EXECUTIVE SUMMARY

• The case study reports about the Supply Chain Strategy of Seven Eleven Japan (SEJ), the largest convenient store operator and franchisor in Japan

• SEJ provides several helpful understanding about achieving supply chain strategic fit in the convenient store industry. In this industry, responsiveness of the supply chain is the most important factor.

• Firstly, SEJ has a set of facilities that are strategically responsive. Its facilities are decentralized in terms of both location and capacity. The report also discusses about the benefits and risks involved.

• Secondly, SEJs transportation system is not only relatively efficient but also responsive and capable of rapid-replenishment. The system is a cross-docking transportation model with goods flow through distribution centers. Advantages as well disadvantages of the model are discussed.

• Thirdly, SEJ invested in a powerful information system that allows rapid and efficient communication. Point of sales data are utilized to bring about a competitive advantage and a smooth cooperation of with suppliers. Features, benefits and risks associated with the system have also been discussed.

• Fourthly, SEJ practices an inventory management strategy that place great importance on freshness and choose to reduce flow time instead of holding more inventory to be responsive.

• Furthermore, the report discusses about the recent moves of SEJ to duplicate the supply chain structure in the United States.

CASE BACKGROUND

Seven Eleven Japan (SEJ) • SEJ is the largest operator and franchisor of

convenient stores in Japan. Since its establishment in November 1973, SEJ has been growing quickly. By July 2007, SEJ has 11,704 stores in Japan. In July 2007, 7-Eleven also became worlds largest retail chain store with more than 32,000 stores all over the world .

Purpose

• This case study, by examine the supply chain strategies of SEJ, aims to offer understandings about supply chain strategies in the convenient store industry. With those understandings, several insights about how to achieve strategic fit in this industry can be gained

Strategic Fit in the convenient store industry

• To achieve strategic fit in this industry, firms must understand the customer needs, demand uncertainty and supply chain capabilities. After that, firms must develop and direct their strategy to fit with the requirements from customer and the supply chain.Some characteristics in customer needs and supply chain requirements in this industry are

• Batch size: Usually small to medium• Response time that customer can tolerate:

Medium to short. Customers usually expect to conveniently get the item they want in short time

• Variety: Moderately important• Service Level: Medium to high• Price: Higher than large supermarkets and

wholesale malls• Product innovation: moderately important

FACILITIES

• Apparently, in the convenient store industry, responsiveness is a key factor of the supply chain. Moreover, SEJ places much more emphasis on the freshness of the product it sells. Therefore, SEJ facilities were designed to support a high level of responsiveness

1.Location

• In terms of location, it is easy to notice that SEJ locates its stores extremely close to the customers to be responsive. For example, 48% of SEJs customers live within 500 meters from the stores, and 63% within 1000 meters. 53% of customers come by less than five minutes of walk or drive .

• In order to achieve that short distance from its customers, SEJ had to develop a dense distribution network. Stores are managed through a system of clusters. There are around 50 to 60 stores in a cluster. Stores in a cluster are concentrated closely to each other in specific areas in a market dominance strategy. A typical SEJs Store

serves an area within 500 meters radius of it. As stated in its 1994 annual report, the market dominance strategy offers several benefits such as higher efficiency of the system, brand awareness or competitive strength.

That is the reason why although SEJ is the strongest convenient store brand in Japan, it has covered only 70% of Japan prefectures.

2.Capacity

• Although the number of SKUs that SEJ keep is not high, its facilities are highly capable. SEJs stores are small facilities (average area of 1200 square feet) capable of stocking only around 3,000 stock keeping units (SKU) while large supermarkets can store more than 100,000 SKUs. However, as said above, SEJs stores form a dense network of 50 to 60 stores per area. That helps boost the capacity of SEJ stores many times. In other words, the small scale of one SEJ store is to serve a very small area (500 meters radius), which is not more than the capacity of the store. More importantly, a massive collection of such small stores in a specific area has created a huge capacity for the network.

• Furthermore, the variety of product this system can process is also extended when SEJ places great emphasis on freshness and continuously change its product mix. SEJ replaces about half of its 3,000 SKUs each year. Goods are retired as soon as sales decline. With such high capacity clusters, it can be concluded that the degree of utilization is not maximized. Low degree of utilization reduces lead-time and minimizes disruption delay. Obviously, cost of the goods is higher with low utilization, however the benefits of the market dominance strategy seems to be able to offset the cost incurred.

• Therefore, it can be said that SEJ has implemented decentralization not only in its location and distribution but also in its capacity. The high responsiveness of SEJ is also reflected through a relatively small order size from the stores and high level of customer service. The small batch size is due to the limited space available in an SEJ Store. That is also a reason for the introduction of the SDCs. Everyday small orders from the stores are transmitted, consolidated and delivered in full truckloads from the SDC to every store. Deliveries are made many times a day, keeping the items fresh and sufficient thus offering great service level

Conclusion• SEJs facilities are truly responsiveness driven. What SEJ is doing with its

facilities configuration are match with the strategic direction that a convenient store supply chain should take. SEJ facilities have been decentralized in terms of both location and capacity to be closer to the customer and offers higher responsiveness. Small batch size and continuously changing product mixed integrated in the facilities are other factors that improve responsiveness. SEJs facilities have been doing a great job to be responsive and be next to customers wherever they need it.

• However, it is important to notice some risks associate with those practices. For example, the strategy of decentralization and market dominance may not be efficient. Especially when the market is not so populated like it is in Japanese cities. Moreover, locating the stores too close to each other may caused certain amount of cannibalization. Besides, customers in this case may not buy from one store consistently but change from store to store over time. That may contribute to the inaccuracy of demand forecasting of stores

TRANSPORTATION

• SEJs transportation has been successful. It has achieved a high level of responsiveness yet an acceptable level of efficiency

1)Design of transportation network 2)Choice of transportation mode

Design of transportation network

• Unlike a conventional Japanese Distribution system, SEJ does not allow direct store delivery in Japan but executes a Joint Delivery Program in which its products must flow through the Distribution Centers (DC). after receiving orders from the store managers and starting production to fulfill the orders, the suppliers begin to deliver the products to the designated DCs. Manufacturers and wholesalers are assigned certain areas to deliver the products. After the items have reached DCs, they will be sorted out by stores and delivered in a full truck to the stores. Another important factor that helps reduce the lead-time and number of deliveries further is the temperature- based joint delivery system

• . In this system, SEJs products are grouped into 4 groups of different temperature. Products that are in the same temperature group will then be handled and distributed in the same truck. The above transportation process is usually managed by third party delivery companies. SEJ keeps close communication with the delivery company. Distribution schedules are also planned carefully. The number of deliveries made in a day depends on the freshness requirement of the items. For example, rice balls are delivered 3 times a day. The timing of the deliveries are communicated with the logistic party and must be followed (with 10 minutes error). The joint delivery program has brought to SEJ many benefits.

Firstly, with the density of the SEJ stores, direct delivery may result in inefficiency. It requires many trucks going through many routes and different trucks from different suppliers have to arrive at the stores many times. By designating a destination to consolidate the incoming items, SEJ can reduce the number of deliveries per day. Moreover, with the introduction of the temperature-based system, deliveries per day are further cut down to 11 per day. Before the implementation the 2 methods of operation, the average number of deliveries to each store was 70 per day. The number of trips decreases means transportation cost and communication cost are cut down and the system is more efficient

• Secondly, the limited space of the SEJs stores requires deliveries in smaller batch size. Therefore, if SEJ use direct store deliveries, the cost for transporting many small batches may increase sharply yet may not be reliable. Consolidating the orders for each store solves this problem effectively. SEJ can have a reliable delivery schedule with minimal number of trips. Moreover, delivering in full truckloads also improves the efficiency of the system. Besides, ordering lead-time is also reduced by a great amount. For direct store delivery, since different trucks of different suppliers for different types of items have to arrive one by one at the same store, more time is spent on just loading, unloading, checking and communicating between them and the stores. The risk for traffic delay will also be minimized if the number of trips to stores decreases. An important feature of the joint delivery program is that the DCs do not hold inventory. DCs in this case are just designated points of pick and pack to consolidate the orders of SEJs Stores. Therefore, the system helps SEJ reduce cost of holding inventory significantly

Choice of transportation mode

• Apart from the design of transportation network, firms can also achieve responsiveness in the choice of transportation mode. Using faster and usually more expensive modes of transport is a way to improve responsiveness. Another way to be more responsive is to diversify the modes of transportation. For example, SEJ has included motorcycles, ships and helicopters to diversify its transportation portfolio. Diversification helps reduce the risk of breakdowns caused by disruption in certain mode of travel. The drawback is that extra cost may incur to maintain and operate the portfolio

Conclusion• The implementation of DCs system has streamlined the transportation of

SEJ sharply. It has provided cost savings through elimination of inventory holding cost. Besides, and more importantly, it makes the distribution system of SEJ more responsive and flexible by utilizing faster and cheaper routing and accelerated product flow. Generally, there are still risks associated with the strategy of micro-matching supply and demand using rapid replenishment like what SEJ is doing. Firstly, rapid replenishment may be expensive, thus it can hurt firms profit margin. Secondly, risks can come from the uncertainty of the traffic condition. More importantly, for rapid replenishment and delivery on demand, one disruption event can even affect the whole area. Thirdly, the threat may as well come from competition.

• For example, if a store is located next to a large supermarket that is efficiency driven and can offer cheaper price, then the SEJ stores may lose sales. Similarly, if SEJ choose to sell products of which demand is too elastic, SEJ may not be able to compete. Lastly, micro-matching demand and supply can be efficient and lean, but demand can sometimes fluctuate largely and SEJ may fail to predict such changes. For examples, during festivals, social events, or natural disasters SEJ may not be able to react quickly because of the fluctuations in demand and the limited stock kept in the stores. As for direct store delivery (DSD), it can still hold true in some situations. For example, DSD can be used in the areas that do not have many stores concentrated. Moreover, for items that are bulky, heavy or expensive, DSD might be a good choice because extra handling activities (loading, unloading, security, quality assurance) are costly.

INFORMATION

• Information is one the most effective tools of SEJ to improve its responsiveness. It connects effectively the stages of the SEJ supply chain and provides valuable insights on demand and strategic operations.

INFORMATION• Store Computer (SC) SC is the center of the store Information System (IS). It connects to the ISDN, Electric Order

System, Graphic Order Terminal and Scanner Terminal. It can track store inventory, sales, orders and

analyze POS data. • Integrated Services Digital Network (ISDN) ISDN is an information network that links several thousand stores. ISDN provides a 2-way

and high- speed channel of communication, which has significant impacts on the process of collection

andanalysis of POS data as well as feedback gathering. • Scanner Terminal (SC) SCs streamline the process of inventory management by helping store managers check

orders. • Graphic Order Terminal (GOT) GOT is a tool to place orders and maintain access to a detailed analysis of POS data at the

same time for ordering insights.

Information Collection

• The above hardware setting has to collect all the POS data. Moreover, the staffs also collect gender and estimated age of the customers. After collected, POS data are analyzed to find out useful information such as hourly sales trend for individual items, scrap trend analysis, stockout ranking, sales trends for new product and hourly sales trend by customer profile. Such complete information system helps create much more responsiveness for the stores. For example, the analysis of hourly sales trend by items and by customer profile can help a store manager determine which type of customer buy what at what time. With the information in mind, the store manager can order differently throughout the day, or can rearrange the products on the shelves many times a day. Moreover, the ordering process is also streamlined significantly. After collected, the POS data are analyzed by the store computer and ordering insights are offered. The orders are transmitted to the suppliers within 3 hours.

Push versus Pull

• Clearly, SEJs supply chain is more like a pull system. And SEJs information system supports the pull strategy effectively. For example, ordering process is streamlined so that an order, after being analyzed from the POS data, can reach the suppliers in 3 hours on average. Information travels both upward and downward quickly enough for the pull strategy

Coordination and information sharing

• Information sharing is also an important strategy that SEJ relies on to be more responsive. Data about life of products or hourly sales of the new products are used to determine the product mix of a store. SEJ also actively shares information with the suppliers to suggest them on product development strategies. Many of SEJs manufacturers now rely on the information shared and tend to work with SEJ before the launch of a new product. Suggestions about the changing taste of the customers are sometimes crucial to new product development to anticipate the changing demand.

• Forecasting Because of the huge

amount of data collected and the short ordering lead-time, SEJs stores forecast frequently but over very short period. Therefore, the accuracy of the forecast is improved.

• Enabling Technologies SEJ invested heavily in its IS,

the goal is to streamline the operations and obtain valuable insights to be more responsive. For example, with the use of Scanner Terminals, delivery time is now sharply shortened because delivery trucks do not have to wait for store managers to check the goods

Conclusion • SEJ is a good example of firm taking advantage of modern technology to

streamline their processes and become more responsive. A pull strategy is most likely responsive; however, it must be supported with information technology so that the orders can be processed in a very short period. Frequently collected and analyzed information also allows a closer forecast horizon and thus more accurate. Firms can also be more responsive by sharing information with suppliers to anticipate and satisfy customer demand more effectively.

• However, there are risks involved in this strategy. • Firstly, a pull system might not be able to deal with great fluctuation in demand

for example, during social events, festivals or natural disaster. • Secondly, usually the investment in IS is not low and without strong capital

position and profitable prospect, firms may not benefits enough from this investment. Thirdly, recording and sharing information with other parties may create negative opinions from customers who think that doing so violates their confidentiality.

INVENTORY• Interestingly, SEJ does not hold much inventory on hand. SEJs

inventory is mainly the inventory on the shelves. In the joint delivery program, there is no inventory in the DCs. Moreover, the level of inventory in transportation is also low because the transportation lead-time is considerably short. The low level of inventory can cause surprise since one of the strategies that firms can use to increase responsiveness is stocking more inventory.

• However, if we look at Littles Law: I =D*T (I = inventory; D = Throughput; T = Flow-time) • The reason for the low level of inventory yet high responsiveness

of SEJ lies in the fact that the flow time of goods through SEJ is very short.

• Clearly, the emphasis on freshness in SEJs inventory management practices has stimulated it to continuously shorten its flow time and improve its responsiveness. Several key products of SEJ have a very short internal shelf life and have to be delivered many times a day. For example, boxes of bento (traditional Japanese rice) are delivered 3 times a day. Coffee is another short life product with just 1 hour.

• From the example of SEJ and Littles Law, we can conclude that there are two ways to achieve responsiveness of the supply chain.

• The first traditional way is to hold more inventories as safety stock, cycle inventory, seasonal inventory

• The second way, which SEJ is implementing, is to streamline operations and achieve a very short flow time by investing in transportation, network, information system and supplier relationship

• Obviously, the second way helps firms reduce inventory cost and operate more efficiently. However, the traditional way may still hold true in some cases because there are certain risks associated with the strategy to reduce flow time.

• Firstly, there is a risk of lost sales because of stockout. The risk is more severe in the industries where the cost of stockout is much more expensive than the cost of holding inventory.

• Secondly, firms may not be able to deal with emergency in which a large amount of goods is needed. For example, natural disaster such as earthquake, tsunami may occur.

7-ELEVEN IN THE UNITED STATES• Recently, Seven-Eleven is attempting to duplicate the supply chain structure that has

succeeded in Japan in the United States with the introduction of CDCs.• Pros: 7-Eleven USA will have a successful model to develop and study. The introduction of

CDCs concentrates on a competitive advantage of 7-Eleven. That is the freshness, high responsiveness and customer service. Japanese fresh food can become one of the substitutes for fast food. Especially there has been increasing concern about healthy food. There is opportunities for 7 Eleven to be more efficient

• Cons: It may be hard to negotiate with wholesalers and suppliers to deliver to CDCs instead.

However, there is still a need to standardize and have every supplier deliver to the CDCs because doing so would improve efficiency. Americas population distribution is not as dense as that of Japan. Therefore the strategy of market dominance may become too inefficient. However, if there is just a few stores in a cluster, the operations of CDCs may not be as efficient as they are in Japan. 7 Eleven USA may face more competition from the efficiency driven companies in USA since there are more space available and the population distribution is less concentrated.

CONCLUSION

• It can be said that SEJ has achieved considerable strategic fit in its industry. The focus on freshness and responsiveness is the right direction for convenient stores.

• However, the process of improvement and innovation must go on continuously because the industry is getting more and more competitive. SEJ should further fine tune its supply chain and look into the areas of the risks involved to solve the problems. Moreover, I think SEJ should as well establish its presence in more areas so as to seize the market before its competitors can expand.

References

• 1. Chopra, Sunil and Peter Meindl. 2007. Supply Chain Management: Strategy, Planning & Operations. 3rd Ed. Pearson Prentice Hall.

• 2. Whang, Seungjin 2001. Seven Eleven Japan. Stanford Global Supply Chain Management Forum. SGSCMF-003-1998 (Rev. 2002)

• 3. Lee, Hau L. "The Triple-A Supply Chain." Harvard Business Review 82, no. 10 (2004): 102-112.

• 4. "Cross docking & Cross Dock Applications." Benchmark Logistics LLC.

• http://www.benchmarkscm.com/cross_docking.html