Scan-Based Trading: A Strategy for High-Shrink Categories

The retail industry represents a competitive market with retailers continuously looking for ways to balance their customers’ demands as it relates to product inventory with their overall operational efficiency goals. As more product categories require inventory diversity, maintaining supplier relationships is more important and challenging than ever.

Categories with numerous SKUs, such as bread, greeting cards, condiments, and salty snacks, tend to be prone to high-shrink percentages and low sales predictability. For these categories in particular, driving revenue growth and performance requires strong supplier relationships and playbook adjustments. Due to the volume, these vendors typically don’t experience the same level of relationship nurturing that other categories benefit from. Innovative inventory management strategies, such as scan-based trading (SBT), are being deployed to more effectively manage the retailer and supplier relationship.

Strengthening Supplier Relationships
Supplier relations influence many retail operation decisions. Trustworthy relationships go a long way in helping retailers keep shelves stocked with products in high demand, while making necessary adjustments for slower-moving products. If retail managers supported every supplier that delivered products to stores, there would likely be fewer empty shelves and lost products.

Inventory management strategies can be leveraged to foster strong retailer-supplier relationships and ultimately grow revenue. SBT, for example, enables category managers to establish successful relationships with vendors in high-maintenance, labor-intensive categories. Inventory is paid only after it is sold to the consumer; suppliers maintain ownership of inventory until a product is scanned at the point-of-sale. Without putting cash at risk for inventory costs, retailers free up operating capital.

For suppliers, SBT can serve as a means to gain shelf space in desired retail locations without putting the burden of inventory investment on the retailer. Retailers, in turn, can try new products and determine what SKUs sell where, growing revenue for themselves and their supplier partners.

Using SBT to Improve Category Performance
High-SKU categories, such as those found in grocery, convenience, and big-box retail, are notoriously difficult to manage. These product areas face high labor intensity due to restocking and rotation, fragmented vendor networks, low forecast accuracy, and volatile demand patterns. SBT offers a collaborative approach to high-shrink, low-profitability categories. The model aligns retailer and supplier goals to help minimize financial risk, improve product availability, and offer valuable retail data. In a competitive high-SKU environment, these strengthened supply chain relationships unlock operational efficiencies that drive revenue growth.

One national convenience store retailer, for example, was able to convert over 500 SKUs in electronics and general merchandise to SBT in its stores. This conversion gave the suppliers visibility to see what was selling best across a wide range of products, to react to buying trends and to replace products that were not selling well. This shift resulted in increased sales, improvement in overall shrink and a considerable reduction in inventory carrying cost for the retailer.

Other businesses that operate with high levels of product variety, such as those in the sporting goods and home improvement sectors, are similarly deploying SBT. By freeing up capital once reserved for inventory, retailers can invest in strategic growth drivers, such as consumer experience initiatives, to better compete with both brick-and-mortar and e-commerce stores.

Managing SBT Internally vs. Partnering with a Service Provider
Once deployed, an SBT model is managed internally or by a third-party service provider. While some retailers choose to manage SBT themselves, many partner with providers that specialize in these strategies. Aspects to consider include:

• Real-time data accessibility: A provider can receive point-of-sale data, as well as the supplier delivery data, across all locations daily and present this data in a digestible format for the retail operator and the supplier. The sales data can be aggregated to closely track KPIs while also tracking sales down to SKU levels.
• Faster shrink detection: Scan-based trading already reduces shrink due to the nature of the process; however, shrink is still a possibility. With the collection of both POS data and delivery data, a provider can turn raw data into actionable insights that quickly detect shrink issues and share this with the retailer. Daily data insights and more eyes on the numbers bring timely course correction, protecting the business from margin erosion.
• Data shareability: Data can be shared with suppliers to establish trust – data provided by the third party offers a neutral view, allowing the retailer and supplier a way to make product decisions that have a dual benefit. When sales growth for both parties is reliant on keeping shelves full of the right SKUs, data transparency can keep daily field strategy efficient and targeted. The what, where, and when become manageable with such foresight.
• Product payment: When the product is sold at the point-of-sale, the supplier is paid on time and in accordance with the agreed terms and will not experience delayed payment since payment is made through the service provider.
• Timely reconciliation with fewer disputes: Data transparency offers less room for time-consuming price and product disputes. With a data provider, most disputes are resolved before the payment due date.

A Collaborative Path to Profitability
As retail organizations face more competition, they must get creative. Inventory management helps to transform the retailer and supplier relationship, building a collaborative, data-centric approach to high-SKU product categories. SBT is a strategic solution for improving overall availability while tackling the challenge of low-margin products. Supplier partnerships can be strengthened without increasing capital risk. In today’s competitive retail landscape, it is a strategic tool that fuels long-term growth for both retailers and their suppliers.

Quote or advice from the author: For suppliers, SBT can serve as a means to gain shelf space in desired retail locations without putting the burden of inventory investment on the retailer.