Beyond CPFR

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.

In those days, building data connections with suppliers would have meant developing separate one-to-one communications with each vendor, Krygier says. But now, Ahold connects only with Prescient’s hosted scan-based trading application, providing through an EDI network daily POS data that Prescient maintains in its web-based Advanced Commerce Repository, the core of its scan-based trading system.

However they want it

Prescient also collects inventory and pricing data from Ahold’s vendors, maintaining in its Advanced Commerce Repository up-to-date, synchronized records from both retailer and suppliers and the related pricing. Because the Prescient scan-based trading system operates as a hosted application, it can receive data from retailers and suppliers in multiple forms. “We look at their language and connect to them in their desired mechanism, whether it’s EDI, EDI over the Internet, FTP files or others,” says Karen Sickles, director of scan-based trading programs at Prescient.

Having Prescient in the middle has made it easier to get participation from vendors, Krygier says. “They act as a recruitment agent for us,” he says, adding that Prescient already has relationships with many suppliers in the grocery industry.

As goods are sold at retail, invoices are automatically sent to Ahold on behalf of the appropriate vendor, who also receives an alert of the invoice status. “We own the inventory only for a split second,” Krygier says.

In addition, both retailer and suppliers can access and analyze inventory records and pricing data in the Prescient system through a web browser to check that inventory levels and pricing are at expected levels. Ahold, for instance, will do periodic physical counts of store inventory and match them against inventory and POS records.

Automated e-mail alerts go out to Ahold’s merchandise buyers to inform them of things like price changes or special promotions entered by suppliers into the Advanced Commerce application. “It gets information quickly to the person in our organization who needs to know,” Krygier says, adding that the alerts confirm what buyers have already worked out with suppliers.

Placing more responsibility on suppliers for maintaining inventory and stock levels, along with the ability to analyze a common set of data, has brought multiple benefits, Krygier says. Vendors do a better job of stocking stores with the best merchandise, for example, and a common view of inventory and POS data has improved cooperation among retailer and supplier in controlling shrinkage.

“There’s an incentive on the part of vendors to optimize their product mix, because they’re getting paid based on sales,” Krygier says. “We’d like to think they were doing this all along, but there is more incentive to make sure they put the right product on the shelf to make sure they get paid for it.” Under conventional arrangements, vendors issue invoices at the time of delivery and expect to get paid within an agreed-upon term, say, 30 days, whether or not products have sold. Vendors would then apply credits for unsold items at the next delivery, creating more paperwork for retailers to review and increasing the chance for errors while making retailers outlay cash sooner, experts say.

Improving inventory management is more important than cash flow, however, to most retailers involved with scan-based trading, says Chandler of Kurt Salmon Associates. “A lot of people think SBT is all about cash flow, but it’s not,” he says. “You can improve cash flow with new payment terms.”

Scan-based trading can help retailers’ financial situation at annual report time, because they don’t have to show the cost of holding as much inventory, Chandler adds. “It makes the retailer’s return on assets look better,” he says.

But the real advantage, he and others say, is in the opportunity to improve overall inventory management to reduce the costs of handling it and to increase sales.

The benefits in inventory management extend to improved control over shrinkage. In conventional direct-to-store relationships, retailers have usually been responsible for shrinkage, since inventory is kept on their premises, even though they had to rely on a supplier’s records as well as their own to try to determine how products were lost.

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But under scan-based trading, it’s more natural for retailers and suppliers to cooperate in determining and controlling shrinkage, experts say. “Today there’s more shrink responsibility sharing, because both the retailer and supplier have skin in the game,” Krygier says.

By using the analytical reports in Prescient’s Advanced Commerce system, he adds, Ahold and its suppliers can each try to identify the source of shrinkage by tracking POS data against inventory movement, using the same set of data. Another advantage of a hosted SBT system, experts say, is that it provides a neutral third party for maintaining a single set of POS and inventory data.

But while suppliers take on more responsibility for shrinkage and other parts of inventory management under scan-based trading, an effective SBT program still needs a high level of cooperation from retailers as well as suppliers, experts say.

Flexible schedules

Before retailers are accepted as a client of scan-based trading systems provider Retail Solutions Inc., for example, they must first prove that they have the proper infrastructure and policies in place, says Rich Head, director of operations for supply services.

Retail clients must show they have an effective item management system for direct-delivery products, so that all items will get recorded at the POS terminal; that they’re capable of transmitting accurate POS data to Retail Solutions; that they have adequate policies for preventing employee theft; and they must have accounting and bill-paying practices capable of paying invoices according to terms agreed upon with their suppliers.

Because direct-delivery vendors operating under a scan-based trading system don’t exchange business records at the point of delivery, and because invoicing is done automatically over the web, it’s not necessary for delivery drivers to be checked in or even observed by store employees. That frees up employees for other things like helping customers or tending to non-direct-delivery merchandise displays, Krygier says.

“We may get five deliveries a week of bread, and that can take a lot of time for our receivers to check in product,” he says, adding that those check-ins also mean employees have to be responsible for forwarding paper invoices to Ahold’s accounting office.

More productivity

The absence of a check-in requirement also can increase the productivity of direct-delivery vendors, since they no longer have to operate according to a planned check-in schedule or wait at the back door for a receiver. “Now they can just come in through the front door” whenever the store is open, Krygier says. He notes that direct-delivery suppliers often use the delivery flexibility of scan-based trading to get in more store deliveries in a single day and with fewer drivers. “Suppliers will consolidate their truck routes,” he says. “Instead of 100 trucks out on a single day, they may have 70.”

That kind of flexibility may help to bring more suppliers into SBT programs, addressing what is still the biggest challenge facing scan-based trading, Krygier says. “The reality is that it will take some time to get many major players on board with SBT, probably another two to four years,” he says, adding that some large suppliers are still hesitant to buy back large volumes of inventory and take on more responsibility for shrinkage.

Prescient, meanwhile, is looking to expand the use of scan-based trading technology beyond retail stores and into warehouses, and has already started serving companies in the automotive aftermarket industry, says Betsy Hargus, vice president of marketing at Prescient.

Ahold, however, says it will stay focused on expanding scan-based trading among its direct delivery vendors. “If we get to 20% of our DSD business in scan-based trading within two years, we’ll consider that quite successful,” Krygier says. l

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Scan-based trading the Chase-Pitkin way

There is more than one way to deploy scan-based trading, though it helps if you have a champion who understands both the financial and technology sides of it.

At Chase-Pitkin Home & Garden, a chain of 15 home improvement stores where more than 60% of products arrive as direct-store deliveries, CIO and controller Chris Dorsey has fashioned an in-house, e-mail-based system that sends files of POS data to direct-to-store suppliers. “We load in the vendor and product codes, then trigger e-mailed files to suppliers based on their frequency requirement, such as weekly or monthly,” he says. “Then they bill us.”

When Chase-Pitkin first considered deploying scan-based trading, Dorsey tried to figure out a way to do it in-house through either its existing EDI or e-mail system. He determined that EDI would be too expensive due to its transfer fees, but then realized that he could leverage Chase-Pitkin’s existing IBM Websphere technology platform integrated with its e-mail system.

“It dawned on us that we could use Websphere to generate e-mail on the fly,” he says. And unlike EDI, which sends communications to a general mail box, e-mail would send scan-based trading data to the particular person at the supplier who needs it, he says.

“We have saved at least a hefty six-figure dollar number by doing this in e-mail instead of a commercial application, plus saving 18-20% a year in an ongoing maintenance fee,” Dorsey says.

Chase-Pitkin, which uses the scan-based trading system with about 5% of its direct delivery suppliers, has realized faster inventory turnarounds and a lower volume of product shrinkage, Dorsey says.

And he’s confident that Chase-Pitkin will draw in more direct delivery suppliers. Many of the existing scan-based trading partners joined because of Chase-Pitkin’s reputation for lowering shrinkage through an in-house system that uses web-based analytics technology from SPSS Inc. to match inventory and sales data, and the use of scan-based trading will only improve that reputation, he says. “We have proved that the faster we turn inventory, the less shrink—and the more sales,” he says.