Scan-based trading

Scan-based trading (SBT) is the process where suppliers maintain ownership of inventory within retailers' warehouses or stores until items are scanned at the point of sale.

History

Traditionally scan-based trading programs use Electronic Data Interchange solutions as the key component to synchronize information on store locations (Organizational Structure 816), items (Price/Sales Catalog 832), daily sales (Product Activity Data 852), receivings (Receiving Advice 861), billings (Invoice 810) and payments (Remittance Advice 820) between a retailer and its Scan-Based Trading suppliers.

While at first it would seem that the benefits of scan-based trading are mainly derived from savings for the retailer, in fact, the scan-based trading supplier is usually the driver of the trading as they receive huge benefits. In the magazine industry alone, the full implementation of SBT has been estimated to provide operational savings to the retailers and suppliers of $220 million per year.^[1] The benefits to the supplier to implement SBT include:

• Improved retailer relationships: The greatest competitive advantage for a supplier is increased collaboration and visibility in its retail-trading partner's organization. With partners agreeing on details like item, price, promotion and shrink at the onset of an SBT relationship, suppliers are able to better service accounts and reduce billing and invoice issues. Sara Lee reported a 60% reduction in invoice error correction costs by the implementation of SBT at an average cost of $70.00 per disputed invoice; the savings are substantial. The improved relationships also allow suppliers to use SBT as a competitive weapon to gain exclusivity at retailers. SBT suppliers are becoming increasingly aggressive in approaching retailers and offering to use SBT on all of their products in exchange for exclusivity in the retailer’s stores.
• Increased sales: SBT suppliers have estimated that their increase in sales by switching to a scan-based trading model is from 1% to 5%.^[2] Despite what this industry paid for study shows sales are not increased by SBT. As long as sufficient product is in the store prior sales remain the same in newspapers. Actually given theft of the product due to non scanning sales will decrease when inventory is adjusted to reflect real sales not just used product.
• Improved visibility of product sales: As a part of SBT programs, suppliers receive sales by item by store by date. This information provides the supplier with an up-to-date view on the sales of product which is invaluable in sales forecasting and inventory management. However this is only if the employees actually scan the items. With newspapers the employees know they can take one for their use or give one away or even charge and steal the money and the stores will never know. They do not consider it stealing since their store does not have to pay. In addition management can sell without scanning thereby realizing the revenue but with no cost therefore the entire sale goes directly to profit on the bottom line.
• Reduced cost of inventory: In the supply chain for supplier-merchandized product, retailers will experience a reduction in cost of inventory. With SBT, product deliveries are based on store inventory of individual items. There is a dramatic reduction in product held in the supply chain (typically by suppliers agents/merchandisers/jobbers).
• Reduction in non-sellable product: Suppliers use SBT to lower the costs associated with non-sellable products (i.e., discontinued, damaged, or out-of-code products that retailers return). SBT provides greater visibility into scan-sales data, allowing suppliers to better understand the demand chain so that they can anticipate and reduce obsolescence and improve overall profitability.
• Reduced time to market: SBT allows suppliers to put new products into retail outlets at no risk to the retailer, since the supplier continues to own the inventory until it is scanned at the point of sale. This allows the supplier to determine new item performance and adjust selection before wide-scale rollout. The result is increased selection of timely products which results in a better shopping experience for the consumer and increased sales for both the retailer and supplier because the “expert” on product, the supplier, who is in charge of inventory selection. On average, the time to roll out new CPG product is four weeks. Introducing new product with the “advanced” item synchronization business processes and the elimination of the item approval process inherent in scan-based trading reduces the time by at least one half.^[3]
• Reduced cost for sales staff to service retailers: By using the coordinated “bi-directional item information synchronization approach" inherent in SBT, suppliers have reported a 7% to 13% reduction in sales force time spent communicating basic item information to customers, following up, resolving queries.^[3]

For retailers, the implementation of SBT has been seen as a goal as it saves money and improves customer satisfaction. The following is a list of benefits derived by retailers switching to SBT:

• Increased sales: Typically, the increase was driven by the supplier having more time in the store to merchandise its product, fill holes, and maintain plan-o-gram integrity. In addition, several retailers mentioned suppliers were able to make an additional stop at each store during the week to merchandise products and prevent out-of-stocks. Salmon and Associates reported that “a grocery retailer’s sales increased in every product category it tested — from bread to ice to magazines. Sales increases ranged from 1% to 5%, based on product category”.^[2] Schnuck Markets reported a 4% increase in sales for its SBT pilot.^[4]
• Reduced invoice/order processing costs: Retailers have reported that the cost to process SBT suppliers is much less than “normal” suppliers as items, price, promotions, and allowance disputes are greatly reduced by pre-set agreements and the use of EDI to synchronize item information between suppliers and retailers. Schnuck Markets reported a nearly 70% reduction in invoice deductions with time spent resolving item and price discrepancies cut in half.^[4] At an average cost of $70.00 per disputed invoice, the savings are substantial.^[5]
• Lowered cost of inventory: As SBT changes inventory ownership to the supplier, the retailer experiences a reduction in retailer-owned inventory.
• Improved financial metrics: Once inventory levels were reduced, all financial metrics that incorporate inventory levels (such as working capital required, return on assets (RONA), and quick ratios) showed improvement: working capital can be reduced as much as 15%, RONA increased as much 4%, and the quick ratio increased as much as 7%.^[2]
• Reduced stock outages: SBT forces the supplier to manage and merchandize its products to ensure that the right product is on the shelf at the right time or the supplier will see a loss of revenue. This provides a powerful incentive to reduce stock outages. As an example, during its SBT pilot, Rite-Aid, realized a 32% decrease in out-of-stocks.^[6]

Test

The Grocery Manufacturers Association (GMA) ran a test of the concept in 2000 with Schnuck Markets in St. Louis, Missouri, and Andronico's Market of Berkeley, California and a dozen suppliers. Sales went up 3% to 4% for the retailers and between 2.5% and 5.2% for suppliers. Mispricing of stock items were decreased by 70%.

Application to direct-store-delivered items

Scan-based trading is primarily applicable to products distributed through direct store delivery, commonly referred to as DSD. The most common application of scan-based trading to DSD products involves garden seeds, DVDs/Blu-ray Discs, newspapers and magazines. Nearly all newspapers and magazines are distributed to retailers by the DSD method of distribution. According to an analysis by one vendor,^[7] "most major retailers in the U.S. - including CVS, Safeway, Kroger Ahold’s divisions, A&P and its subsidiaries, Hess, Barnes & Noble and Rite Aid - conduct their newspaper business using the SBT model." According to Poff "Most [retailers] rely on a third-party partner to provide oversight.

Sales synchronization

Scan-Based Trading is based on the ability to transmit sales information from the retailer to the supplier. Sales information is used to by both parties for financial settlement of sales and to inform the supplier of sales by location. This information is critical for suppliers to plan production, sales and marketing activities. The process is simply to have the retailer send daily sales to its SBT suppliers of items scanned at POS by store for each item an SBT supplier sells in an EDI Product Activity Data (852) document which is formatted by the retailers EDI software and transmitted to the supplier. The Product Activity data is primarily used by the supplier to support stock replenishment program, to provide input to sales analysis and forecasting systems and to calculate the total dollar volume by store for Invoicing.

Item synchronization

Implementation of SBT is dependent on synchronization many pieces of information with the synchronization of item information between the supplier and the retailer being the most important. Typically a retailer will use the EDI Price/Sales Catalog (832) document to send and receive item information to/from its SBT suppliers to ensure item synchronization as without item synchronization, Scan-Based Trading is not possible. The initial step is to have the retailer export its item information to its SBT suppliers as an EDI Price/Sales Catalog (832). The outbound 832 provides details on what items the retailer had in its item database. It is critical that the SBT supplier review this item information as proper item synchronization is critical to the SBT business process. The next step is for the supplier to send back a detailed EDI Price/Sales Catalog (832) back to the retailer. The inbound 832 from the SBT suppliers contained information used by the retailer to identify/categorize/price item information to facilitate the SBT process. The information sent generally includes:

• POS item descriptions
• Long form item descriptions
• Unit Cost Price
• Retail Cost
• Supplier Classification codes
• Logistics information

To aid in the ongoing synchronization of items, the SBT supplier must send the retailer any item changes (modifications, additions, deletions) as soon as possible to ensure that the retailer's item database is fully synchronized to the supplier’s item database. If there are any “issues” with item synchronization, they will be addressed prior to the implementation of any further EDI documents.

See also

• Vendor Managed Inventory
• Consignment

References

• Retailer Quick Start for Scan Based Trading – SoftCare EC Inc. – January 6, 2006