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NCR Confidential Proprietary
What is Scan Based Trading?
Scan Based Trading (SBT) is a technology-enhanced
business relationship between suppliers and retailers
that can involve the paperless flow of financial
documents and goods through the supply chain. In an
SBT arrangement, the manufacturer retains ownership
of the product until it is purchased by the consumer.
The consumer sale doubles as an invoice to the retailer
who transfers funds to the manufacturer for the cost of
goods sold.
Rooted in the traditional consignment-sale
arrangement, SBT gained broad industry attention in
1997 with the publication of the first pilot test involving
business-to-business communication standards for
electronic data interchange (EDI) in support of this
advanced concept. A second pilot test was completed in
2000, expanding public knowledge about the use of a
third party intermediary to manage the communication
process and administer the supporting technology
platforms. Both pilot tests were conducted as joint
industry initiatives by the Food Marketing Institute
and Grocery Manufacturers Association through GMA’s
Direct Store Delivery Committee.1, 2
What it Takes to Implement SBT
In order to establish an SBT relationship, trading
partners must progress together through four
developmental stages.
1. Synchronize item, price and promotional data so that
identical files exist at both trading partners.
2. Exchange item-level sales data so that the supplier
has access to store-level item movement.
3. Negotiate a new set of terms and conditions so that
the risks (primarily inventory shrink ownership) and
rewards of the new relationship are defined and shared.
4. Implement a series of new procedures, primarily
within the retail organization so that accurate perpetual
inventories can be maintained and invoices can be
generated from the POS system data.
These four stages involve increasingly complex
requirements for success and yield benefits that
accumulate as companies progress through them.
However, given the wide variety of IT systems and
practices across the food industry, only a few companies
have been able to establish Data Synchronization links
(the first stage) with their trading partners. Even fewer
have progressed through to the “gold standard” of full
SBT implementation.
Current Industry Focus
Initial interest in the concept of SBT was driven by
DSD suppliers such as Pepsi-Cola, Frito-Lay, Nabisco,
Dreyers and Earthgrains (now Sara Lee Bakeries). They
formed the nucleus for the DSD Committee and the
early pilot tests because their anticipated efficiency
improvements on delivery routes offered significant
motivation. The DSD system also contains less inherent
risk of inventory loss for suppliers because product is
under their control up to the point of store delivery. As
a result, SBT has been adopted most successfully in DSD
product categories such as bakery, beverages, snacks,
frozen pizza, ice cream and greeting cards. Broader
implementation has been slow for three main reasons:
• Early pilot test participants quickly learned that they
needed to synchronize their own internal systems and
multiple databases before they could engage in data
synchronization with trading partners. Many have
completed their “housekeeping” activities by now.
• The one-to-one connectivity approach of traditional
EDI communication protocols is extremely expensive
and complex (six UCSII transaction sets are involved for
full SBT). Internetbased Application Service Providers
and industry data registries have become the norm for
companies implementing SBT.
1 Scan Based Trading: Using Scanner Driven Technologies to Change Direct Store Delivery Practices, 1997, Grocery Manufacturers Association.
2 Scan Based Trading: Enabling E-Commerce Through an Intermediary Service Provider, 2000, Grocery Manufacturers Association.
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• Retail data from legacy POS systems were often
too inaccurate and unavailable on a daily basis by
store. System upgrades have corrected this at some
companies; many opportunities continue to exist.
As a result, only a few retailers have been strong
proponents of SBT and data synchronization. Wal-
Mart, Target, Meijer, Kroger, AutoZone, Lowes,
Ahold, SUPERVALU and Albertsons are the lead
proponents in 2005. Lead manufacturers on the Data
Sync front include Unilever, Procter and Gamble and
Johnson & Johnson, in addition to the DSD suppliers
mentioned earlier.
Periodicals and Greeting Cards
Two major product categories – periodicals and
greeting cards – pose unique challenges to the
implementation of SBT or Data Sync. The extended bar
codes on these products are needed to record sales that
are message-specific (for cards) and issue-specific (for
magazines). The extensions are not needed in retail
systems to record price-point sales, i.e. the traditional
application of POS data. The inclusion of these
unique product numbers at this level also adds tens of
thousands of records to a retail database. As a result,
retailers have generally been slow to advocate for SBT
partnerships in these categories.
In 2001, the Magazine Publishers of America added
their voice to the chorus of associations encouraging
adoption of Data Sync and SBT – which they call “Pay-
on-Scan” (POS) – with the publication of a whitepaper3
describing benefits and challenges for the publications
industry. Their involvement was driven in large part
by consolidation among publishers and wholesalers in
this threetiered supply chain and by steadily declining
single-copy magazine sales.
Two high-profile retailers – Wal-Mart and Barnes &
Noble – pushed for SBT adoption in the periodicals and
greeting cards supply chains in 2001 and 2002. Both
backed off somewhat due to their system limitations in
storing and accessing the issue-specific data necessary
to support SBT transactions for publications. However,
both are strong proponents of Data Sync and continue
to push suppliers across all categories to subscribe to
UCCnet-Transora or other data pools in the Global Data
Synchronization Network (GDSN). Wal-Mart “turns
on” SBT at each new store and in 2005 mandated all
suppliers join UCCnet for Data Sync.
Publishers have remained disconnected from SBT
relationships because the publications supply chain
involves wholesale distributors who own the inventory
and who have the direct relationship with retailers.
Where SBT arrangements have been forged between
periodicals distributors and retailers, inventory shrink
runs 1% to 2%, after a “settling down” period. In
addition to the systems limitations in reading the
extended bar codes, magazine returns are a huge
challenge. It is not unusual for 60% of the delivered
quantity to be returned in the single-copy channel.
Accounting for the returns not only adds incremental
costs for retailers and distributors, it inherently offers
several opportunities for human error.
It is easy to see why SBT is a highly desirable new
business process for magazines. In recent efforts to
improve operating practices, some retailers now
require a 50% maximum return rate to carry specific
titles. Clearly, the publications supply chain has
severalopportunities for improvement that would be
enabled by more accurate inventory control methods.
Beyond DSD
While SBT implementation has been focused primarily
on DSD categories, Data Sync implementation has
occurred in several “warehouse-delivered” product
categories. Assuming Data Sync subscriptions increase
to critical scale, retailers will be likely to look toward
SBT as a next-level improvement for warehouse
delivered product. However, the list of challenges is
much greater than the list of benefits for suppliers of
warehouse-delivered product.
3 Recommendations for Pilot-Testing the Application of Scan-Based Trading to Magazines, 2001, Magazine Retail Advisory Council.
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In a white-paper4 on SBT for warehouse-delivered
categories developed in 2000 for Meijer, Procter and
Gamble, Ralston Purina and a privately-held manufacturer,
the study group observed that “retailers could accrue
more benefits than manufacturers” and that “this concept
involves significant changes in work processes in addition
to the introduction of new technologies.” They concluded
that SBT adoption beyond DSD categories was not in the
foreseeable future. This was re-affirmed in the fall of 2004
by a Kurt Salmon survey5 that found “very few retailers are
participating in SBT in this manner [warehouse-delivered
categories] today.”
The most significant challenges to applying SBT
to warehousedelivered categories center on the
warehouse inventory.
• Manufacturers have no control over retailer warehouse
operations and providing manufacturers with visibility
of this inventory would be difficult. As a result, most
industry observers believe that retailers would retain
all responsibility for warehouse inventory shrink in an
SBT relationship.
• Traditional retailer margin enhancement strategies such
as forward buying and diverting would not be possible in
an SBT arrangement. Many retailers can not afford to give
up these buying practices.
Tax liability implications would also be a significant added
cost for manufacturers who would own inventory in
several locations controlled by retailers. Inventory and
sales taxes vary widely across the various cities, states and
municipalities. Retailers already manage this complexity
and DSD suppliers are also already “in-market” with their
DCs and depots. Retailers currently assist DSD suppliers with
the store-level inventory data (for tax and shrink calculation
purposes) in active SBT relationships. For warehouse-
delivered product manufacturers, this hurdle is generally
considered the SBT “deal breaker.”
The Wholesaler Dilemma
Food industry wholesalers have little to gain from the SBT
arrangement between suppliers and retailers and much
to lose, if the concept were to be applied to warehouse-
delivered products. With the exception of corporately
owned stores, the wholesaler business model would be
reduced to the equivalent of a third-party warehouse
operation in an SBT scenario.
However, some wholesale supply chains, such as magazine
distributors, approach the SBT opportunity more
aggressively. Several strong regional distributors have
embraced the concept as a way to solidify their relations
with regional retailers. For example, Woodman’s and Lund’s
in the Wisconsin/Minnesota area have SBT arrangements
with Chas Levy Company (now part of Source Interlink
Companies), a strong Midwest distributor. The relationship
with the magazine wholesaler is the key because publishers
are not involved in the new SBT business relationship. All
risks and rewards are shared between the retailer and the
magazine wholesaler.
Benefits of SBT
Whether the new business relationship is between a
retailer and a magazine distributor or a DSD bakery, the
industry publications on SBT show several benefits accruing
to companies that successfully implement the required
changes in systems, operations and business practices.
Benefits resulting from Data Sync are listed first and are
retained through the more complex stages as a company
progresses to full SBT.
4 Scan Based Trading for Retailer-distributed Products: A Feasibility White Paper, 2000, Meijer, Procter & Gamble, Purina, Prime Consulting Group.
5 Secrets to Developing a Successful Scan-Based Trading Program, 2004, Kurt Salmon Associates.
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Two additional benefits accrue incrementally at each
progressive stage of SBT development:
• Stronger partnerships are forged between manufacturer
and retailer as they collaborate on increasingly complex
activities, yielding a range of benefits for both parties.
• Administration costs are trimmed as error handling
functions decline.
In order to realize these benefits, SBT partners must invest
in additional resources (people and systems) and change
several practices. Collaboration in the development
of performance benchmarks and partner scorecards is
recommended in all of the industry publications to date.
Key Success Factors
Although growth has been slow, both manufacturers and
retailers have lead the spread of SBT relationships with
trading partners. Now, however, most growth is driven
by retailers who have succeeded with their leading-edge
suppliers and who are now striving for greater efficiencies
across their individual supply chains.
The associations that were once visibly leading the
exploration of SBT are now in the background on this
concept as the marketplace takes over the process
of business practices development. The associations
are, however, pushing hard on the adoption of data
synchronization. The application service providers and
industry data pools are consolidating and some big retailers
are “mandating” that manufacturers subscribe.
The following key requirements must be met for an SBT
relationship to succeed and yield benefits to both trading
partners.
• Data synchronization and data quality improvements.
• Periodic inventory reconciliation and shrink settlement.
• Efficient inventory buy-back process for SBT rollout.
• Formal agreement on all protocols, responsibilities and
practices involved in SBT.
• Changes in store operations such as receiving practices
and scanning disciplines.
• Changes in route operations including compensation
incentives.
• Cross-functional management teams endorsed and led
by the top of the organizations.
As retailers work with new suppliers to develop the
required core competencies, it is becoming clear that
the “best practice” is a slow and steady approach
through a pilot test process that helps both trading
partners overcome their hurdles. This approach also
helps suppliers gain comfort with SBT with limited
risk. In some cases it has yielded important “no-go”
decisions, saving trading partners time, money and
frustration. For example, even though Barnes & Noble
was able to read the issue code extension of the UPC,
they put their SBT initiative on hold.
Examples of Retailerdriven SBT
After a successful pilot test, the next sensitive point
involves the inventory buy-back by the manufacturer.
Since this can be a significant financial hurdle, a “go-
slow” approach may be appropriate here too. Wal-Mart,
for example, “turns-on” SBT only at new stores and at
Supercenter conversions. However, even this retailer
who is highly regarded as a leader in scan data systems
experiences problems. Store-level files can be lost and
keeping up with the constantly changing UPC files
requires diligence.
AutoZone pushed for SBT adoption by automotive
aftermarket suppliers in 2003 and 2004. Driven by new
CEO Steve Odland who came from the CPG industry
(COO of Ahold USA, CEO of Tops Markets), AutoZone
succeeded in moving some supply chain costs to their
suppliers. However, other retailers in this market took a
wait-and-see approach, with some pursuing a price cut
from suppliers in lieu of an SBT cost shift. Mr. Odland
joined OfficeDepot in March of 2005 as Chairman
and CEO which leads to the expectation that SBT
might eventually become a viable business strategy at
Office Depot.
eroding market share; mass retailers, drug stores and
bookstores have experienced increasing market share.
One more MPA fact is worth noting: 480 new titles were
launched in 2004. Clearly, the publications category is
an appealing target for the supply chain improvements
available from SBT.
Based on a NCR Business Impact Modeling assessment,
a typical grocery retailer can expect to save between
$1,000 and $1,500 annually per store through scan based
trading. These savings can be achieved through improved
operational efficiencies in regards to shared shrink
responsibility, improved back office procedures, and
improved product mix.
SBT and the Impact onCheckout Productivity
Retailers interested in developing SBT relationships with
suppliers quickly learn that some of their traditional
checkout productivity techniques need to be abandoned
in favor of practices that ensure the capture of every
barcode passing through the checkout. For example, the
quantity key has long been considered a time-saver and
the ability to enter a price into a department helps when
an item will not scan. Both capabilities must be disabled
at the SBT retailer.
Productivity eventually returns, however, as cashiers learn
new habits. In the first SBT pilot test, HEB saw checkout
productivity actually rise to above the chain’s average
in non-SBT stores. Other retailers have reported similar
experiences and generally credit several improvements
in cashier techniques. However, in the extended bar code
categories such as magazines, hardware capabilities can
also impact checkout productivities.
Older platforms that can read the extended code can
cause considerable slow down. These configurations
had a first pass read rate of the extended code of 70%
- 80%. Here most retailers would limit the number of
unsuccessful attempts at 2 or 3 and then prompt the
cashier to key-enter the missing numbers. When you
consider the average scan time of the failed attempts
and the time to key in the missing information, this can
NCR Confidential Proprietary
Target has moved several suppliers into SBT
relationships, using a third party service provider as
the trainer/implementer and for connectivity and
data synchronization. Prescient (formerly the viaLink
Company) works with suppliers and manages the
ongoing transactions. Target’s arrangement typically
includes sharing of shrink up to a certain level beyond
which Target assumes ful responsibility. Supplier
benefits are difficult to quantify and may be limited to
continued distribution in Target stores. Some suppliers
report reduced shelf space after signing on to SBT,
further complicating the interpretation of benefits for
manufacturers.
A second wave of retailers appears poised to push for
SBT. In the summer of 2005, Safeway announced that it
wants to convert magazines to Pay on Scan (SBT) in all
divisions by year end.
Potential Retailer Benefitsfrom SBT in Publications
The range of benefits from SBT have been documented
since 1997 and continues to be validated by those
companies that are still pursuing the concept. While
both trading partners accrue benefits as described
earlier, the retailer benefits are generally considered
to be more significant and attainable than the
manufacturer benefits.
In their 1999 study6 for the magazine industry,
Mercer Management Consulting estimated potential
industry benefits from SBT and other business process
improvements using existing technology at about 10%
of retail sales. For 2004, the Magazine Publishers of
America reports single-copy sales of $3.139 billion. That
means, over $300 million could be “on the table” as
potential industry-level benefits across all channels for
adopting SBT for magazines.
MPA also reports that single-copy sales in 2004 were
broken out by channel as follows: 38% in supermarkets,
17% in mass retailers, 11% in book stores and 34%
in all other retail formats. Over the past 10 years,
supermarkets and convenience stores have experienced
6 The Single Copy Magazine Channel – A Fresh Look: GMA DSD Committee Briefing, 1999, Mercer Management Consulting.
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impact productivity at a typical supermarket checkout.
Therefore, retailers must evaluate their hardware as a
part of their SBT decision.
New solutions help overcome the technical hurdle
to implementing SBT. Leveraging the latest NCR
scanner technology can improve first pass read rates
of the extended code to 92 percent and minimize the
productivity impact at the checkout. NCR RealScan™ 75
scanners can be upgraded to include the Super ASIC chip
set which provides the performance required to optimize
SBT. NCR RealScan 76 customers already have the
performance needed to implement this new process.
For more information on the business impacts of
SBT, for a customer business impact analysis or for
more information on how NCR RealScan can help
you achieve your objectives, please contact your NCR
Account Representative, call 866.431.7879, or email
Bibliography
Scan Based Trading: Using Scanner Driven Technologies
to Change Direct Store Delivery Practices, 1997,
GroceryManufacturers Association.
Scan Based Trading: Enabling E-Commerce Through
an Intermediary Service Provider, 2000, Grocery
Manufacturers Association.
Recommendations for Pilot-Testing the Application of
Scan-Based Trading to Magazines, 2001, Magazine Retail
Advisory Council.
Scan Based Trading for Retailer-distributed Products: A
Feasibility White Paper, 2000, Meijer, Procter & Gamble,
Purina, Prime Consulting Group.
Secrets to Developing a Successful Scan-Based Trading
Program, 2004, Kurt Salmon Associates.
The Single Copy Magazine Channel – A Fresh Look: GMA
DSD Committee Briefing, 1999, Mercer Management
Consulting.
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