Suppliers Should Transition to Scan-Based Trading Now

couple buying food at grocery self-checkout

The global shock created by COVID has resulted in a more complex, costly and risky supply chain for companies supplying merchandise to retailers.  An unexpected order from a retailer is now much more costly to fulfill and can cause various challenges to the supplier-retailer relationship.  Now more than ever, suppliers should be doing everything they can to align their supply chains to end-customer demand.  Suppliers should be moving away from their buy-sell arrangements, which provide no visibility to sell through, and moving toward Scan-Based Trading (SBT).  SBT offers a powerful consignment business model capable of overcoming such challenges by enhancing inventory visibility, leading to increased profits, better supply chain efficiency and improved retailer relationships.

SBT diverges from the conventional buy/sell model in which retailers bear the financial burden of unsold inventory upon delivery.  In an SBT model, the supplier retains ownership of the merchandise until it is purchased by the end-customer.  The supplier is provided the daily sales file in a timely manner, usually the day after the sales transaction takes place, thereby giving them tremendous visibility to sell-through.  However, to achieve this visibility the supplier bears the responsibility for unsold inventory, which increases financial risk.  To maximize the benefits, they must also actively manage the price book and closely monitor in-store inventory levels.

The near real-time visibility to product sales at the store level enables suppliers to make well-informed decisions regarding production requirements, inventory levels and re-orders, and product assortment.  But an SBT model also facilitates stronger relationships between suppliers and retailers.  While retailer category managers maintain control of the product mix, under an SBT model the supplier is responsible for fulfillment, thereby streamlining the re-order process and allowing the supplier to better optimize their supply chain.  This leads to lower carrying costs and an improvement in financial performance for retailers and suppliers.

A recent study by Lim, Richards, Rabinovich and Choi published in Manufacturing and Service Operations Management[1] found that suppliers who adopt SBT generally experience an increase in sales and a reduction in costs.  Lim, et al found that SBT allows the retailers and the supplier to increase their profit by approximately 20% and 29%, respectively”.  The study references separate studies indicating suppliers utilizing SBT also achieve better inventory turnover ratios due to a more attractive product appearance at retail and a perceived greater level of quality by the consumers.

An SBT model can be challenging for a supplier to implement on its own.  By leveraging a third-party SBT platform, a supplier can utilize numerous tools to overcome these challenges and minimize their financial risk.  As the leading SBT provider for North American retailers and suppliers, Nexxus Group offers a comprehensive, turnkey third-party SBT platform for suppliers.  The Nexxus Group Platform manages Electronic Data Interchange (EDI), synchronizes and audits pricing, validates and provides detailed payments, eliminates costly errors, and monitors inventory.

In summary, SBT is a potent instrument for suppliers seeking to optimize their supply chains, bolster their bottom line and expand their business.  Although SBT transfers the responsibility for unsold inventory to suppliers, the potential benefits of superior inventory management, fortified relationships with retailers, and heightened supply chain efficiency outweigh the possible risks.  Capitalizing on these benefits does require some investment in internal resources.  By collaborating with Nexxus Group the supplier can move the bulk of this investment to an experienced partner with a proven and successful track record.

[1] Lim, S.F.W.T., Richards, T.J., Rabinovich, E. and Choi, M. 2022. Scan based trading and bargaining equilibrium: A structural estimation of supply chain profit. Manufacturing & Service Operations Management, 24(4): 2328–2348

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