An NCR White Paper

SCAN BASEDTRADING

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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

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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

retail.contactus@ncr.com.

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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