SCAN-BASED TEST OF DSD REPORTED TO PARE COSTS

JAMES TENSER

WHITE SULPHUR SPRINGS, W.Va. -- A new model for handling direct-store-delivered products promises to cut supply chain costs while simultaneously building sales through improved in-stock positions.

Called Scan-Based Trading, its advocates say it could be the basis of a future standard for retailer-manufacturer partnering. It aligns the interests of both parties by using daily point-of-sale data, Uniform Communications Standard transaction sets and electronic data interchange to focus the whole DSD business on sell-through and payment for merchandise based on scan data.

Preliminary results of a 20-week SBT pilot were presented here last week at the Grocery Manufacturers of America 1997 Executive Conference by Scott McClelland, senior vice president of marketing at H.E. Butt Grocery Co., San Antonio, and Randy Whaley, vice president of customer development at Frito-Lay, Plano, Texas.

"Scan-based trading is all about synchronizing at the point of sale," said Whaley. "It creates a common revenue stream, a common supply chain, and a collaborative alignment to drive out costs from the distribution center to the pantry."

He added, "Traditional DSD has a disconnect. Suppliers recognize revenue and pass title at the back door, while for retailers, the front register marks the start of their P&L. This disconnect drives tremendous inefficiency for DSD, a ripple effect between our networks, our systems, and with our people."

In addition to pay-on-scan, the SBT tests focused on elimination of back-door check-in, maintaining a perpetual inventory, sharing shrink risk between both retailer and manufacturer, and a complete paperless information flow that includes electronic funds transfer.

"We are not just talking about the practice of pay-on-scan, but also the implication and opportunity to buy, sell, promote and even replenish off the scan. The goal is to strip away costs and fuel faster growth," said Whaley. "If we used the information to better facilitate greater in-stocks, we knew that greater sales would follow."

Said McClelland, "From the retailer's perspective, primary savings came from the one-time buy-back of the inventory, where the suppliers came in and bought the inventory back. Based on a 50% participation rate at H-E-B, these savings would be worth $25 million in cash flow."

Such a windfall, which could hypothetically be generated at H-E-B if half its DSD volume were switched over to scan-based trading, could fund the construction of three new stores, he added by way of illustration.

At the same 50% participation rate, he said, "Overall inventory investment would be reduced by 10% to 12%. This obviously would have a very significant impact on our return on assets."

A formal report on the pilot test will be published by the GMA in August. Whaley and McClelland said it would document the benefits of scan-based trading, which include significant time savings when products are delivered to stores' back doors, reduced shrink, sales increases due to better in-stock position and a reduction in paperwork.

Seven DSD manufacturers participated in the pilot, which was sponsored by the GMA, Washington.. They included Anheuser-Busch, Coca-Cola, Earthgrains, Frito-Lay, Nabisco, Miller Brewing and Pepsi-Cola. Prime Consulting Inc., Bannockburn, Ill., designed, ran and tracked the test.

The participating companies are all members of the GMA-sponsored DSD work group of 24 manufacturers who between them account for more than one-half of the U.S. all-commodity volume of DSD products.

H-E-B was asked by the DSD committee to participate because of its advanced capability in POS scanning, which is seen as a "prerequisite" for SBT.

H-E-B is also advanced in its use of the UCS II transaction sets for EDI, another required technology for SBT.

"We chose three stores. One was an inner-city store, two others were suburban stores," McClelland said. The pilot ran in those stores over a 20-week period from January through May 1997. Sales volumes of the stores ranged from a low of $250,000 per week, to $750,000 per week and $1.2 million per week.

McClelland said the seven member companies who participated were worth $287 million in sales to H-E-B, more than 44% of the chain's overall DSD volume. DSD accounts for more than 25% of the chain's total grocery volume. Despite the chain's commitment to retail technology, this presents significant challenges.

"Just last week alone, H-E-B processed 54,000 DSD invoices," Whaley said. "Of those, 35% or 18,000 invoices had some discrepancy or error attached to them. Add to that the need for H-E-B to employ eight full-time accounting folks to reconcile weekly and an audit team to verify item maintenance, pricing and promotions and it is easy to see this is not the most efficient way to do business."

He added, "This transaction intensity means DSD has potential to be a paper nightmare. At Frito-Lay, prior to hand-held technology and EDI intervention, our 13,000 routes would generate 100,000 pieces of paper a day, nearly 40 million documents annually. Now through EDI we reduced our paper burden by a third, which is $2 billion of our $6 billion in sales currently flowing through electronic practices."

Among other results, shrink in the pilot averaged 0.07% for the test, a level significantly lower than H-E-B's overall grocery shrink. After resolving a count issue in one store, Frito-Lay's shrink was controlled at an acceptable level of 0.14%.

Time savings were also significant. On average, between 30 and 40 minutes were saved per stop, per route, per day at the back door, across the five companies in the pilot.