Is it Time for Scan Based Trading?

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Feb 24, 2005
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By Bill Bittner


As the brick and mortar retailers continue to work against the encroachment of online retailers, one of the huge weights on their backs is the investment in presentation stock
they must make in order to merchandise vendors’ products.


Whereas the online retailer invests in a Web site and/or catalog images of the vendor’s products, the brick and mortar retailer must display the actual item at each store location.
The ability to eliminate this investment in inventory would have a huge impact on the retailer’s return on assets.


Scan Based Trading (SBT) has been around for many years, but has not spread much beyond the magazine and ice cream categories. Under SBT, the retailer does not take ownership
of the products on display in its stores. Vendors are paid based on scanning data recorded when the product is sold. The advantage to the retailer is obvious.


The advantage to the vendor is subtler. By not transferring ownership, the vendor no longer has to wait for store personnel to verify deliveries. Also, if the SBT solution is
tracking inventory, it can cut the trips the driver makes from the parking lot to the shelf in half. As the driver leaves the truck, they can have the product they need to replenish
the store without first walking into the store to count the remaining inventory. Some damaged product that is collected may not be replaced, but most often this will not be enough
to warrant another trip to the truck. Also, since delivery check-in is not required, deliveries can be made during off hours such as overnight when traffic is much less.


So the vendor gains by speedier deliveries resulting in lower labor and equipment costs. (This is the reason ice cream has been popular because, the investment in freezer trucks
is costly.) The partnership between the retailer and the vendor is strengthened because their goals become more closely aligned. With SBT, they both want to see product sell,
not just transfer ownership from one to the other.


There are a couple challenges to the implementation of SBT. The first is the concern that by not taking ownership, retailers will lose an incentive to care for the products lining
their shelves. Vendors fear the burden of inventory losses will not only shift from the retailer, but also increase because of a lack of retailer concern.


The accuracy of scan data as the basis for payment can be a challenge. The retailer’s POS system must be coordinated with the vendor’s delivery system so that UPC’s or EAN’s
that are delivered to the store are assured to be captured by the POS system when they are sold.


Moderator’s Comment: Can SBT be a viable way to help brick and mortar retailers? Is the opportunity to display their product for consumers important
enough to vendors that they will support SBT? Are there ways to address the concerns of vendors? Are there other obstacles?


A bunch of things are coming together to make SBT technically feasible. The coordination of vendor and retailer databases through data synchronization ensures
that what is received is captured when it is sold. The implementation of data warehouses for scanning data that are supported by “trickle feeds” from POS systems make near-real-time
inventories possible.


With the technical hurdles subsiding, the pressure now shifts to the business processes and the business partnership. I believe that by implementing auditing
processes and explaining the importance to vendors, vendors will recognize that the benefit of having their product on display outweighs the potential risks of SBT.


If it becomes widespread, SBT has the potential to improve retailer’s financial results and strengthen their partnership with vendors as objectives become
more closely aligned.

Bill Bittner – Moderator

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9 Comments on "Is it Time for Scan Based Trading?"


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Stephen Baker
Guest
15 years 9 months ago
In the technology business, I believe we call this consignment. Most tech retailers use it as a way to RONA and other financials when they are compared to companies like Dell, which has a very high return on assets because it never owns any inventory. Retailers in tech have applied it to categories such as consumer software, networking, and blank media. We have not yet seen it spread into logical low-turn high cost categories like advanced TVs or notebook PCs, mostly because the vendors in those categories will not accept it. Most of the vendors hate it because they have to adjust their financials to only count a product as sold when it goes out the door of the retailer, not when it leaves their warehouse. Most tech vendors are afraid that retailers will order too much product when they don’t have a financial responsibility for the inventory and, with rapid product obsolescence, the burden of cost is even more heavily on the manufacturer. Finally, in electronics, this doesn’t solve the display issue, since someone… Read more »
Dan Gilmore
Guest
Dan Gilmore
15 years 9 months ago
I believe it is inevitable that scan-based trading will accelerate dramatically over the next decade, as profit pressures force retailers to look for yet another way to shift costs back down the chain, and technology, especially RFID, makes the accountability and accounting much more accurate and transparent. Many, in fact, think that one of the real (if unspoken) drivers behind Wal-Mart’s RFID push is to set the stage for consignment inventory. Step one will be to dramatically increase the use of vendor managed inventory programs, based on improved information about movement both to the stores and from back room to shelf to POS. Step two will then logically be to move to a consignment inventory approach, where Wal-Mart collects the margin without the investment. Some of the initial comments here seem to imply “scan-based trading” can only work for direct store delivery items, and indeed that is where much of the initial focus has been. But if RFID enables retailers and manufacturers (reluctantly) to provide near real-time inventory visibility and better manage shrink issues, consignment… Read more »
Dan Raftery
Guest
15 years 9 months ago

One of the reasons that SBT has been as successful as it has is that the DSD manufacturers – especially bread – have seen immediate benefits from route efficiency improvements. The other is the simple fact that traditional DSD inventory is owned by the distributor prior to arrival at the store. And with turns being so high for bread, for example, the cost of extending ownership into the store is not a deal breaker. It’s much more complex for warehouse delivered products. If they can get over the huge capital hit of buying back the inventory in the retail system DCs, multi state inventory tax issues are a big deal for warehouse delivered product manufacturers. I don’t think SBT is the secret reason behind Wal-Mart’s passion for RFID.

Laura-Lynn Freck
Guest
Laura-Lynn Freck
15 years 9 months ago

My question: Who becomes responsible for shrink? Moreover, is there a check and balance system for the retailer? It seems to me that it would be tempting for a retailer to begin some potentially shady practices for items that are slow moving. Retailers have gained so much power with the onset of such things as slotting fees. This seems yet another way to remove power from manufacturers. Ultimately, consumers will be the worse off. Slotting fees have already diminished choice and innovation since only the larger manufacturers can afford the exorbitant fees. It sounds like a forward thinking solution, but I think it will actually drive the industry backward.

Art Williams
Guest
Art Williams
15 years 9 months ago
SBT makes so much sense that it is puzzling that it has not taken off better. The biggest hurdle is that the senior management of both the retailer and manufacturer has not embraced it. I believe that is primarily based on fears created by past experiences and distrust. Retailers are afraid to open up their backdoor security procedures and allow vendors to stock and restock without restrictions. It isn’t hard to understand why they would be reluctant to give free access to the very people that they have caught repeatedly in theft. We wouldn’t be very eager to leave our homes unlocked either. But if they aren’t able to do this, the manufacturers are unable to achieve the savings they need to offset the cost of the transfer of inventory. Retailers also need to be able to insure more accurate accountability at the checkout, long an Achilles Heel of retail. All of these issues are easily solvable, but only with top management support. Manufacturers don’t trust retailers on the shrink issue. It ranges from inaccurate… Read more »
Dennis Serbu
Guest
Dennis Serbu
15 years 9 months ago

Other questions remaining unresolved in SBT are how to compensate Distributors and Independent Operators when product is distributed DSD. Does the manufacturer shift ownership of inventor to a regional distributor or an Independent truck operator who likely can afford floating this investment? SBT is VERY attractive for distribution efficiency and for data collection. As a passing thought, I wonder if we will see the massive lobby displays we have seen in the past when the Retailer was funding the inventory.

Dan Gilmore
Guest
Dan Gilmore
15 years 9 months ago

SBT is not THE (meaning only) secret reason behind Wal-Mart and its passion for RFID, but I have heard from enough people to be confident it is among the strategies Wal-Mart believes it could pursue based on RFID system deployment. Pervasive vendor managed inventory, and related concepts such as the manufacturer basically “owning” the shelf space and being responsible for its total profitability (discussed at the recent RILA logistics conference) seem to me to all be setting the stage for a potential move to consignment inventory, though the switchover would be challenging, as was suggested.

As an aside, there are other “secret” potential strategies for Wal-Mart and RFID, such as dramatically reducing store labor costs if we finally get to item level tagging through pervasive use of customer self-checkout – but they understandably aren’t touting that publicly either.

Howard Evans
Guest
Howard Evans
15 years 9 months ago
SBT is potentially a win for all in the product chain for some products — specifically those that have already established strong consumer appeal and demand, and those that have a specified and recognized space in the retail store. However — this covers a small percentage of products most retailers stock! For the thousands of products that could easily “get lost” (i.e. NOT the “Tide”), SBT has real pitfalls, even with seamless delivery to the back door. Most of these products, which are low volume items, also are impacted by shrink much more severely than high volume items. Without a significant space on shelves, the product is often left out, relegated to being moved around a back room and potentially damaged or destroyed. The retailer sees no urgency to get this product up before his consumers, and doesn’t take the same level of ownership he would about a “Tide.” SBT is another way to potentially limit selection. From the financial perspective, most vendors, even small ones, would prefer to manage inventory through SBT IF the… Read more »
Ed Martin
Guest
Ed Martin
15 years 7 months ago

The biggest challenge for SBT is that the retailer must adopt the role of seller instead of the traditional role of buyer. I worked on a SBT pilot with one retailer who was very supportive of the project until they (the buying department) realized there would be no opportunity to forward buy product. I tried to explain that this was a good thing, but my reasoning fell on deaf ears. Unfortunately, this came as a revelation early in the pilot and caused the pilot to abruptly end.

The real problem is that all of the administrative savings and financial benefits do not reflect on the current criterion used for measuring Category Management performance. As long as these areas of the company remain in silos, little progress can be made.

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