Scan Based Trading (SBT) impact on distributors
This week I will be addressing Scan Based Trading. what is it? Why was it set up? What are the pros and cons? How can a DSD get set up as an SBT? Let’s get right into it.
What is Scan Based Trading ?
Scan Based Trading (SBT) is the process where suppliers maintain ownership of inventory within the stores until items are scanned at the register (Point of Sale). It means that the retailer that you distribute to, pays you directly into your bank account, every single time that your SBT products get scanned out of the register.
Why was SBT set up?
Scan Based Trade is not a new concept. It started in the late 1900s with a high focus on the magazine and ice cream categories and the results were astounding. According to a 1999 study from Mercer Management Consulting, the full implementation of SBT in the magazine industry has been estimated to provide operational savings to the retailers and suppliers of $220 million per year. However, in recent years retailers realized that the traditional distribution model had a tremendous amount of shrinkage and an SBT trading model could help to get rid of that factor.
What does shrinkage mean for retailers?
Shrinkage is the loss of inventory that can be attributed to factors such as employee theft, shoplifting, vendor fraud, damage, and clerical and cashier error. Shrinkage is the difference between recorded inventory on a company’s balance sheet and its actual inventory. This concept is a key problem for retailers, as it results in the loss of inventory, which ultimately means loss of profit.
Conventional DSD trade vs Scan Based Trade model
In order to assess the pros and cons of an SBT, we need to understand the differences between both trading models. The table below summarizes the main differences between conventional DSD trading and the Scan Based model.
What are the benefits of Scan Based Trading for the retailer?
With Scan Based Trade, retailers reduce their financial risk by not purchasing inventory until it is sold to the consumer. This means that the cost of the inventory and any shrinkage will be removed from the retailer’s balance sheet and transferred to the distributor’s balance sheet. Since retailers do not pay for scan-based products until they are sold, there is less risk by dedicating shelf space to new, unproven products, which leads to sales increase and better customer satisfaction.
Benefits of Scan Based Trading for the distributor
There is an old saying that goes “What is good for you might be bad for me”. At first glance, distributors might think that this applies to an SBT model since now they will be responsible for the losses associated with shrinkage. However, an SBT, combined with Route Accounting software, offers a lot of opportunities for the distributors to maximize efficiency, controlling shrinkage losses and increasing sales. Let’s take a look at these benefits and how to achieve them.
Reduced collection time
The first and obvious pro is that you get paid a lot faster. In a Scan Based model, the sales for the period agreed (typically a week) are made via ETF (Direct to Bank Electronic Funds Transfer).
Reduction in non-sellable product and optimized product mix
A scan-based trade system can give you forecasting and sales information so that you can understand how certain products are moving in each store. With that information, you can decide what the optimal quantity per store per product is. This will reduce shrinkage due to improving product rotation.
Increase sales and numeric distribution
Numeric distribution is based on the number of outlets that carry a product – outlets that list at least one of the product’s SKUs. Since with SBT the customer does not have the risk of buying something that does not sell, they are more prone to accept new products with a good record in other stores. This gives an excellent opportunity to the distributor to increase sales via increment of the number of products in the stores.
By taking the SBT data and incorporating it into the information collected by Route Accounting software, distributors can spot reconcile inventory levels maintained at the retailer´s location and, if there is shrinkage, they can identify the reasons for that, be it employee theft, shoplifting, driver error, vendor fraud or damaged products.
How a distributor can implement a scan-based solution
Setting up any scan-based trade system involves two steps: locate a scan-based trade provider and have a system that knows exactly what you should have in each store.
Scan Based Trade Provider (SBTP)
SBT providers are companies that ….. Many companies are offering this service but Nexus and ParkCitigroup are two of the most used. This is how it works: anytime the retailer deposits some money it goes to the SBTP first. There is a little reconciliation process and it gets deposited to you. The SBTP periodically reports to you what was sold through the register and if you’re a savvy distributor you should know what you put in and you can calculate and reconcile exactly what inventory you should have in the store.
The second and most important thing in the implementation of an SBT system is having the ammunition to actually defend yourself if you’re getting shorted, and the only way you can have this ammunition is with a DSD Route Account system. The list of products under the SBT agreement scanned in the store and invoiced, is compared with the “theoretical” sales stored in the DSD software SBT file. If there is an overage, one will know which driver was responsible and proper action would be taken. But in case there is a shortage, the difference or shrinkage is sent to the scan-based trade provider via FTP. If this difference exceeds a predefined threshold, that shrinkage will be allocated to the store, as stolen goods. This information provides the tools for you to invoice the stolen items.
Doing Scan Based Trading is not something that should be taken lightly. Many distributors struggle financially with the retailers because there is a lot of shrinkage and that cost lies solely on their shoulders. But if you put the right systems in place and work with the right people you can mitigate this theft or shrinkage and in the end, you will actually benefit from it.
I hope this article has been helpful. We will continue to publish information related to Warehouse Management and distribution practices. If you are interested in this article or want to learn more about LaceUp Solutions, register to keep you updated on future articles.
If you want to know more about how a SBT works, take a look at this video.