Exhibit 2
MUSICTODAY, LLC:
Growth at Musictoday, LLC
Number of merchandise clients: 19982003
350
300
250
200
150
100
50
0
1998
1999
2000
2001
2002
2003
Merchandise orders per day: 20012003

2000
1500
1000
500
0
2001
2002
2003
Data source: Company files. Used with permission.
2-Feb
3,999
549
(171)
2,697
3,249
1,122
9-Feb 16-Feb 23-Feb

3,465
2,957
2,577
492
423
361
141
67
(31)
2,628
2,585
2,519
4,112
3,913
3,726
1,029
1,407
1,282
5-Jan 12-Jan 19-Jan 26-Jan

988
344
(170) 4,350
297
760
714
620
360
230
50
(52)
2,451
2,373
2,294
2,741
4,309
3,958
3,669
3,433
1,584
1,491
1,340
1,237
1,000
500
9-Feb 16-Feb 23-Feb
9-Feb 16-Feb 23-Feb

534
508
380
57
69
62
188
74
98
69
43
66
137
199
187
93
122
125
Week Ending Inventory of NightTrain Products in 2003

ITEM NUMBER ITEM DESCRIPTION
NTCD06
NT Yankee Hotel Foxtrot CD
NTCH01TBBK
NT Black Toboggan Hat
NTCT08SXWH NT Moon Buggy T-shirt SS White
NTCT10SXWH NT Farm Wheel Ringer T-shirt SS White
NTCD12
NT Farm Wheel Rolls CD
NTCT26SXGT
NT Old School Logo T-shirt SS Granite
2-Feb
2-Feb
351
71
119
44
184
115
500
500

1,000
5,000
500
Week Ending Date

577
644
514
480
56
37
46
94
184
130
180
102
37
78
79
53
360
351
289
236
138
93
151
103
Receipts of NightTrain Products in 2003

NTCD06
NTCH01TBBK
NTCD12
NTCT26SXGT
Demand for NightTrain products in 2003

NTCD06
NTCH01TBBK
NTCD12
NTCT26SXGT
2-Mar
1,911
287
1,880
2,443
3,471
1,214
2,000
2-Mar
2-Mar
666
74
89
76
255
68
9-Mar 16-Mar 23-Mar 30-Mar

1,681
1,421
813
2,426
494
429
372
289
1,717
1,633
1,486
1,385
2,408
2,321
2,266
2,188
3,166
2,979
2,650
2,488
1,156
1,047
975
829

2,000
250

230
260
608
387
43
65
57
83
163
84
147
101
35
87
55
78
305
187
329
162
58
109
72
146
First Quarter 2003 Sales Receipts and Inventory Data for Night Train Merchandise
MUSICTODAY, LLC:
Exhibit 3
-7-
Q1 Inventory
Change
1,438
(8)
1,025
(263)
(1,821)
(755)
Q1 2003
Receipts
8,000
750
2,500
500
1,000
500
Q1 2003
Sales
6,139
814
1,659
800
3,181
1,393
UV3539

NTCD06
NTCH01TBBK
NTCD12
NTCT26SXGT

NTCD06
NTCH01TBBK
NTCD12
NTCT26SXGT

NTCD06
NTCH01TBBK
NTCD12
NTCT26SXGT
6-Apr 13-Apr 20-Apr 27-Apr

2,192
1,815
1,392
1,147
251
202
109
29
1,303
1,164
1,059
931
2,114
2,063
1,975
1,927
2,155
2,011
2,681
2,354
757
655
540
466
1,000

234
377
423
245
38
49
93
80
82
139
105
128
74
51
88
48
333
144
330
327
72
102
115
74
4-May 11-May 18-May 25-May

604
147
(289) 4,382
991
910
874
825
855
748
599
461
1,859
1,816
1,728
1,662
2,022
1,818
1,460
1,223
322
249
662
558
500

5,000
1,000

543
457
436
329
38
81
36
49
76
107
149
138
68
43
88
66
332
204
358
237
144
73
87
104
1-Jun
3,440
670
2,263
1,535
852
287
2,000
1-Jun
1-Jun
942
155
198
127
371
271
500
1,000
500
500
8-Jun 15-Jun 22-Jun 29-Jun

2,030
752
(816)
(97)
997
829
658
462
1,913
1,463
1,070
654
1,367
1,189
999
803
1,118
397
690
(37)
(4)
111
221
421
1,000

2,000
500

1,410
1,278
1,568
1,281
173
168
171
196
350
450
393
416
168
178
190
196
734
721
707
727
291
385
390
300
Second Quarter 2003 Sales Receipts and Inventory Data for Night Train Merchandise
Exhibit 3 (continued)
-8-
Q2 Inventory
Change
(2,289)
211
(649)
(1,311)
(2,192)
(336)
Q2 2003
Receipts
7,000
1,500
2,000
3,000
2,000
Q2 2003
Sales
9,523
1,327
2,731
1,385
5,525
2,408
UV3539
6-Jul
744
242
326
890
1,301
532

NTCD06
NTCH01TBBK
NTCD12
NTCT26SXGT
13-Jul
1,579
70
(78)
700
576
702
500
250
2,000
500
13-Jul
1,165
172
404
190
725
330
13-Jul
2,000
6-Jul
1,159
220
328
163
662
389
6-Jul
2,000
ITEM DESCRIPTION
NT Moon Buggy T-shirt SS White
NT Farm Wheel Ringer T-shirt SS White

NTCD06
NTCH01TBBK
NTCD12
NTCT26SXGT
ITEM NUMBER
NTCD06
NTCH01TBBK
NTCT08SXWH
NTCT10SXWH
NTCD12
NTCT26SXGT
20-Jul
3,017
(144)
1,595
524
847
809
1,000
500
2,000
20-Jul
3,000
20-Jul
1,562
214
327
176
729
393
27-Jul
4,690
641
1,147
364
(5)
929
500
27-Jul
3,000
1,000
27-Jul
1,327
215
448
160
852
380
3-Aug 10-Aug 17-Aug 24-Aug 31-Aug

4,158
3,724
3,316
2,051
4,232
457
241
527
365
260
760
405
2
1,664
1,376
161
(30)
301
127
32
218
605
(56) 4,234
3,781
583
223
384
88
333

1,000
1,000
1,000
3,000
500
2,000
500
1,000
1,000
5,000
500
500

1,532
1,434
1,408
1,265
819
184
216
214
162
105
387
355
403
338
288
203
191
169
174
95
777
613
661
710
453
346
360
339
296
255
500
500
7-Sep 14-Sep 21-Sep 28-Sep

3,944
3,550
2,998
2,571
718
682
645
605
1,246
1,135
1,003
812
(24)
393
346
271
3,516
3,169
3,010
2,713
219
112
(6)
353
500

288
394
552
427
42
36
37
40
130
111
132
191
56
83
47
75
265
347
159
297
114
107
118
141
Third Quarter 2003 Sales Receipts and Inventory Data for Night Train Merchandise
-9-
Q3 Inventory
Change
1,827
363
486
(619)
1,412
(179)
Q3 2003
Receipts
16,000
2,000
4,000
1,250
10,000
3,500
Sales
13,332
1,857
3,842
1,782
7,250
3,568
UV3539
Data source: Company files.
12-Oct
6,629
746
478
651
2,365
126
19-Oct
6,200
702
310
620
2,197
489
5-Oct
2,036
791
617
697
2,520
240
19-Oct
19-Oct
429
44
168
31
168
137

NTCD06
NTCH01TBBK
NTCD12
NTCT26SXGT
12-Oct
5,000
12-Oct
407
45
139
46
155
114
500
500
250
5-Oct
5-Oct
535
64
195
74
193
113

NTCD06
NTCH01TBBK
NTCD12
NTCT26SXGT

NTCD06
NTCH01TBBK
NTCD12
NTCT26SXGT
26-Oct
5,719
651
150
1,038
2,055
347
500
26-Oct
26-Oct
481
51
160
82
142
142
500
500
1,000
9-Nov 16-Nov 23-Nov 30-Nov

3,000
3,000
3,000
500
2,000
9-Nov 16-Nov 23-Nov 30-Nov

343
1,066
1,413
1,699
80
123
175
233
184
224
442
580
60
116
202
218
215
542
662
1,090
158
256
324
424
2,000
250
1,000
500
500
2,000
1,000
500
2,000
2,000
500
500
4,000
1,000
500
7-Dec 14-Dec 21-Dec 28-Dec
7-Dec 14-Dec 21-Dec 28-Dec

2,131
2,713
2,125
1,948
337
348
314
239
647
723
618
544
283
372
294
237
1,330
1,539
1,255
901
521
713
604
416
2-Nov 9-Nov 16-Nov 23-Nov 30-Nov 7-Dec 14-Dec 21-Dec 28-Dec

8,160 10,817 12,751 14,338 12,639 10,508
7,795
5,670
3,722
1,063
983
860
685
952
615
267
453
714
70
1,886
1,662
1,220
640
1,993
1,270
652
108
1,002
942
826
624
406
373
501
707
970
1,769
1,554
1,012
350
260
(70)
391
1,136
4,235
237
79
323
499
75
54
341
1,737
2,321
2-Nov
3,000
500
2-Nov
559
88
80
36
286
110
Fourth Quarter 2003 Sales Receipts and Inventory Data for Night Train Merchandise
-10-
Q4 Inventory
Change
1,686
(77)
(509)
273
1,715
2,081
Q4 2003
Receipts
17,000
2,250
4,000
2,750
10,000
6,000
Q4 2003
Sales
15,849
2,141
4,704
2,051
8,478
4,032
UV3539
ITEM DESCRIPTION
NT black toboggan hat
NT Moon Buggy T-shirt SS white
NT Farm Wheel ringer T-shirt SS white
NT old school logo T-shirt SS granite
Data source: Company files.
ITEM NUMBER
NTCD06
NTCH01TBBK
NTCT08SXWH
NTCT10SXWH
NTCD12
NTCT26SXGT
COST
$9.18
$12.23
$8.75
$8.75
$9.18
$8.75
CASE
QUANTITY
100
25
50
50
100
50
Product Cost, Shipping Pack Quantity, and Retail Selling Prices
MUSICTODAY, LLC:
Exhibit 4
-11-
RETAIL PRICE
$14.95
$29.95
$24.95
$24.95
$14.95
$24.95
UV3539

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UV3539

Rev. Mar. 7, 2014

From One Band to Many

In addition to lining up an ever-expanding list of big-name clients, Musictoday also

Rolling Stones hat

Evanescence Guitar tablature book

Blue Man Group keychain

Source: Company files. Used with permission.

Merchandise orders per day: 20012003

Data source: Company files. Used with permission.

9-Feb 16-Feb 23-Feb

5-Jan 12-Jan 19-Jan 26-Jan

9-Feb 16-Feb 23-Feb

9-Feb 16-Feb 23-Feb

Week Ending Inventory of NightTrain Products in 2003

5-Jan 12-Jan 19-Jan 26-Jan

Week Ending Date

Receipts of NightTrain Products in 2003

Demand for NightTrain products in 2003

9-Mar 16-Mar 23-Mar 30-Mar

9-Mar 16-Mar 23-Mar 30-Mar

9-Mar 16-Mar 23-Mar 30-Mar

Week Ending Inventory of NightTrain Products in 2003

Receipts of NightTrain Products in 2003

Demand for NightTrain products in 2003

6-Apr 13-Apr 20-Apr 27-Apr

6-Apr 13-Apr 20-Apr 27-Apr

6-Apr 13-Apr 20-Apr 27-Apr

4-May 11-May 18-May 25-May

4-May 11-May 18-May 25-May

4-May 11-May 18-May 25-May

8-Jun 15-Jun 22-Jun 29-Jun

8-Jun 15-Jun 22-Jun 29-Jun

8-Jun 15-Jun 22-Jun 29-Jun

Week Ending Inventory of NightTrain Products in 2003

Receipts of NightTrain Products in 2003

3-Aug 10-Aug 17-Aug 24-Aug 31-Aug

3-Aug 10-Aug 17-Aug 24-Aug 31-Aug

3-Aug 10-Aug 17-Aug 24-Aug 31-Aug

7-Sep 14-Sep 21-Sep 28-Sep

7-Sep 14-Sep 21-Sep 28-Sep

7-Sep 14-Sep 21-Sep 28-Sep

Data source: Company files.

Week Ending Inventory of NightTrain Products in 2003

Receipts of NightTrain Products in 2003

Demand for NightTrain products in 2003

9-Nov 16-Nov 23-Nov 30-Nov

9-Nov 16-Nov 23-Nov 30-Nov

7-Dec 14-Dec 21-Dec 28-Dec

7-Dec 14-Dec 21-Dec 28-Dec

2-Nov 9-Nov 16-Nov 23-Nov 30-Nov 7-Dec 14-Dec 21-Dec 28-Dec

Data source: Company files.

Product Cost, Shipping Pack Quantity, and Retail Selling Prices

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