I was not able to post any blog entries in June as it was an unusually busy month for me.  In some respects I expected to be busy as I had planned some vacation time.  However, I also had a few unexpected events that kept me out of the office.  In the early part of the month, I had the pleasure of contracting a fairly nasty stomach illness, which kept me confined to my bedroom (and bathroom) for about 48 hours.  I had just suffered from a stomach virus in late March so my initial assumption that I had caught another strain.  Although the illness was not pleasant, my bigger concern was that I was going to pass on the stomach virus to my 18 month old son and my wife who was six months pregnant.  However, my illness proved not to be contagious as my son and wife never became sick.  As I read the newspapers over the following week it occurred to me that perhaps my illness was not a stomach virus, but salmonella poisoning instead. 

The US has been the victim of a fairly serious outbreak of salmonella in raw tomatoes throughout the past two months.  The latest reports from the Centers for Disease Control have identified 810 salmonella cases in 36 states linked to raw materials.   The tomato salmonella outbreak is the largest fresh produce contamination issue in US history.  In early June, many of the top food service establishments such as McDonalds, Burger King and Chipotle all stopped serving tomatoes for a short period of time.  Grocery retailers suspended sales of tomatoes as well.  One of the unfortunate consequences of food safety issues is that an entire product category is often penalized for problems that may be isolated to a particular SKU.  Regulators, retailers, distributors and manufacturers have learned to be overly cautious in the case of public food safety matters.  No retailer or manufacturer wants their brand name tarnished by a series of public health issues.  Such was the case with tomatoes in the US throughout the early part of June.  For example, Roma tomatoes were identified to be the source of the poisoning.  Cherry, grape and other variants of tomatoes were not affected.  Public health officials were able to isolate the geographic source of the outbreak as well.  Tomatoes harvested in California, Texas, Georgia and many other states were deemed to be safe for consumption.  Nonetheless, grocery and food service retailers were not discriminatory in efforts to remove tomatoes from their product lines.  The National Restaurant Association claims the salmonella outbreak has cost the industry $100 Million to date.

The source of the contamination has still yet to be identified.  Experts state that the root cause may never be determined.  Given the advanced technology and extensive resources in the US, I find it fascinating that after 60 days public health officials have not been able to pinpoint the source of the outbreak.  The Centers for Disease Control (CDC) seems to have the primary responsibility for researching the root causes of food safety issues.  The Wall Street Journal published an article titled “Anger Rises over Salmonella Probe” on the front page of yesterday’s newspaper.  Also on the front page was a story about how the US government is forcing UBS to divulge account holder information for several of its customers.  I thought the point of having a Swiss bank account was to keep the ownership information private!  In any event, I am pleased to see that the government has plenty resources to violate privacy rights and prosecute tax evaders even if they cannot resolve long-standing public health issues…

But let us suppose that the CDC had been able to quickly identify the source of the outbreak amongst the various tomato growers.  How quickly would the agricultural and retail community have been able to respond?  The easy part would be to contact the affected tomato farmers to request suspension of all future shipments.  The more challenging exercise would have been to pinpoint the location of all the contaminated tomatoes already stocked in various warehouses, grocery stores and food service establishments throughout the country.  Which types of supply chain applications and e-commerce technologies could be leveraged to rapidly identify and recall contaminated food products?

The retail industry has developed a set of standards for the traceability of food products.  The efforts have been led by the GS1 organization based in Brussels and its various member organizations throughout the world.  Specific traceability models have been developed for fresh produce products as well as beef, fish, wine and bananas.  More information can be found at www.gs1.org/traceability.  The food traceability processes depend upon a few key e-commerce technologies such as EDI, data synchronization, barcode labels and RFID.  Unfortunately, many of the underlying e-commerce technologies, particularly data synchronization, suffer from a lack of critical adoption by major retailers and agricultural product manufacturers.  As a result, the GS1 traceability models would be relatively ineffective in efforts to accelerate the recall of unsafe food products from the supply chain.

I find the lack of a technology infrastructure to rapidly isolate and recall unsafe food products somewhat disturbing.  What if the tomato salmonella outbreak was much broader in scope, affecting 8,000, 80,000 or perhaps even 800,000 people?   What if there was an intentional effort to sabotage the food supply (i.e. bioterrorism)?  How many lives would be impacted?  What economic impact would occur?  Should the retail industry and government regulators be more aggressive in efforts to promote food traceability technology?  More in a future post…

The Long Tail gets Longer 

I was visiting a US consumer products brand leader a few weeks ago to present GXS view of market trends and best practices.  Of course, one of the concepts I introduced was my theory on the Long Tail of B2B Standards.  The chart actually initiated a provocative discussion on the varying e-commerce standards in use throughout industry today.  The discussion revealed to me that the tail is even longer than I originally anticipated…

This particular brand owner markets a variety of consumer packaged goods in the coffee category.    As a result, they engage in the purchase of ingredients such as green coffee beans from suppliers in Latin America and other parts of the world.  I was surprised to learn that there is actually an e-commerce standard that governs how contracts, pricing and transportation documentation is exchanged amongst buyers, sellers, brokers and shippers of green coffee bean products.  Over the past two weeks I have been researching this standard and have arrived at a number of fascinating insights about the coffee sector…

My Coffee isn’t Green it is Brown 

This is true.  The coffee we drink is not green.  It is dark brown or some might say black.  However, the coffee does not start out that color.  Coffee is created from green beans grown on coffee plants typically harvested in large commercial plantations.  The beans are actually wrapped in a fruit-like flesh while being grown.  Once harvested, the exterior is removed to reveal the bean itself.  Prior to roasting, the beans are soaked, cleansed then dried by air and sunlight.  The roasting process transforms the color of the bean from green to yellow then light brown.  As the bean expands in density and doubles in size it will eventually crack resulting in the powdery material which is used to produce the beverage we drink every day.

Green Coffee Association (1923-Present) 

The XML standards for the coffee sector are created by the Green Coffee Association (GCA), an industry organization which serves to promote the commercial and regulatory interests of coffee growers, brokers and buyers.  GCA provides the industry with a number of critical functions including:

• Standards to ensure the uniformity of coffee contracts, bills of lading and other commercial documents.
• Liaisons with third parties such as the International Coffee Organization and Coffee, Sugar and Cocoa Exchange.
• Lobbying with the governments of various countries to promote free trade policies devoid of import quotas and fixed pricing.
• Rules and procedures for the arbitration of disputes amongst buyers and sellers arising from order fulfillment discrepancies or payment delinquencies.

Green Coffee XML Launches 

On July 23^rd, 2001, GCA launched a series of XML schemas designed to digitize and standardize processes for buying, selling and transporting coffee.  Historically, contracts for coffee were processed on standardized forms purchased by the GCA and completed using a typewriter.  As computer automation evolved, GCA sought to develop a machine-to-machine e-commerce process for buyers and sellers to exchange orders, pricing and transportation data.  The XML standards prevent trading partners from designing their own forms which may not contain sufficient detail to fulfill an order to arbitrate a dispute.  The flexibility of XML offers the benefit of standardization, while offering buyers the latitude to specify a wide variety of tendering, payment, transportation, insurance, pricing and performance measurement terms in the contracts.   The GCA XML schemas can be exchanged directly over the Internet or through a third party network. 

Green Coffee Association in 1923

Why does Green Coffee need its own XML Standard? 

The commercial trade processes for coffee beans are much more complex than you might imagine.  Below are a few examples of the variability that can exist in terms and conditions for coffee contracts:

• Contract Types – There are nine different types of coffee contracts to accommodate a variety of sales scenarios for transactions outside, inside and at the border of the country of destination.
• Quantity – Bulk coffee can be measured in metric tons, long tons, pounds, kilograms or weight denominated bag sizes (e.g. 75 kg bag).
• Packaging – Coffee can be packaged into natural fiber bags, bulk container liners or synthetic fiber super sacks.
• Insurance and Freight – parties must agree upon who will pay for cargo insurance as well as freight charges such as currency adjustments or congestion surcharges.
• Technical Descriptions - including crop year, grade, color and moisture tolerances are used to specify quality levels.
• Quality Claims – must be filed within specified timeframes such as 15 days of discharge, tender or government clearance.
• Weighing – processes are typically agreed upon in advance to specify when, where, how and by whom coffee will be weighed for invoicing purposes.
• Position – the transfer of ownership can occur at five different points in the supply chain.  GCA refers to these locations as shipment, afloat, arrival, deliver and spot.
• Tender – transfer of ownership can only occur with the presence of the specified types and numbers of documents such as the bill of lading, insurance certificate and commercial invoice.
• Payment – Funds transfer can occur directly between buyer and seller on open account terms or by a bank facilitated transaction such as letter of credit.

The Green Coffee Association’s XML standard offers an excellent example of the Long Tail of B2B Standards.  The standard orchestrates a highly specialized set of business processes within an industry subsector.  Tremendous benefits can be derived from market participants as a result of the flexibility offered via the wide variety of tendering, payment, pricing and performance management terms that can be modeled in the XML.  Such benefits would not be practically achievable with a more generalized standard such as EDI… 

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

It is hard to believe that the middle of May has arrived already.  There are only a few weeks remaining before schools let out for summer vacation.  In the coming weeks, many universities and high schools throughout the US will celebrate graduation or commencement exercises.   I was in a greeting card store two weeks ago buying Mother’s Day cards and I noticed a large rack of Graduation cards on display.  What do you buy someone these days as a graduation gift?  I’m in my thirties, but have admittedly lost touch with the Facebook generation of students that are graduating this year.  I suppose most people send a check or a gift card.  You can buy gift cards just about anywhere nowadays…except for greeting card stores.  Strangely, I have yet to see a display of gift cards adjacent to a greeting cards display in any store format.  I am certainly no expert on consumer merchandising strategies but it would seem like a logical pairing to me.  But one of the places you can now find a wide variety of gift cards at is grocery stores.   In December, I published an entry titled Gift Cards and the New Retail-to-Retail Channel in which I explored the fast growing practice of selling other retailer’s branded gift cards in stores.   I continue to be fascinated by the genius behind the gift card phenomenon in the US retail sector.  In addition, to the concept of retailers using other retailers as a channel, there are a few additional facets of the gift card business model that strike me as particularly compelling:

#1 – Near-Zero Product Development 

Brand owners in consumer product segments ranging from apparel and footwear to food and beverage will each spend billions of dollars this year trying to devise the next hot product.   The costs to perform R&D, marketing and distribution are significant for each new SKU added to retail shelves.  However, with gift cards retailers have found a way to build a new multi-billion dollar category without any product development at all.  A Tower Group study reported that US gift card spending in 2007 reached almost $100B.  This new revenue stream was created simply by re-packaging retailer’s existing product lines.

#2 – Inventory-Less Retail 

Gift cards have an almost “inventory-less” property to them.   While the cards do occupy shelf space, the carrying costs and impact on working capital is almost negligible.  The plastic cards have no value to the consumer until they are activated.   Furthermore, funds are not exchanged with the 4PLs who distribute the cards or the retail brand owner on the card until after the sale occurs. 

One could argue that retailer’s inventories are indirectly affected by gift cards.  Upon redemption of the card, the consumer will expect a rich selection of merchandise to choose from in the store.  However, the impacts on future inventories are transferred to another retailer when gift cards for other retail brands are sold.

#3 – Revenue potential per square foot 

There is an opportunity cost associated with displaying gift cards in premium locations such as end-caps or near check-out.  If gift card sales are low then the retailer loses the revenue opportunity that could be realized by placing alternative products in these high traffic areas.  However, gift cards offer revenue potential with a density few other products can match.  A $25 or $50 gift card sells for 10X more than a typical consumer goods package that would be put in the same location.  What else can a grocery retailer sell for $50 or $100 each that takes up only 2”x3” on a shelf and can be stacked 10 deep?  

On-line merchants need not make tradeoffs between shelf space for gift cards and other merchandise.  E-commerce sites have the flexibility to add more pages to accommodate gift certificates.  Some don’t even have to manage an inventory of cards.  For example, some retailers are allowing consumers to print their own gift certificate directly from a web site.  Others such as Amazon.com have been distributing electronic gift certificates with a specialized activation codes for years. 

#4 – Simplified supply chain dynamics 

From a supply chain perspective gift cards are a relatively simple product to stock, track and manage:

• Gift cards are not perishable so there are no worries about being over-stock.  There are no sensitivities to transporting or storing the cards.
• Cards are not activated until check out so there is little concern about shrinkage from backroom, warehouse or transportation staff.
• Gift cards are rarely returned.  The flexibility offered almost eliminates the possibility of returns as an option in all but extreme circumstances.

#5 – Easy Upsell Possibilities 

Gift cards also drive demand for a new category of products – gift card accessories.  Buyers of gift cards often feel guilty about taking the easy way out.  As a result, they want to buy an accessory to “dress up” the gift card so the purchase appears more thoughtful.  So they buy accessories such as boxes to store and present the card in are very popular.  Gift card accessories can be a high margin business.  For example, retailers can charge $5 for a box that probably costs $0.15.  More creative schemes for gift card packaging continue to be introduced.  Consumer electronics retailers have special CD jewel boxes that consumers can buy to present gift cards for music lovers.  Apparel retailer American Eagle has introduced a card that allowed purchasers to record their own digital audio greeting on the card.

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved. 

“May Contain Nuts” – No Longer Acceptable 

Today’s consumer is also more health-focused and socially conscious than ever.  And these educated consumers are demanding more information about products before they make purchasing decisions.  Consider the case of food.  Today’s health-conscious consumer wants to understand not just the brand, price and size of each SKU, but they also want to know:  

• Is it organic?  Have the ingredients been genetically engineered? 
• Is it locally grown?  If not, has it been imported from another country?  
• Is it carbon neutral?  Were environmentally friendly or recyclable packaging materials used?
• Is it fresh?  How long before its predicted expiration time frame?
• Is it safe for me?  Does it contain ingredients from common allergens such as nuts or shellfish?       
• Is it heart healthy?  How much cholesterol or sodium is included?
• Is it dietary?  How many grams of fat and carbohydrates are contained?
• Is it diabetic friendly?  How much sugar is contained? 

This growing selectivity of consumers is changing the landscape of food products forever.  The result is a proliferation of SKUs catered towards a range of different consumer segments based upon social responsibility (environmentalists, locavores, naturalists) and upon health characteristics (diabetes, food allergies or heart disease).  The grocery sector is migrating from the mass-market of the twentieth century towards a long tail of highly, specialized niche markets.  Retailers and brand owners must now market towards these new niche segments or risk extinction.  The challenge for category captains and retail merchandisers is being able to define an assortment that meets the specialized demands of today’s consumers.  Food manufacturers and retailers have responded by introducing new SKUs (e.g. diabetic -friendly, heart-healthy), redesigning store layouts (e.g. organics section, local produce aisle) and more detailed labeling (e.g. transfat content, allergen notices).  But further challenges exist, ones that can be directly solved through broader adoption of data synchronization.

100 Mile Diet National Bestseller in the US 

Information Hungry Consumers and Shifting Buying Behaviors 

Consumers are demanding more detailed information to make purchasing decisions.  In fact, studies by leading retailers have shown that the degree of product information available for a particular SKU will influence not only which brand consumers will purchase, but also which retailer they buy from.  Having detailed item attribute information represented on a product label or store shelf display is beneficial to consumers walking through a store, but is insufficient to satisfy the full needs of today’s multi-channel shopper.  What about the consumers who research recipes on a brand-owner’s web site or purchase groceries on-line for home delivery?  These shoppers expect complete item attribute data to be displayed at all steps of the decision making process.  The steps include not only the physical product labels but also home delivery storefronts, brand owner sites, in-store kiosks and newspaper advertisements.

Ocado - Popular British On-Line Shopping Web Site

Merchandise Managers Growing Appetite for Product Data 

Merchandisers must have ready access to detailed product attribute information as well.  For each SKU, there is an average of 200 data attributes that can be used to describe it - everything from brand name and packaging dimensions to ingredients and recycling instructions.  If you multiple the attributes per SKU by the number of products in the marketplace, you begin to appreciate the magnitude of the challenge.   Yes, the item attributes are displayed on the product label, but most merchandisers do not keep an inventory of products in their offices.  Nor do the retailers have the time or resources to search through file cabinets full of supplier product specification sheets or to navigate supplier web sites to find the information required.  Item attribute details must exist in merchandising systems in order for retail personnel to make decisions about which products to stock.  Highly automated, data synchronization processes are the only means of achieving any type of scale for managing product data. 

Retailers versus Suppliers – The Power Struggle 

Many of us who monitor and study the retail industry often debate whether the retailers or the consumer products companies have more power and influence over the supply chain.  Fifty years ago, the industry was dominated by large national brands which shaped consumer demand and drove retailer behavior.  Today, global retailers with multi-national footprints and large private label assortments have amassed considerable leverage over their suppliers.   But I believe that question of whether the retailer or supplier has more influence in the supply chain is becoming increasingly less relevant.  In today’s retail value chain it is the consumer that holds the greatest power.   And we see evidence of this phenomenon in IT investments.  Retailers continue to be more focused on customer-facing, store operations functions than internal-oriented, back office processes.  I believe the growing hunger of consumers for rich item data to perform purchasing decisions will shift data sync from a back office, cost reduction technique to a customer-facing differentiation strategy.  And this shift will ultimately be the catalyst that drives demand for data synchronization in the retail sector.

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

Earth Day and the Green Movement 

We will celebrate Earth Day later this week.  Unfortunately, I wasn’t able to enjoy much of the outside world today as we have been inundated with thunderstorms here in Washington DC.  Nothing like a good dose of acid rain to remind you of the need to proactively attack the environmental problems we are facing.  The customer service manager at the car dealership I purchased my last vehicle from told me that the Washington DC area suffers from some of the worst acid rain in the world.  I believe everything she said was truthful and in no way influenced by the desire to sell me an exterior paint sealant package…

Source: US Environmental Protection Agency 

Nonetheless there has been a tremendous groundswell of environmentalism sweeping the globe in the past 24 months.  What is fascinating to me is that the environmental problems such as the global warming and ozone depletion have been documented and publicized for over three decades.  Why in 2006 did we see such a surge in environmental responsibility around the world?  From my perspective, it was really the consumer population, not big business or national government, which is responsible for driving the change.  These days consumers are really the driving forces behind more and more policy initiatives particularly the recent wave of corporate social responsibility sweeping the Western hemisphere.  The green movement led me to start thinking about the challenges facing some of the supply chain initiatives being pursued around the world.  There are a number of noteworthy supply chain initiatives with strong business benefits that have yet to achieve significant adoption.  Some were created years ago, but still struggle to gain visibility and investment from corporate leaders.  Data synchronization is one that comes to mind.

Data Sync Movement 

For almost ten years now there has been a movement in the retail industry to standardize the process for exchanging product data between retailers and their suppliers.  Recent efforts have focused on utilizing XML and Internet based standards for product catalog exchange.  There are older EDI standards such as the ANSI X12 832 document and the EDIFACT PRICAT document, which provide a simple, cost-effective process for exchanging item and price information.  But like any process associated with EDI, these standards were deemed inadequate and the search for a new data sync standards framework was initiated.  Unfortunately, despite hundreds of millions of dollars in invested capital and hundreds of thousands of invested manhours, the industry still struggles with a lack of adoption.  Even in the most highly penetrated countries such as the UK and Australia, data sync adoption levels are between 10-20% of the overall retail community. 

Catalysts for Data Sync

Extensive business benefit studies have been conducted for data synchronization by the Grocery Manufacturers of America (GMA), Kurt Salmon Associates (KSA), AT Kearney, Accenture and other highly respected thought leaders.  Benefits such as accelerated new product introductions, fewer expected invoice deductions and higher perfect order fulfillment rates have been well established and quantified.  Furthermore, there have been several market forces in the recent years, which were believed to be catalysts that would drive data sync to a critical inflection point yielding mass adoption:

·  Standards efforts were unified at a global level by the GS1 organization which created a global product registry and Global Data Synchronization Network.

·  RFID technology, which depends upon clean and accurate product data, was mandated by large channel masters such as Wal-Mart and the US Department of Defense.

·  IBM, Oracle and SAP - three of the largest software vendors– have developed or acquired master data management suites, which require synchronization to populate product data repositories.

·  Several of the largest data pool providers have merged or consolidated including UCCnet and Transora, SINFOS and Agentrics as well as UDEX and GXS.

However, none of these catalysts has resulted in substantially higher adoption rates amongst retailers.  I believe that, much like in the environmental movement, it will be consumers and not businesses that will ultimately drive demand for data synchronization.  Retailers will be driven to data synchronization, not by back office efficiencies in accounting or receiving, but instead by the need to differentiate themselves to an increasingly information-driven consumer population.  More on this topic to follow shortly in an upcoming post…

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

Consumer Software Deployment Models 

In my last post (http://blogs.gxs.com/keifers/2008/03/23/office-2007-rollout-postponement/), I began a comparison of the software deployment model used by corporations and consumers.  While most corporations of any significant size (50 employees or larger) utilize a completely electronic process to distribute software centrally over the local area network, most consumers use a very physical process to purchase and install software for their home PCs.   When new products such as Office 2007, Windows Vista, Adobe Acrobat 8.0 and TurboTax 2007 are released, most consumers visit a retailer such as Best Buy, Wal-Mart, Tesco or Amazon.com to purchase the actual physical box with the DVD in it.  

It is hard to believe with how digital we have become that this is still the process for software distribution in the consumer sector.  And it causes its fair share of challenges – not just for consumers who purchase the software, but for the retailers, distributors and publishers who have to manage the supply chain for the physical media.  Consider a product such as Windows Vista, which was formally launched a little over a year ago.  We tend to refer to Vista as one product, but it actually ships in five different versions – Ultimate, Home Premium, Home Basic, Business and Enterprise.

The Software Supply Chain Challenge 

As a result, retailers who sell Microsoft’s operating system must ensure that an adequate stock of all five versions of the product is available for consumers to purchase.  Some software publishers sell discounted “Upgrade” versions of the product to users who have already licensed a prior version of the product.  Both the upgrade and new user versions of each SKU must be carried by retailers.  The supply chain issues are compounded for multi-national retailers selling into a diverse group of countries.  The instruction manuals and other enclosures such as advertisements, warranties, authenticity certificates and technical support references must be in the local language of the country where the product is sold.  Some software publishers avoid the challenge of packaging country-specific contents, by shipping multi-lingual materials in all boxes.  The external packaging of the software, however, is usually country specific with pricing in local currency and labeling in local language.  In summary, not only must different functional versions of the product be managed, but publishers must distribute country specific versions of each SKU as well. 

Shortcomings of Traditional Supply Chain Models 

How do software vendors manage the supply chain complexities associated with retail product distribution?   A traditional “push” supply chain model would utilize a centralized manufacturing facility.  Publishers would attempt to forecast demand for product sales by SKU and by country weeks in advance.   Physical media enclosed in country and retailer specific packaging would be staged at distribution centers around the world to respond to fluctuations in demand.   If only it were this simple.  There are a few challenges with the traditional supply chain model:

• Forecasting Sales – With a push model, software publishers must forecast sales weeks in advance.  These predictions are most complex for new product introductions of major software packages as a high percentage of the retail sales occur in the first few months after launch.  Retailers and software publishers are challenged to estimate post-launch sales as they have no historical demand pattern to build forecast models.  This is not unlike the challenge with DVD new product launches (http://blogs.gxs.com/keifers/2007/12/04/24-hours-to-prevent-lost-sales-holiday-edinomics-part-1/).  Products with seasonal demand such as tax applications also present forecasting challenges.  Income tax packages enjoy peak sales during the few months of the year prior to filing deadlines.  Forecasting errors can be costly leading to either having too much or too few of the right SKUs to satisfy consumer demand. 
• Security and Feature Upgrades – One of the keys to a successful launch is ensuring the consumer can easily install and operate the software without the need to access technical support.  While software publishers go to great lengths to perform a rigorous testing process on new packages before launch, it would be cost prohibitive to test every permutation of hardware and software.  As a result, the time frame shortly after launch results in a high volume of end-user generated bug fixes and product enhancements.  Additionally, the first 30 days after launch is the period in which the highest number of security vulnerabilities in source code are exposed.  It is in the software publisher’s best interests to quickly deploy bug fixes to as many end-user desktops as possible to mitigate risk of a security breech or hardware incompatibility.  Of course, upgrading software code that has already been burned to a DVD inside a shrink-wrapped box is a bit challenging.
• Inventory and Supply Chain Costs – What supply chain costs you might ask?  If additional copies of a SKU are needed, can’t they be duplicated onto media at an almost negligible cost?  While the physical media, cardboard packaging and instruction cards may be low costs, the supply chain expenses can add up quickly.   For each box of software there are inventory carrying costs, transportation expenses and shrinkage losses which must be considered.  Additionally, software products have a short time to obsolescence, particularly immediately following a launch as bug fixes and feature enhancements may be introduced daily.

Postponement

Using a technique called postponement, software suppliers can alleviate many of the demand forecasting and supply chain management challenges experience in the push model.  A new breed of specialized logistics firms is emerging that offer light manufacturing and configuration services.  These firms leverage a network of warehouses and manufacturing facilities located close to the end-consumer in major metropolitan areas throughout the world.  The postponement specialists can therefore efficiently perform late stage product configuration on behalf of software publishers.  

Here is how the process would work for an application such as Microsoft’s Office 2007.  Retailers and the software publisher would establish weekly sales forecasts by analyzing various demand signals.  The forecasts are communicated daily to the third party postponement provider, who is responsible for demand fulfillment.  The postponement specialists will then perform a “light manufacturing” process to create the appropriate number of software packages for shipment to the retailers.  The process involves duplicating the appropriate version of the software with the latest bug fixes onto the physical media and then “stuffing” the country-specific packages with the localized instruction manuals and enclosures.  Using a postponement approach, the software publisher can respond quickly to changing demand patterns while minimizing supply chain and inventory costs.  Although, I have used Microsoft as a hypothetical example above, the process could apply to any software publisher.

A New View of the High Tech Supply Chain 

Postponement specialists also can configure hardware.  In fact, the majority of the volume for these late-stage product completion firms is consumer hardware devices such as mobile phones, personal computers, laser printers, digital cameras and digital audio players.  This is not surprising, since typically, discussions on challenges in the high tech supply chain focus on hardware products.  Rarely do you see the software supply chain discussed in industry forums.  But I am quickly learning that the supply chain for software products can be equally, if not more complex, than the hardware value chain.

By the way, I did eventually figure out the mystery behind my disappearing scroll bar.  After 30 minutes I of searching through Microsoft Word “Help,” I switched over to Google and found the answer in a total of 3 mouse clicks…

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved

It’s Sunday morning at the annual National Retail Federation Big Show in New York City and there is a mix of excitement, intensity and competitiveness is in the air…. 

Some of you may wonder what I was doing at a tradeshow on Sunday.  Well, I don’t usually spend my Sundays going to tradeshows.  However, I felt compelled to get to the NRF show for its opening day.   Unfortunately, it always seems to me like the best sessions at NRF are held on Sunday – especially in the morning.  However, one good thing about this year’s show is that it is one week earlier.  Normally, the show is held on the week of the Martin Luther King holiday, which means that to attend the conference you may have to forgo not only a Sunday, but a holiday Monday as well.  However there are a number of benefits to being at NRF on Sunday morning.  In my opinion it is really the best time to be there - not just because there are great speakers and content, but because of the atmosphere.   

The first session I attended was a presentation by Dr. Ira Kalish of Deloitte’s research group.  Every year at the NRF show, STORES Magazine and Deloitte release their annual “Global Powers of Retailing” report.  This is one of two retail industry studies that I look forward to each year.   The other is AT Kearney’s Global Retail Development Index - http://www.atkearney.com/shared_res/pdf/GRDI_2007.pdf.   I often carry a hard copy of the Deloitte study with me in my briefcase because it proves to be a useful reference throughout the year.   This year’s version does not appear to be online yet, but the 2007 report is posted at www.deloitte.com/dtt/cda/doc/content/Global%20Powers%20of%20Retailing_07(3).pdf if you are interested.    

I will share a few of the results from the 2008 study.  The top 10 global retailers were listed as:

1. Wal-Mart
2. Carrefour
3. Home Depot
4. Tesco
5. Metro
6. Kroger
7. Target
8. Costco
9. Sears Holdings
10. Schwarz 

A few other interesting insights from the 2008 study: 

• US Leadership – 37% of the Top 250 global retailers were based in the US.  45.5% of sales from the Top 250 were from the US market.  Most of the US leaders are non-grocery retailers and most only sell in the US.  Apparel is particularly strong with the US claiming the top 5 global chains worldwide.
• Emerging Markets - Chinese retailers are growing quickly with 6 retailers in the Top 250 and 3 of the Top 10 fastest growing chains (GOME, Suning Appliance and AS Watson).  There are no Indian retailers in the Top 250.  However, Russia and Eastern Europe are well represented.  In fact, Russia’s electronics retailer Euroset Group is the world’s fastest growing chain as measured by 2001-2006 sales.
• Sector Analysis – Hardlines, which as defined by Deloitte includes consumer electronics, office supplies and toy retailers, was the most globalized sector with leaders such as IKEA (37 countries), PPR (45 countries) and Toys “R” Us (35 countries) represented on several continents.   Hardlines enjoyed 14.5% CAGR from 2001 to 2006 – largely driven by the housing bubble in markets such as the US and UK. 

These are a few of the highlights from the study, but they don’t do justice to the outstanding presentation delivered by Dr. Kalish.  He provided what I think is the most succinct and easy-to-understand explanation of the root causes of the global credit crunch and its relationship to the US trade deficit and mortgage crisis that I have heard from anyone.  He then went on to reveal some fascinating insights about the retail market in 2007 and some intriguing predictions about what we can expect in the years to come.  While, Dr. Kalish’s presentation was without question the best session I attended all day, I could not help being somewhat distracted by my peers in the audience.   One of the most interesting aspects of the Sunday morning sessions at NRF is the attendee demographics and behaviors you observe.  On Sunday most of the attendees are not actually from the US, but instead from overseas.  There is a particularly large contingent from Europe and Latin America.  The Asian and the Middle Eastern countries are also represented, but with significantly fewer attendees.  These attendees are all hard-core retail types.   Many of them have traveled more than 3,000 miles to hear from the leading US strategists on innovations in consumer marketing, real estate and store design.   Although it is a Sunday most of this group is dressed in business attire.  And many are carrying digital cameras which they use to take snapshots of important slides presented during the conference.  By the way, these are not the disposable cameras you buy from a street merchant in Times Square or even the standard consumer digital cameras you use to take pictures of your family.  These are high end digital SLRs, which reflects both the passion and intensity of the audience.

Another excellent session I attended was titled “How America Shops” by a firm called WSL Strategic Retail.  I had not heard for WSL (www.wslstrategicretail.com) prior to this show, but I was very impressed by the presentation given by Wendy Liebmann, their Founder and Chief Shopper.  This session was attended by another capacity crowd eager to learn from WSL’s findings about consumer preferences and shopping behaviors. The theme of the presentation was “It’s Anarchy,” referring to the erratic buying behaviors exhibited by US consumers.  However, the theme proved to also be excellent foreshadowing for the end of the session.  WSL had produced about 100 color copies of the presentation handouts.  However, the room must have had at least 400 attendees.  As the session broke there was a mad rush by the crowd of to get a hard copy of the presentation.  People were literally pushing, shoving and kicking each other to make their way to the table to grab a copy.  It reminded me of being stuck in a mosh pit.  It is hard to believe that one would observe this type of behavior on a Sunday morning at a retail tradeshow, but as I stated above – these folks are hard core.  I did manage to get a copy of the handout, which I am considering auctioning on eBay…

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

Holiday EDInomics Part 4

Of all the presents exchanged this holiday season, what gift do you think was received by more people than anything else?

• Video Game Consoles
• Navigation Devices
• DVDs
• Clothing 

If you read the title of the blog you probably have already guessed that none of the answers above are the one I am looking for.  The answer is gift cards.  Gift cards have enjoyed phenomenal sales this holiday season.  An NPD Group poll found that 61% of consumers are giving gift cards this year.  I doubt you would find any other product category so frequently purchased as a holiday gift.

Although Christmas is over, the shopping has just begun for many.  Gift cards have contributed to a third big wave of holiday shopping (following 1) the Thanksgiving weekend and 2) the few days preceding Christmas).  A CNNMoney story posted earlier this week suggests that American consumers will spend $60B on retail purchases during the week between Christmas and New Years.  In 2007, December 26^th will ranks 6^th amongst the highest grossing retail shopping days of the year.   Of course, the post-holiday rush is not driven by gift cards alone.  Retailers often host aggressive merchandise promotions in their end-of-year sales.   Aftermarket accessories are another driver for post-holiday sales.  Consider all those electronic devices your family received on Christmas.  How many people will take to the stores in search of accessories, batteries or media to support these new gizmos?    But back to gift cards - the sales uplift received by retailers doesn’t stop at year end.  Gift card redemptions will carry forward into January providing a boost to first quarter sales for many retailers.

I have been fascinated by the growing gift card phenomenon in the US for the past several years, but it wasn’t until this holiday season that I put my finger on what really intrigues me.  It started with a visit to Safeway earlier this month.  While I accompanying my wife on a weekly grocery shopping trip, I turned the corner of an aisle and was amazed to see an entire rack of gift cards located on one of the end-caps.  This end-cap was prime real estate in the grocer’s floor plan, occupying space near the check out registers that would otherwise be reserved for a high-turnover promotion item.   But the plan-o-gram strategy was not what caught my attention.  What was fascinating to me was that most of the cards were not for redemption at Safeway.  The cards featured brands of third parties.  For example, there were a variety of cards from other retailers including DIY stores such as Lowes and Home Depot; department stores such as Kohl’s and Sears; and food service establishments such as Red Lobster and Outback Steakhouse.

Safeway is not the only retailer selling other retail brand cards.  General merchandisers such as Wal-Mart and Target; convenience store operators such as 7-Eleven and WaWa; and grocery stores such as Kroger and Albertsons are all selling gift cards.  Cards are available for telecommunications services such as long distance and wireless calling as well as for entertainment venues such as theme parks and sporting events.  And there are general purpose cards available from leading payment brands such as MasterCard, Visa and American Express.  Most interesting to me is the growing willingness of retailers to promote gift cards from other retailers.  The cards carried are never from direct competitors, but instead from popular food service, electronics, DIY and specialty store brands.   Well, at least, not traditional competitors.  I did find it intriguing that a grocery store would promote gift cards for food service chains.  One of the biggest challenges grocers face with increasing sales is the continuing trend of Americans to eat out at food service establishments.   In many respects, food service is a competitor to the grocery segment.  So the prominence of food service gift cards is either a gross oversight on the part of merchandising department or an ingenious strategy to capture sales from a non-core segment - the food service market.  I’ll assume the latter.

The New Retail-to-Retail Channel 

Typically retailers have limited their merchandise assortment to products they purchased from suppliers national brands, private label items they designed themselves and occasionally services from third party contractors.  Rarely, if ever, have we seen retailers selling products or services from another retailer.  The gift card has introduced a new horizontal, retailer-to-retailer channel into the market.

What are the implications for EDInomics?  We will explore this topic in a future post later this week. 

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

Holiday EDInomics Part 3

It’s December 24^th.  For many gift buyers panic is beginning to strike (if it hasn’t already).  There are only a few hours before the stores will close for Christmas and the window of opportunity for 2007 holiday shopping will have closed.   The panic is especially high for shoppers who may not have received all of the gifts they purchased on-line.  There are only a few hours of parcel delivery remaining for those critical packages to arrive.  Some of these on-line gift buyers may find themselves disappointed.  What to do if you are one of these panic-stricken shoppers still missing a few essential gifts?

·         Some will stand by the window with nervous anticipation, hoping to hear the familiar roar of a parcel carrier’s truck engine as it travels down their street.

·         Others will frantically head to the stores, hoping to purchase a back-up gift just in case the shipments bought on-line don’t arrive.

But most will probably start by logging onto the Internet hoping to get an up-to-date status on their anticipated deliveries.  Unfortunately, many will fail to find satisfaction on-line. 

Lost Packages 

The largest, most experienced retailers provide consumers with visibility to the status of their Internet orders on-line.  A popular technique is to provide the consumer with a shipment tracking number.  The tracking identifier can be used on a third party site such as FedEx, UPS or DHL to identify the last known location of package.  However, many second and third tier on-line merchants still lack such an order tracking capability.  Status information is typically limited to “order received” or “expected due date.”  Those retailers without on-line order tracking sometimes provide a toll-free phone number for consumers to call.  However, customer service representatives in retail call centers rarely have more information about the location of the package than can be obtained on a web site.  Not only do these retailers not know when the package will arrive, but many do not even know when the package shipped. 

How is that possible you might ask? 

You place the order with the on-line retailer and then someone in the warehouse puts a packing label on the box and sends it to you. 

How hard could it be to track this process? 

Right? 

Wrong! 

Drop Shipped 

Unfortunately, it is not that simple.  Many retailers use a process called “drop ship” for on-line orders.  With drop ship, the retailer forwards the consumer’s order directly to the manufacturer for fulfillment.  The manufacturer ships the package directly to the consumer straight from their warehouse.  Some retailers even provide the manufacturer with custom-branded packaging materials to create the appearance that the package shipped directly from the retailer.  99% of the time this drop ship process is a strong positive for consumers.  By shipping direct from the manufacturer’s warehouse the package arrives faster and the price is lower.  If the shipment were routed through the retailer’s distribution center first and then forwarded onto the consumer, several additional days would be required.  Furthermore the shipping costs would be higher due to the use of multiple carriers and the need to involve more warehouse personnel.  The drop ship process is efficient for the retailer as well.  Using drop ship, the retailer does not have to hold as much inventory in their distribution center.  Drop ship is especially effective for:

·         Infrequently ordered products which would not be cost-effective for a retailer to stock

·         Expensive products which may be costly to stock in any significant volume

·         High turnover products which may be challenging to keep in stock

·         Time sensitive products which need to be transported as quickly as possible

The challenge with the drop ship process is visibility.  The retailer lacks visibility into when the product shipped and where it is located.  This is not an issue until something goes wrong.  And usually nothing does go wrong.  However, in the peak of the December holiday shipping period, some packages will inevitably be improperly labeled, incorrectly routed or accidentally lost.

So what is the answer?  Don’t wait until the last minute to buy gifts online?

Well…that is one option, but probably not realistic for many of the procrastinators who make the last minute on-line purchases.  A better option is for on-line retailers using “drop ship” models to ask their suppliers to send an “Advanced Shipment Notice” or ASN.  The ASN, often referred to as “the 856”, which refers to its ANSI X12 document number,  is an EDI document used to communicate key information about the consumer’s shipment to the retailer.  Common data within an ASN includes the transportation carrier, point of origin, expected arrival date, package dimensions, content weight and the shipment tracking identifier.  Once received from a supplier, the ASN data can be stored in the retailer’s system along with the consumer’s order.  The shipment information can be exposed on the retailer’s web site or be available to customer service personnel in the call center.  Either way, the consumer’s questions about when the package was shipped and where it is located can be answered quickly.

Lost Customers and Dropped Relationships 

So why don’t more tier 2 and 3 retailers use ASNs?  As with any IT initiative, key reasons businesses do not deploy technology are:

1) Lack of experience

2) Costs to implement and support

3) Inability to justify

The full cost of an ASN including creation by supplier, delivery over a network and receipt by the retailer is less than a first class postage stamp.  So it adds negligible cost to both the manufacturer and retailer.  In fact, many manufacturers are already providing ASNs to their retail customers for traditional orders delivered to the physical store.   Expanding an ASN program to include drop ship orders is a natural extension of their existing program. 

As for justification - it is much more cost effective for retailers to warehouse the ASN data (rather than the physical product).   But more importantly, the risk of losing consumer loyalty is too high to not provide this type of customer service.  For Internet shopping, the competition is only a click away.  Being empty-handed on Christmas is a memory one doesn’t easily forget.  The odds of a consumer making a repeat purchase at a retailer who failed to deliver last Christmas are remote at best.

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

Holiday EDInomics Part 2

There is a great article in the current issue of Business Week on the supply chain challenges Nintendo is experiencing with availability of its Wii console this holiday season.  This is an intriguing subject to me because it seems like every year there is one hot product that everyone wants, but no one can find.  Back in the 1980s we had “must have” gifts like the ColecoVision and Cabbage Patch Kids.  A few years ago the Sony Playstation 2 was the killer gift and then Apple’s iPod Nano. 

A few interesting insights on Nintendo’s Wii from the Business Week article:·        

• “Over Thanksgiving weekend, online retailer Amazon.com reported that its British site sold out its entire stock of Wii consoles in just 10 minutes.”·          
• “A search of eBay’s U.S. site pulls up thousands of listings for new Wii consoles, with bidding well above the suggested retail price.”  “Some…are going for triple the suggested retail price online.”

I’ve always wondered whether the hardware OEMs who manufacture these products intentionally short supply during the holiday season just to create a buzz.  Certainly, the hype around these “hard to find” products is successful in creating even greater demand.  One could argue that the hardware manufacturer enjoys higher margins from such an approach as they can sell the product at full list price.  Additionally, the OEM stabilizes sales across a broader time horizon throughout the year, rather than peaking around the holidays and experiencing lower sales in the subsequent quarter.  And with under-supply, there is no risk of excess inventory to manage.  All of these factors make an argument for intentionally limiting supply.  Or could it be that OEMs struggle to accurately forecast sales for these items, or for that matter, to manufacture in sufficient quantities to meet consumer demand.

The video game sector presents an interesting case study to examine this issue of supply and demand.  The industry economics are such that the video game consoles are typically positioned as loss leader products.  Higher margins are generated from sales of the actual games to the captive install base of owners.  Royalties from the game sales are shared by the publisher with the console manufacturer.  From a supply chain perspective, if the consoles are not in stock then game sales will suffer as the install base will be smaller.  Given this, it seems unlikely that any OEM would deliberately short supply.  Furthermore, with the fierce competition that exists between Nintendo, Microsoft and Sony, it seems unlikely that any OEM would risk losing market share during the key selling period by limiting supply.

So how does EDInomics fit into all of this?  B2B integration technologies are the key enabler that allows manufacturers to obtain demand data from their downstream channel partners, the retailers.  But that begs a larger question - What types of data can high tech OEMs use to better forecast demand for holiday season sales of hot products such as HDTVs, video game consoles and digital music players?  To build an accurate forecast will necessitate gauging consumer demand months in advance.  Demand signals such point-of-sale, loyalty or market basket data would probably less useful in this scenario.  It’s unlikely that console purchases in September or October would provide meaningful insights into demand in November and December.  In fact, an inverse correlation may exist as those in the market for a game console will probably defer their purchase until the holiday season.  More accurate sources of demand data might be the frequency of page clicks on popular on-line retail sites such as bestbuy.com;  links to the product on personalized “Wish Lists” such as amazon.com; or the number of bids on auction sites such as eBay.  Or if one could somehow eavesdrop on the holiday wishes children are telling Santa at local malls…  There are obvious privacy challenges with all of the above, but there are perhaps ways that data could be aggregated to prevent identification of individual consumers.

Once demand data is aggregated, a critical factor in supply chain success will be the ability of the OEM to propagate this demand data to multiple tiers of the value chain.  Regular updates of forecasts and inventory need to be shared with the contract manufacturers who produce the consoles; their suppliers who fabricate the semiconductors and components; and, of course, game publishers who distribute the software.  Access to electronic information whether it is via direct integration of ERP systems or using web portals will be a necessity to respond quickly to new demand signals.

With regard to Nintendo, I think the real story is not so much the supply chain challenges it has experienced in the past month, but rather the phenomenal sales success the Wii product continues to enjoy.  One year after the product introduction, Nintendo’s Wii is still experiencing amazing success in the marketplace.  Sales growth continues even with the recent introduction of Sony’s Playstation 3.  Nintendo’s quarterly earnings reflect the results.  On October 26^th the Wall Street Journal reported “Nintendo’s group net profit rose to 132.42 billion yen ($1.16 billion) for the half ended Sept. 30 from 54.35 billion yen a year earlier. Sales for the Kyoto-based company more than doubled, to 694.8 billion yen from 298.82 billion yen.”  Wii can only be envious of such strong results…Here are the links to the Business Week and Wall Street articles I referenced above: Business Week - A Long, Long Wait for a Wii, -http://www.businessweek.com/magazine/content/07_51/b4063030297026.htm?chan=magazine+channel_newsWall Street Journal – Nintendo Plays it a Wii Bit Cautious http://online.wsj.com/article/SB119697501146616201.html

Steve Keifer 

© Copyright 2007 GXS, Inc.  All Rights Reserved.