StratVantage Consulting, LLC — Mike’s Take on the News 06/01/01


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StratVantage Consulting, LLC — Mike’s Take on the News 06/01/01

Clipped from: http://www.stratvantage.com/news/060101.htm

The News – 06/01/01

Scan-Based Trading

There’s a revolution a-brewing in retail. It’s called Scan-Based Trading, and if it really gets off the ground, every aspect of the supply chain of businesses involved in retail will be changed.

PriceWaterhouseCoopers defines SBT this way:

If you could somehow marry the retailer’s goal of not wanting to own inventory with the manufacturer’s goal of a just-in-time, no excess inventory supply chain, then you would have something. The key to this marriage would be to allow market demand to dictate the supply. And probably the best proxy we have in the market today for demand is capturing real-time consumer purchase activity.

In this union of marital bliss, a manufacturer would produce a product according to demand. It would be transported to the retailer’s shelves just in time to be picked up by a customer who would take the item to the checkout. The item would be scanned, the customer would pay, the manufacturer would be paid automatically, and a replacement order would be placed electronically. The retailer has no inventory investment, the manufacturer has optimized its supply chain, and a consumer transaction controls settlement all along the supply chain. That is the essence of scan-based trading, or SBT for short.

This is a drastically different world than the one we’re living in today. Supply chains today are relatively inefficient, resulting in overstocks, out-of-stocks, excess inventory (and subsequent markdowns), and money lost to out-of-date merchandise. SBT intends to address these various inefficiencies by extending the just-in-time concept to the retailer’s shelf. Donaldson, Lufkin & Jenrette put it this way:

We believe that the next wave in supply chain management or B2B is about to be rolled out. We expect the next wave to reduce retailers net investment in inventory to near zero, pull inventory out of the channel reducing markdown pressures and transaction costs, and substantially reduce out of stocks.

Basically, in SBT, retailers pay the manufacturer for the merchandise only after it has been scanned at the point-of-sale cash register. The retailer doesn’t own the goods in its stores, or its warehouses. Obviously, there are many issues to solve, not the least of which is, what to do about shoplifting? Alert SNS reader John Gehring asked the following questions about SBT. I provide what answers I can.

  • Do suppliers actually get paid 30-60 days after the sale is made?

    Payment is generally made a good deal more quickly after the sale using SBT. That’s part of the upside for the supplier. There are actually three concepts involved in SBT: Scan-based Settlement, Scan-based Replenishment, and Scan-based Promotion. Each speeds up the ability of the supply chain to respond to events at retail such as out-of-stocks and promotions, while getting money to the supplier much faster. See the PWC white paper link at the end of this article for more information.

  • Will there finally be a backlash against retailers adopting this policy?

    It’s hard to say. The retailers own the customer and that won’t change. That’s a pretty big hammer. I think, however, that if the supply chain can get efficient enough and responsive enough, there will be upside for everyone. The key is going to be the demand chain info flowing back to the supplier. This info is gold, gold that ACNielsen has been selling for years. If retailers can make it work in their supply chains, and manufacturers can use it to plan demand, everyone will be happy. But this is by no means a slam dunk. There was a lot of activity back in ’99 on SBT, with pilots and tests, but now I think folks are waiting to see what WalMart does with it before going crazy on it. Nonetheless, grocery retailers such as H. E. Butt, A&P, Safeway and Schnucks, and consumer packaged goods (CPG) manufacturers, including Proctor & Gamble, Gillette, PepsiCo, and Coca-Cola have all tested SBT.

    Plus there’s plenty of savings for the manufacturer. Dreyer’s Grand Ice Cream uses SBT in more than 1,500 stores, and has been since 1994. But they haven’t had to add any vehicles in spite of recording 10 percent to 15 percent increases in volume each year. Here’s what the Grocery Manufacturers of America pilot tests found:

  • Will the resulting margin erosion make sales to some retailers unprofitable, especially for lower-volume suppliers?

    SBT won’t work for everyone, initially. But I think it will eventually be the way of the world. The key to making SBT work is for there actually to be no margin erosion. Manufacturers make up for any price pressure by becoming more efficient. In addition, there is a recognition that several of the traditional retailers’ costs need to be rolled in to the manufacturers’ margin.

  • How will the huge increase in accounts receivable days outstanding look to suppliers’ lenders?

    Lenders have to be clued in for SBT to work. The point of SBT is to reduce the number of days between manufacturer and sale, so this could make things better, accounts-receivable-wise, rather than worse.

  • Where is the opportunity to make money on this "pain" being inflicted by retailers?

    While at first blush it may seem to be all pain for suppliers, I don’t think it will necessarily be a one-sided proposition. Both sides have to win for SBT to take over the world. Nonetheless, supply chain enablers are going to be the big growth B2B firms, because of SBT and many other factors. In order for SBT to work, all kinds of new accounting, tracking, financing, logistics, and decision support systems need to be implemented. All that needs consulting and applications.

It all really boils down to WWWD: What Will Wal-Mart Do? The secretive retailing giant is playing it close to the vest, but indications are that, after a rocky start, its SBT experiment is yielding double-digit same-store sales growth. The company has said selling 100 percent of its inventory before paying suppliers is a reasonable three-year goal.

Regardless of how the gorillas go, there are many obstacles to SBT, some technological, some process-oriented, and some trust-oriented. Nonetheless, businesses that sell into retail need to be aware of this trend, especially for products that are direct store-delivered, a segment where SBT seems to be taking hold.

PriceWaterhouseCoopers White Paper

Briefly Noted

  • I’ve just re-ranked my list of important Internet trends in the TrendSpot .
  • I’m speaking at the Designing a Handheld Computing Strategy for Your Enterprise conference in Rosemont, IL, Tuesday, June 19. My topic is The Next Wireless Killer Apps: Will You Have to Have It?

  • I’ve been pretty down on the Internet appliance market because I just don’t see the appeal with cheap PCs and new Net devices on the horizon. Nonetheless, Cahners In-Stat Group predicts a 101 percent compound annual growth rate between 2000 and 2005 for sales of 20 million units and a total of $1.3 billion by 2005. Most of the growth will be outside of North America and Europe, where the PC market is well-developed.
    Newsfactor
    NUA Surveys
  • Alert SNS reader Mike Todey sent along a reference to incredible data base research at the University of Rochester (NY). At a recent conference on lasers and optics in Baltimore, researchers reported that they had invented a way to use light to do a database search of 50 items in a way that can’t be duplicated in any particle-based computer. Rather than relying on a digital system that uses strings of 1s and 0s to encode data, the Rochester machine is analog. It works on a simple principle discovered in the 19th century: When different waves of sound or light combine, they create unique patterns, called interference.
    BusinessWeek
  • Insight Research says small and medium-sized businesses really want fixed broadband wireless services, and projects revenues will reach $3 billion next year, 93 percent from small and medium-sized businesses.
    NUA Surveys

Can’t Get Enough of ME?

In the unlikely event that you want more of my opinions, I’ve started a Weblog. It’s the fashionable thing for pundits to do, and I’m doing it too. A Weblog is a datestamped collection of somewhat random thoughts and ideas assembled on a Web page. If you’d like to subject the world to your thoughts, as I do, you can create your own Weblog. You need to have a Web site that allows you FTP access, and the free software from www.blogger.com . This allows you to right click on a Web page and append your pithy thoughts to your Weblog.

I’ve dubbed my Weblog entries “Stratlets”, and they are available at www.stratvantage.com/stratlets/ . Let me know what you think. Also check out the TrendSpot for ranking of the latest emerging trends.

Return to Mike’s Take

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About NextPhase Selling

Social Media Performance Group is a premier enterprise social media consulting company that offers a unique approach to integrating social media into the enterprise — forget about the tools, it's all about the strategy! Rather than focusing on the tactics (do this or that on LinkedIn, Twitter, YouTube), first we work with you and your senior leadership to comprehend your corporate strategy. Once we understand your strategic objectives and goals, we show you how a comprehensive social media strategy can integrate with and support your corporate strategy. We take an enterprise-wide view based on our unique Enterprise Social Media Framework, which maps social media to all appropriate touchpoints in your enterprise. We go beyond the obvious quick hits — sales and marketing — and help you achieve social-media-driven results in areas such as product development, customer service, and employee engagement and retention. As a result, social media is not just bolted on; it is integrated with, and provides support for, your company's existing strategy and operations, yielding unprecedented results.
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