About Scan Based Trading

Scan-Based-Trading’s Ascendance Changing the World of Magazine & Newspaper Distribution

By Elizabeth F. Poff , Founding Member and Vice-President, EBOnline.com

MAY 24, 2010 --- As brick-and-mortar retailers and their vendors continue to face ever-greater competition from the Internet, the need to find meaningful ways to reduce supply chain costs continues to gather urgency. After some false starts, Scan-Based-Trading (or SBT, as it is often referred to) is rapidly emerging as a standout solution that delivers genuine value for both retailers and vendors.

From the outset, SBT has been viewed by many progressive members of the supply chain as a crucial opportunity for retailers and vendors to cut handling costs, increase staff productivity, accurately track sales, and determine inventories in real time.

After more than a decade of implementation and testing, and despite having proven itself across several categories, Scan Based Trading still faces questions. Key among those questions is the matter of retailer accountability.

Many suppliers are deeply concerned about retailers self-policing a process where inadequate oversight can cost suppliers dearly. Suppliers fear that retailers with no “skin in the game” will be less rigorous in their commitment to item file precision, and overly relaxed about store compliance with best practices for a win-win SBT process.

Retailers counter that argument by pointing out that loss prevention is actually easier to enforce with a process like SBT because it allows loss-prevention staff to focus on results, as opposed to being bogged down in process.

Both points of view have merit.

Scan-Based-Trading Gains Traction

Scan Based Trading entered the retail-world lexicon in 1996, with a test pilot program between San Antonio, TX-based grocery chain H-E-B and large vendors such as Anheuser-Busch, Coca-Cola, Nabisco and Frito-Lay. The program proved to be a success with cost savings seen from both sides (1).

Among the myriad of case studies conducted on Scan Based Trading since its inception, the consensus is clear: SBT equals true efficiency with more sales and fewer errors. Sara Lee is a case in point. After implementing SBT, Sara Lee saw a 60% reduction in invoice error correction costs. This proved to be a significant savings for the company (2).

Dreyer’s Grand Ice Cream, another company at the forefront of this movement, was able to use Scan Based Trading as a catalyst to help improve efficiency and reduce invoice contradictions. According to John Shreve, Dreyer’s Manager of scan based trading development, “there are fewer invoicing discrepancies; fewer shorts, overpaid, and unresolved invoices to handle.” In fact, according to Shreve, the company cut shrink to a mere 8/10^th of one percent, a vast improvement (3).

Scan-Based-Trading And Magazines

With SBT gaining traction in other categories, the pressure began to mount on magazines in the late 1990s, as retailers looked for ways to reduce cost and waste in a category that has historically generated high levels of shrink, and even greater levels of anxiety for retailers.

In 1999, the Mercer Management Consulting Group was commissioned by the Magazine Publishers of America (MPA) to determine what effects wide-scale implementation of SBT would have on the three major distribution channel members: publishers, national distributors and wholesalers. The Mercer study concluded that SBT – executed properly - provided a great value proposition, revealing cost efficiencies for all parties involved. The Mercer study also cautioned that for true savings to be secured that “both retailers’ and wholesalers’ systems capabilities had to be enhanced.” (1).

But while the concept won acclaim from Mercer, there was also deep concern about Scan Based Trading from suppliers within the magazine distribution channel, and much foot dragging as a result. Four years after Mercer’s study was released, SBT had still not met its considerable promise.

Larry Scheur, president and CEO of Empire State News, summed up Scan Based Trading as “frightening.” Scheur, who has since sold his agency and retired from the business, felt that SBT was “very one-sided, benefiting the retailers only.” Scheur had this to say about a pilot test with one store: “We went into the store, and bought magazines; we had the magazines and the register tape. But the sales never showed up on the SBT report”(4).

Scheur’s fears, as well as his anecdotal evidence supporting it, underscore the critical nature of confidence by vendors in the integrity and oversight of an SBT program in order for it to succeed.

In 2003, Gopher News, a leading regional magazine and newspaper vendor began implementing SBT. The transition was a rough one with initial growing pains that saw extraordinarily high shrink. However, despite the rocky ride, Gopher News stuck with SBT, worked hard with its partners to increase oversight, and eventually worked out the kinks, seeing lower than average shrink (5).

According to a 2008 article by Baird Davis, an industry expert, it was estimated that the distribution of more than one quarter of all magazines by wholesalers was done using Scan Based Trading.

Scan-Based-Trading and Newspapers

By 2005, newspapers rapidly became a category retailers sought to consolidate with SBT – or else, some threatened. With many national retailers dealing with hundreds, and in some cases thousands of small distributors, the burdens associated with the newspaper category was leading some retailers to a decision to remove newspapers. One such retailer, FoodMaxx, a Northern California chain, removed newspapers from nearly all of its stores. The same decision was made by Longs Drug in Southern California, Duane Reade in New York and New Jersey, and Mars Foods in Baltimore. Other retailers, including CVS and Safeway, were scaling back newspapers and threatening elimination.

As their peers on the magazine side, newspaper publishers and their distributors were wary of SBT. It was the emergence of a third-party program to measure and enforce procedural integrity that helped many overcome that suspicion and move forward.

Today, most major retailers in the U.S. - including CVS, Safeway, Kroger Ahold’s divisions, A&P and its subsidiaries, Hess, Barnes & Noble and Rite Aid - conduct their newspaper business using the SBT model. Most rely on a third-party partner to provide oversight. iControl Systems USA, a Rockville, MD company headed by Tal and Sean Zlotnitsky, two brothers who formerly owned and operated large magazine & newspaper distributorships, is the leading third-party provider.

“We saw SBT as an opportunity for a better supply chain,” said Tal J. Zlotnitsky, iControl’s Chairman & CEO, “but we also completely understood the deep apprehension among suppliers. SBT can be a magnificent and rewarding process – but only if it’s done right. By done right, I mean that the process is monitored non-stop and that the retailer accepts the reality that SBT can only work if someone is there to police the process vigorously. Though I sympathize with the frustration of retailers over some glaring inefficiencies, I tell our clients that just moving the shrink from one side to the other cannot be the end game. The end goal has to be the virtual elimination of shrink through aggressive oversight and enforcement – something that can absolutely be achieved. But to do it, I believe, requires an unbiased third party monitor to serve as the honest broker” (6).

At a time where the newspaper category as a whole has shrunk by upwards of 20%, chains managed by iControl who rely on SBT, such as those cited above, have experienced double-digit sales growth, according to Zlotnitsky (6).

John Murray, Vice President of Circulation for the Newspaper Association of America, made a 2008 presentation at the SNA Circulation Conference emphasizing the positives that SBT provides for both retailers and publishers. He pointed out that retailers benefit from ease of inventory and returns, payment on scan, and the opportunity to consolidate to just one invoice per publisher. Publishers also benefit, said Murray, by gaining access to new accounts, improving distribution and delivery options, and receiving payments in a timelier manner.

Mr. Murray went on to say that this win-win can be facilitated by companies like iControl, which “balance the needs of retailers with the needs of publishers and their distributors. Third party vendors like iControl offer accurate discrepancy reports, provide training for clerks to reduce shrink, automate checks and balances and help retailers track inventories with appropriate UPC, labels, and pricing information” (7).

Gerald Carter, President of Extra, a regional newspaper distributor had this to say: "The time and money I save using SBT is well worth the investment I have made in the solution. I wish I were conducting SBT with all my retailers" (8).

The Future of Scan-Based-Trading

Though there are still challenges, in the coming years “SBT is realistically expected to exponentially expand” (9).

According to survey results presented by the Newspaper Association of America in 2008, 46% of participants surveyed reported that at least 10% of their circulation was in a pay on scan environment, with 37% saying it accounted for 16% or more (7). Though numbers aren’t available past 2008, projections are that the numbers have reached upwards of 50% by the end of the first quarter of 2010, and may exceed 75% by the end of 2010.

With many retailers requiring vendors in all categories to move to Scan Based Trading, it is important for vendors to realize that SBT does have the potential to be a true benefit for all parties involved. With a quality business model in place to provide oversight and enforcement, positive results can be seen.

The positives for retailers are obvious and Baird Davis, a magazine-industry expert, explains that with cooperation, the benefits do extend to the suppliers as well: "SBT requires upfront sacrifice from wholesalers and national distributors, but in the long run, it's likely to be the best alternative for protecting the newsstand business" (9).

Sources:

1. "Scan Based Trading - Wholesaler Supplied Model - Voluntary Suggested Best Practices". International Periodical Distributors Association, Inc. 5/11/2010
2. Cobban, Michael. "Scan Based Trading SBT for Retailers". Softcare EC Solutions, Inc. 5/09/2010
3. “Case Study: Dreyers' Grand Ice Cream". Park City Group. 5/09/2010
4. Gallagher, Sean. "Scan-Based Trading Still A Work In Progress". Baseline. 5/13/2010
5. "Case Study: Gopher News". Park City Group. 5/12/2010
6. Zlotnitsky, Tal. Email Interview. 5/9/2010.
7. Murray, John. "Single Copy Issues: Scan Based Trading". Newspaper Association of America. SNA Circulation Conference, Las Vegas, Nevada. 11/19/2008. Presentation.
8. "Extra Inc. Delivers the News with Prescient's Scan Based Trading Solution". Find Article. 5/12/2010
9. Davis, Baird. "Scan-Based Trading's Hold-Up". Folio. 5/10/2010

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