In Stock

Nothing sends the wrong message like an out-of-stock. When a product is missing from the shelf, it`s like telling a customer to look elsewhere, causing some difficult-to-replace shoppers to leave and never return. But it doesn`t have to be that way, experts say, if retailers reduce out-of-stocks by sharing point-of-sale information electronically with suppliers.

So far, sharing POS data remains the province of a few giant discounters and grocery chains doing it in just a few merchandise categories. Experts who follow the technology hesitate to estimate how many retailers are participating or how many categories are involved, because the numbers are still small. Small chains may have trouble getting started, but larger retailers appear poised for a major shift in the next few years, experts say.

A major change

"We are going through a sea change" among big retailers, says Rich Kauffeld, managing director of the Consumer Products Sector at BearingPoint, a consulting and systems integration firm based in McLean, Va. He says big chains will make the transition because of the tremendous potential to increase sales by reducing out-of-stocks. At any given time, he says, 7% of SKUs on store shelves are out of stock, and pilot tests have shown consistently that sharing POS information electronically can cut the problem in half.

At the heart of the emerging movement of shared information are web-enabled synchronized demand networks, says Kauffeld. When the networks supply POS information, manufacturers respond by adjusting what they make, how much they make, when they make it, what they ship to warehouses and what they deliver directly to stores. The demand-driven system, which allows suppliers greater control than ever, would take much of the uncertainty out of inventory replenishment. Suppliers would know what has been sold and where it was sold. It`s a big difference from today`s supply-based system, where manufacturers gauge production by watching what leaves their factories, taking orders from retailers and trying to guess how much merchandise may be sitting in the supply chain in warehouses, distribution centers and stores.

The new approach involves using granular information for production and delivery, while studying aggregated data to understand trends--just the opposite of how it`s been done traditionally, says Rob Garf, analyst at AMR Research Inc., Boston. Until now, retailers have provided suppliers with exactly the wrong kind of numbers, he says. Orders have been aggregated at the distribution center level or chainwide, when suppliers really need to know what`s selling at the stores. The stores might be full of a certain item, for example, but if the distribution center doesn`t have any, the supplier would ship more, he says. Meanwhile, the old way of exchanging information has been through individual electronic documents that were nearly impossible to combine to study trends.

Foundation in place

The foundation already has been laid for sharing electronic data at the point of sale, Kauffeld says. The cornerstone was set in the mid-1990s, when testing began in the grocery industry. By 2000, progressive retailers were thinking hard about sharing POS information electronically, he says. Meanwhile, the supply chain industry has been working out standards for data synchronization technology that matches the differing product names used by suppliers and retailers, says Betsy Hargus, director of marketing at Prescient Systems Inc., a supply chain software provider with offices in West Chester, Pa., and Dallas.

At the same time, retailers have been bringing greater Internet bandwidth to the stores, which can relay more data more quickly, says Garf. Concurrently, improvements have come in Internet business-to- business applications that allow communication from one large group to another large group, according to Kauffeld. "We`re beginning to see opportunities that are scalable for large retail chains and large manufacturers," Kauffeld says.

Sharing POS information constitutes the supply chain`s latest step in a progression from phones to faxes to value-added networks to the Internet, says Garf. Exchanging so much data isn`t practical over value-added-networks--or VANs--because each transmission carries a fee. The tolls mount up, he says, and the cost becomes prohibitive.

VANs do represent an improvement over the error-prone and labor-intensive procedures that preceded them, including phoning and faxing, says Lora Cecere, supply chain analyst for AMR Research. Virtually all retailers still use the these older processes for some functions, Cecere says, but the emphasis continues to shift to more advanced, web-based technology.

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Moving from pilots

Just how many retailers are sharing POS data with suppliers remains in question, according to observers. Kauffeld says he knows of grocers who provide the information to a few suppliers, but he maintains that converts are beginning to appear. "It`s moved significantly over the last couple of years and will continue to move toward the Internet," he says. "Things that were pilots three and four years ago, for some retailers and some manufacturers, are becoming the way they do business."

Not all are willing to disseminate information that could fall into the hands of competitors, however. "The challenge becomes the willingness of the retailer and supplier to share some of this more granular information," he says. What`s more, some have invested heavily in integrated VANs and internal applications and will want to see returns before abandoning that technology.

For many smaller retailers, the technology needed to share POS information may seem out of reach, says Lance Jacobs, chairman of TCI Solutions Inc., an Irvine, Calif.-based provider of merchandising and inventory management software, mainly to grocers. "A 50- to 100-store chain may not even be collecting movement data," he says. "Outside the top eight or so major retailers, a lot of them aren`t doing it."

Big players are already experimenting with ways of using shared POS information to gain competitive advantage beyond the halving of out-of-stocks. The technology makes it possible for retailers to ask suppliers to retain possession of merchandise moving through the supply chain. In the traditional model, ownership might transfer to the retailer when goods leave the supplier`s loading docks. One of the newest models is scan-based trading, in which the supplier owns the merchandise until it`s scanned at the point of sale and turned over to the consumer.

Garf cites Target Stores as one retailing giant using scan-based trading as a tool in its competition with Wal-Mart. In Target periodicals sections, for example, covers are no longer torn off of magazines and returned for refunds, thus reducing labor costs, he says. Now, publishers or wholesalers receive POS data and can assume that any publications that wasn`t scanned didn`t sell. Most of the advantages are harder to see but no less real. Persuading someone else to own the inventory frees capital for other purposes, says Garf.

Streamlined supply chain

Retailers and suppliers all benefit from one aspect of scan-based trading: the streamlining of the supply chain. Backdoor receiving functions are virtually eliminated. But suppliers are beginning to squawk over the handling of shrink, which is costing them more than they save in reduced receiving costs, says Jacobs of TCI. Typically, retailers and suppliers agree to a ceiling on how much the supplier has to pay to cover shrinkage. If costs exceed that amount, the retailer has the right to stop using scan-based trading.

The switch to scan-based trading can in itself cause accounting headaches for suppliers, says Kauffeld. If a store has two weeks of inventory, for example, and switches to scan-based trading, the supplier would lose two weeks of sales from the current quarter. "One of the deterrents to moving to SBT is how do we overcome that one-time cost to the supplier," he says. Changing payment terms to a shorter period would help compensate but might not overcome the issues a publicly traded manufacturer has with sales goals and reported sales.