January 31, 2006, 12:00 AM

Beyond CPFR

Web-enabled scan-based trading emerges as a trusted tool for managing in-store inventory

Retailers have long dealt with mixed results from direct store deliveries, where suppliers bypass retail warehouses and bring straight to retail locations items like loaves of bread, cases of soda, wood supplies and flower seeds. The process saves merchants warehouse space and processing time, and gets fast-moving items onto store shelves sooner.

But things often don’t go smoothly. Retailers rely on vendors to accurately charge for new deliveries based on what was sold since the last delivery, but the accuracy of invoices can be compromised by conflicting retailer and vendor records. Suppliers can have inaccurate reads on what was sold and what and how much needs to be replenished, leading to either too much or too little of the right products on store shelves. Inconsistent records of store inventory make it difficult to control shrinkage, or inventory lost to misplacement, damage or theft. And both store personnel and delivery drivers can get bogged down trying to meet schedules for checking in goods.

Changing the relationship

There has to be a better way, many retailers have figured, and now more are moving into scan-based trading, a form of web-enabled collaboration with suppliers. Scan-based trading, or SBT, is designed to bring direct-to-store deliveries into a more productive environment under which suppliers don’t invoice retailers until after their products are scanned at the cash register.

Indeed, scan-based trading is fundamentally changing the relationship between retailers and direct-to-store delivery suppliers, placing more responsibility in the hands of the latter to maintain accurate inventory and pricing records while keeping store shelves stocked with products that a store’s customers want to buy, experts say. “I’d like to do everything in scan-based trading,” says Chris Dorsey, CIO and controller of home-improvement retail chain Chase-Pitkin Home & Garden, a 15-store unit of Wegmans Food Markets Inc. “When you do that, you put a lot of accountability on suppliers that products will turn.”

Collaboration between retailers and suppliers, of course, is not new. Collaborative planning, forecasting and replenishment, or CPFR, and vendor managed inventory, or VMI, have long grabbed the retail industry’s attention and challenged trading partners to share sales forecasts and other data to improve the timely flow of goods into retail distribution centers and stores.

A new stage

Now scan-based trading is emerging as a new stage in managing in-store inventory. Operating in a web-enabled environment that supports data connections and automated communications with multiple partners, and instant browser access to analytical reports on inventory status and current pricing, scan-based trading reduces shrinkage, saves suppliers and retailers time and expense of checking in deliveries, increases accuracy of invoices, and boosts sales, experts say.

Unlike CPFR and VMI, scan-based trading shares retailers’ point-of-sale data with vendors, instead of just sales forecasts and inventory records, providing for a whole new level of productive collaboration, users say. “We can react faster to inventory re-stocking as part of our partnership with SBT suppliers, and we’re getting to the point where we can improve sales,” says Kevin Krygier, director of direct store delivery business applications for supermarket chain Ahold USA.

Because scan-based trading provides direct-to-store vendors with near-real-time updates of POS data related to their respective products, it supports a system under which vendors don’t submit invoices to retailers until after the products are sold to consumers. That pushes vendors to get more directly involved in assuring that inventory turns quickly, producing better margins and keeping stores stocked with fresh merchandise that attracts customers, experts say.

“It really makes the supplier think like a retailer more than ever before,” says Mark Chandler, a former convenience store manager for Exxon and now a partner and director of the CPG industry practice at consultants Kurt Salmon Associates.

Many suppliers aren’t ready for such responsibility, or for the costs they must bear in getting started with scan-based trading, so it isn’t easy to get them to participate. To get started with scan-based trading, vendors must buy back from retailers their inventory already in stores, and they must arrange to send to an SBT application data on inventory levels and product pricing, including changes to reflect scheduled store promotions. Indeed, Ahold, Chase-Pitkin and other retailers using scan-based trading generally apply it to a small percentage of direct-store deliveries.

But things are changing, and more suppliers as well as retailers are seeing the value of scan-based trading within the broader trend of supply chain collaboration, experts say. “Once retailers and suppliers are accustomed to a collaborative relationship with VMI and CPFR, scan-based trading takes it to the next level,” says Kara Romanow, supply chain analyst at AMR Research Inc. “I’m seeing more interest in scan-based trading today than a few years ago across the board with my clients. We’re seeing the beginning of a trend.”

The supplier carries the load

Buy-in among more companies is crucial, experts say. “It can cost $500,000 to $1 million to get set up with scan-based trading, so it probably doesn’t make sense to do it with one vendor,” Chandler says. “But if it’s for a reasonable percentage of direct-to-store volume, it’s worth it.”

Ahold USA, the U.S. unit of Netherlands-based Royal Ahold, is using a hosted scan-based trading system from Prescient Applied Intelligence Inc., which it implemented in October 2004. The system has provided for positive changes in Ahold’s relationships with direct delivery vendors in multiple ways, starting with putting more responsibility on suppliers to stock stores with the right quantity and mix of goods and maintaining accurate and up-to-date product pricing, Krygier says.

“We wanted to put as much work as possible on the supplier, where it should be,” he says. “If they’re responsible for keeping merchandise and costs up to date, they’ll do a good job of it or put their program at risk of poor performance.”

The biggest benefit of scan-based trading to Ahold, Krygier says, is the accuracy now kept in product retail pricing and inventory costs, which assures that products are properly priced for regular and promotional displays, that both retailer and supplier are using a single version of the data, and that Ahold receives accurate invoices. “Years ago, we were using our own merchandising system and our costs of record were not shared in collaboration with suppliers, so there were errors in costing,” he says.

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