Winning Formula -- December 2003

Those who have never experienced the sweet revenge of blowing up an alien pig monster with a rocket-powered grenade launcher in "Duke Nukem" can still appreciate just how far the video game has grown from Pong's humble beginnings in the early 1970s. According to the NPD Group, a global marketing and sales information firm, annual video game revenue for 2002 topped out at $10.3 billion in the United States alone. Taking into account that this figure does not include the sale of PC games, one thing is abundantly clear: video games mean big business.

The Art of Electronics

Sitting atop of the video game heap is Redwood City, California-based Electronic Arts (EA), the leading video game publisher in the United States with $2.5 billion in revenue for 2003. EA holds over one hundred popular titles to its credit including "NBA Street", "Madden NFL 2004", "SimCity 4" and "Medal of Honor." The company develops games under such brand names as EA Games, EA Sports, and EA Sports Big. EA also distributes titles for third-party labels and publishes games based on Hollywood hits, including "The Lord of the Rings," "Harry Potter" and "James Bond."

EA develops its games for PCs and console systems such as the Sony PlayStation 2, Nintendo GameCube, and Microsoft Xbox. Keeping games replenished at stores for different consumer platforms is an ongoing process that begins every August, the start of the company's busy season. The latest Madden football game, for instance, will ship to 650 display units on the same day. To help make this process run smoothly, EA has established a final reorder date to its retail partners which ends in early December. This pause in activity allows EA to refresh its stock before the holiday rush.

"We deal with a significant order flow and do a lot of work to coordinate our display units," says Marc West, chief information officer, Electronic Arts. "We also have some very specialized systems to deal with re-order points, replacement points, on-shelf inventory and distribution center inventory."

At the heart of EA's tech operation is an Oracle database that has been fed a steady diet of custom-tailored applications since 1995. West says he considered different vendors that were all the rage at that time but the ability for those vendor solutions to gain a better sense of sell through did not exist. West believes this crucial visibility still doesn't exist today.

"You get a larger and more mature package now but there is still not a robust order-to-distribution capability that allows you to fully shape your forecast to demand planning," says West, who adds that Oracle has been a partner in providing EA with good insight into how its capabilities work. "They have been pretty heavily engaged in trying to understand what we do here and have taken a lot of our recommendations and worked to incorporate them into the standard offering. We are a little demanding about how it works." So how does EA's front-end strategy work? West describes it as a "trade off" between financial services and warehousing.

"The ability to tell first day sales versus first week sales is critical to the marketing campaign and how you shape future orders," says West.

No Place Like Home

In response, EA relies heavily on two, homegrown, workhorse applications that filter through the Oracle database. One is called North American Forecast and Demand System, the other is called Wings, which allows EA to scrutinize the core elements of its business performance. Together, the systems blend forecast and demand with P&L structure to provide a clear view of what is happening in EA's supply chain as product moves through a new launch and segues into catalog sales.

"It is a very life cycle system," says West. "It deals with inception and the planning phase through the materials management and manufacturing process and then ties back out to the performance."

Keeping Pace With Demand

Perhaps EA's greatest attribute is its ability to create buzz and demand for its games through numerous marketing channels. And even though the company's selling cycle is tightly monitored, it's still a nerve-wracking proposition to back up the maddening hype that comes with a hot, new release like "Harry Potter", which EA first released last year.

"We launched it in 61 countries and 17 languages on the same day of the theatrical movie release," says West. "We realized that the Oracle's of the world are good at handling transactions and helping us understand large categories. We also have people who work closely together who are in tune with demands and sweat in the middle of the night making sure it's all happening," he continues.

Another EA title however, NCAA Basketball, outsold the company's expectations by a significant margin this past July.

"You must be prepared, especially when you get into the business of taking an individual title, as well as the full Christmas stream of titles to deliver them successfully across multiple languages and countries while still creating a consistent presence or brand for the title itself," says West.

Clearing House

On the back end of business, EA reduced its operational costs by 34 percent in the space of a year, following the implementation of a warehouse management solution from Irista. The company relies heavily on the iristaWarehouse cartonization feature, through which it selects an appropriate box to ship based on order size. If this all sounds like a wild guessing game, think again. The system is tied to an automated scale that can detect the absence of a single unit within a carton.

"We were able to reduce the natural order time by one day, which is pretty significant," says West. "It allows us to be more responsive to re-orders. We don't get a backlog of orders because somebody didn't release them."

Better visibility and data tracking produced a multi-million dollar reduction in charge-backs. The elimination of nine steps in the fulfillment process achieved additional efficiencies. Immediately available revenue recognition information boosted financial reporting. And highly efficient pick-to-label procedures were enabled. Ultimately, EA improved the quality and quantity of data necessary to audit processes and measure key metrics.

Project Greenlight

The Irista project timeline was established during the initial phase of implementation. EA's cross-functional team, with representatives from finance, IT, operations and training, met with the Irista project team to map out the existing business process requirements with the proposed warehouse and transportation management system solution. Maintaining the existing operational methodology and process flows while incurring minimal software modifications and facility redesign were key to the team's mission. Included in the project plan was the installation of A-frame picking systems, in-line scales for carton validation and radio frequency bar code scanning technology. A dedicated training facilitator worked with Irista to develop a curriculum that helped EA employees better understand the operational area within the distribution center.

EA's labor costs have also dropped by more than 30 percent since the Irista implementation, mainly due to the company's ability to replenish forward pick locations. Today, EA deals with fewer broken cases, short picks and missing product. West anticipates that further improvements will arise as users engage additional modules, including those that support value-added processes such as light manufacturing and assembly.

New Frequency

West embraces new technology and feels that Radio Frequency Identification (RFID) is not a concern but an opportunity. Wal-Mart's pallet level RFID requirement for select companies is also a positive, according to West.

"The economy of scale has shifted to the DC versus shipping to the back door," says West. "It is many times more beneficial for us than it is for Wal-Mart. We try to look at it as being an opportunity for us and not very disruptive."

Besides Wal-Mart, a tremendous part of EA's overall market strategy includes the "mom and pop" shops. In North America alone, there are over 30,000 mom and pop outlets that currently buy from EA.

"Their total revenue for the company is not as significant as an account like Wal-Mart, yet we get such tremendous sell opportunity by having the kids in the local store looking at the games and the advertising and the excitement around it," says West. "One of our fundamentals is we get our best feedback from people who are in the local gaming stores."

To EA, handling supply chain to the mom and pop stores versus the Wal-Marts of the world is a different process, alas, not a very significant one.

"Wal-Mart uses EDI, Gator Games uses the EA Internet site or a phone call, so it's all about how we handle our customer base," says West. "When Wal-Mart says RFID, we say great. It's an opportunity to look at how we are streamlining and if we can use it better, let's proceed to use it."

Future Plan

West says EA's plan for future growth is simple and does not involve movies or music, even though both categories are a part of EA's whole.

"We make games," says West. "Whether we look into more online experiences like PlayStation 2 through broadband connections or on the PC, our demographics are expanding and we are selling more games. We are constantly looking at new properties to develop; licensing, creating our own intellectual properties, but it's in a sense of creating games."

West says EA gains market share in the hotly competitive video game landscape by keeping a finger on the pulse of what consumers want. By producing quality video games, West says EA continues to build loyalty. Overseas opportunities abound as well, between Europe and Asia Pacific/Japan and emerging countries like China, where West anticipates a higher degree of disposable spending from consumers. EA also keeps a close tab on the game console makers. As they create next generation systems, EA is helping them to not only build a better station but to also have an early release of popular EA games.

"It's not only growth through the fact that interactive entertainment and movies is moving more mainstream," says West. "We are expanding our market by driving more entertainment into the same channels and expanding the channels themselves; the consoles, PCs, contests and challenges. We are going to continue to make the best games we can and we think that is powerful in it's own right."