MAKING TRADING SCAN-BASED

LIZA CASABONA

Next June marks the 30th anniversary of the first time a product -- it happened to be a 10-pack package of Wrigley's chewing gum -- was scanned at a supermarket checkout lane. While bar-code scanning has revolutionized the industry since then, retailers are still trying to figure out how best to use all the scan data generated at the point of sale.

One strategy that has slowly developed over the past decade or so is for retailers and product manufacturers to jointly use the POS scan data as a marker of when a product has actually been sold and when the manufacturer should therefore be paid -- the process known as scan-based trading. SBT, while showing promise over the years, is another example of a program whose progress has been stalled by the complexities of trading partner relationships.

The good news is that a new industry initiative -- data synchronization -- may, among its effects, make SBT more practicable. Data synchronization, being spearheaded by UCCnet, a division of the Uniform Code Council, Lawrenceville, N.J., is enabling retailers and manufacturers to be on the same page -- in sync -- when it comes to information about products, such as names, descriptions and UPCs. This information harmony is a prerequisite for using scan data as the basis for trading.

"Data synchronization is a foundational item for scan-based trading as well as many other e-commerce activities," said Pam Stegeman, vice president of supply chain and technology for the Grocery Manufacturers of America, Washington. "Retailers as well as manufacturers need to work on their internal data, subscribe to UCCnet, and begin registering products and synchronizing with their trading partners. They will then find that scan-based trading will be considerably easier."

Supervalu, Minneapolis, has been pursuing scan-based trading with a few of its retail chains, but data synchronization via UCCnet "is a critical piece to the rollout of scan-based trading," said Greg Zwanziger, Supervalu's director of electronic commerce, in New York early in 2003. Beyond just item synchronization, synchronization of price and promotion information is also needed, he noted, though those areas have yet to be standardized.

As data synchronization continues to develop in the retail/consumer packaged goods industry, about 12 to 15 retailers are conducting tests of SBT, Stegeman estimated. Known practitioners include H.E. Butt Grocery, which participated in a pilot study with GMA and its DSD Committee in 1996. Andronico's Markets, Albany, Calif., and Schnucks, St. Louis, took part in an SBT pilot with many of the same GMA member companies in 2000. Other retailers who have piloted SBT, or plan to, include Hy-Vee, Albertsons, Wal-Mart and Kmart.

In May, Ukrop's Super Markets, Richmond, Va., announced it had selected the sbtLink system from viaLink, Dallas, to facilitate scan-based trading with its suppliers.

In addition to confirming payments to vendors, SBT can use daily POS data, generally transmitted from stores by EDI (electronic data interchange), for validating promotions, replenishment and on-time funds flow. When items are scanned at the register, the information is communicated either directly to the supplier or to a third party intermediary like viaLink, at which time an invoice is generated only for those goods.

The SBT model has been piloted almost exclusively with DSD (direct-store-delivery) vendors, rather than goods delivered from a retailer's own warehouse or a wholesaler.

Full-Blown SBT

One of the Supervalu retail chains that have proceeded with SBT is Shop 'n Save, St. Louis. With the help of Supervalu's IT department, Shop 'n Save has implemented SBT this year with a number of its DSD vendors, following a pilot earlier this year. According to Dave Potts, merchandising systems specialist for Shop 'n Save, the chain is now "in full-blown scan-based trading." Shop 'n Save uses viaLink to handle data communications.

"My philosophy is that there is only so much profitability built into margin," said Potts. "Any increases you want to make must be carried out through the area of internal efficiencies in your supply chain, and scan-based trading is one of those."

Shop 'n Save uses SBT on such DSD items as frozen ice cream and pizza, and bakery products. Most grocery items are supplied by Supervalu and don't require SBT.

Shop 'n Save's relationship with their DSD vendors was already strong, Potts said, helping to make the chain's experience with SBT positive thus far. Once it became apparent that SBT could be a mutually beneficial distribution system for the retailer and DSD vendors, it was a "no-brainer," he added.

What are those benefits? One of SBT's chief advantages to both retailer and supplier is that it eliminates the check-in of goods because the supplier maintains ownership of the products until they pass through the point of sale, observers say. For retailers, this can mean labor savings, as well as a boost to category profitability, sales growth and shrink management.

According to viaLink, in a recent GMA-sponsored scan-based trading pilot using the vendor's sbtLink service, suppliers saved 20 to 30 minutes per delivery, while retailer receivers saved 10 to 15 minutes on average per delivery.

Under an SBT distribution model, shrink is typically split evenly between the retailer and supplier, a relationship that benefits retailers who bear 100% of the cost of shrink in a traditional distribution scenario.

Suppliers can improve their efficiencies with reduced check-in times at the point of delivery, and generate sales growth through the better management of product offerings.

David Carlton, trade programs management director for Flowers Foods, a packaged bakery foods producer and marketer based in Thomasville, Ga., said that check-in elimination is an important benefit to DSD suppliers like Flowers because it saves the company's independent distributors a significant amount of time they can devote to other tasks.

Price synchronization has also delivered benefits to Flowers by reducing price discrepancies and making detection faster. Flowers launched SBT in September 1999 and currently uses it to serve close to 4,000 stores.

A Matter of Trust

Apart from any technical challenges, industry observers agree that a successful SBT hinges on the retailer/manufacturer relationship. For example, effective synchronization requires a willingness to share information that has not always been in place.

"If you come to the table, you should be willing to give and take," said Karen Sickles, director of supply delivery and scan-based trading for viaLink. "The less of that you can do, the harder it is to get the relationship cooking." ViaLink's first step in setting up an SBT relationship for a client, Sickles explained, is called "laying the pipeline." That stage is where the "true partnership" of information-sharing is established, she added.

Thus, SBT requires a shift away from the standard win/lose scenario, Sickles noted. The partnership is no longer about who gets the best price, but rather about jointly working to supply the best product at the best price as quickly as possible to consumers. The consumer should be the winner in these relationships, she said.

Craig Rosenblum, vice president of business development for Crossmark, Plano, Texas, a broker working its way toward implementing SBT, also observed that trade partner relationships must be "steeped in trust and shared objectives, driven by a willingness to collaborate in order to serve the consumer." For that to happen, "a belief or behavior change must take place," he added.

Mike Ellis, senior vice president, Fred Meyer, Portland, Ore., agreed that developing good relationships with vendors is essential to the success of SBT. "We've been involved in scan-based trading with some vendors for several years, and we've had some success," he said in October at the Executive Forum 2003, an event sponsored by SN and the Food Industry Leadership Center at Portland State University. "But the sharing of information is a key and everyone would need to understand the rules."

GMA's Stegeman said SBT, by necessity, creates more trust between the manufacturer and retailer if it is effectively implemented. The willingness to share information in both directions is required to ensure that data synchronization, and thus SBT, can occur.

Still, not all trading partners are ready to forge ahead with an alternative distribution method. According to Rosenblum, SBT is a business process that is preached, but not yet significantly practiced, because it still poses a problem for some suppliers.

That's in part because retailers have the most to gain through SBT, since their cost of goods decreases and cash flow increases by only "buying" products that are sold to consumers, Rosenblum pointed out. Manufacturers have more to lose, since their cash flow decreases and cost of goods increases as more systems and processes are required to track product and sales activity.

Manufacturers also worry about shrink, which they typically bear a 50/50 responsibility for under SBT. Two GMA test pilots show that shrink levels stay within acceptable levels during SBT, but it's an important consideration for wary suppliers looking to evaluate the efficacy of SBT.