Below are the handout copies from the study and presentation made to the Food Marketing Institute (FMI) UPC Scanning Committee sometime around October 1977 in Chicago, IL. I appolgize for the image problems. It was interesting trying to resurrect documents from the 1970's for presentation on the World Wide Web. This copy was rescued from a FAX.
The day after the presentation the McKinsey & Company Consultant, Tom Wilson, under contract to FMI to assist with industry automation, called Tommy Tomlin, Bill Selmeier's manager, to tell him that this presentation was adopted late the previous day as the official FMI justification for UPC Scanning. That marked an increasing rate of scanning store installations.
Introductory slide | |
This is to be a review of the status of Scanning in Supermarkets with particular reference to the benefits being achieved. The data presented is a result of a survey of supermarkets of a variety of size and types using IBM Scanning equipement from across the country. Some of their names are listed here | |
During the 1960's Supermarkets experienced:
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The industry attempted to combat these negative trends by:
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Getting benefit results in the initial scanning installations was very difficult. First there were very few items that had the symbol included in their brand packaging, forcing the scanning stores to apply expensive supplemental symbol labels to most packages. The industry had to rethink it's checkstand design and it took several iterations before productive designs emerged, Store management was unprepared to instill necessary discipline in scanning techniques, and elements in the scanning checkout equipment did not operate at the speed required for the task. Price removal benefits became questionable as retal clerks encouraged consummers to fight Price Removal and some legislatures proposed laws mandating continued item pricing in Grocery Stores. A lot of shopper education was requried. But that was 3 years ago, where do things stand now? | |
IBM recently surveyed stores with electronic checkouts across the country to attempt an update on the original pro forma projections based on actual experience. Here is where things currently stand in various benevit areas: Checkout productivity gains have been far less than the original projection of 1.185% of sales. Although it varies from store to store, productivity gains have only be .43% of sales on average across the country. | |
Several things contribute to the current state of productivity: IBM has noticed that it is necessary to scan and bag to achieve higher productivity. Scan then bag is only marginally faster. Impressive productivity gains with electronic keying systems have been attained through well disciplined and enforced checkout training. But significantly the time stamp nature of data in Checkout systems is letting all electronic system level stores achieve store wide improvements on when they bring people in, resulting in improved productivity results. | |
The results of Produce keying/scanning has been much better than originally projected. We found it ranged from a low of .07% at one store in the east to a high of .24% at a store in the west. Overall the average was .16%, significantly higher than the .10% originally projected. | |
Produce gains arise from several affects:
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Non-perishible shrink came in just about where it was projected, although there were wide store to store differences | |
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Price Removal has been a benefit most have found difficult to achieve due to consummer resistance. But for those stores that have successfully removed prices, the benefit has been almost double what was originally anticipated. | |
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System level products have check authorization data bases that speed up checkout settlement by avoiding having the customer go to a office window for check approval. Although a modest cost benefit, it greatly improves relations with the shoppers. | |
We were surprised to find that office savings were about 150% higher than originally projected | |
Office savings arise from savings through:
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Now we come to some observed benefit areas that were not considered in the original pro forma analysis.
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This benefit was a surprise that we didn't anticipate. We don't know why it happens, but in most cases the volume of sales in a store goes up after a scanning system is installed. This is a very healthy benefit, .631% of sales on average. That is because these are the most profitable sales you can make. You have already paid for the Advertising, Store Manager, Rent, electricty and so on. The net profit on additional sales is much higher than on the original base. | |
As I mentioned we can't really explain it, but generally within about 5 weeks of starting scanning, store sales will start up and level off on average 10-12% above the prescaning level. We haven't had any drop off reported. | |
Before we sum up the benefits let's consider the many alternatives open to Grocery stores today. There is not just one type of automation.
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This is a summary of the previous listed benefits. First, this is a summary of benefits achieved today at some scanning store. There is no score that is achieving all the benefits, but every benefit included is being achieved by some store. Since we collected details about how the benefits occur, we've appropriately assigned partial benefits to stores with less than a full communicating scanning system. An example would be the electronic scale accuracy benefit occures for all systems, the benefit from better pricing and PLU lookup depends on having an adequate PLU capability, etc. So partial benefits are awarded. It is also true that some beneits are more easily achieved. Some benefits require coordination between different parts of the chain to achieve, Price Strategy for example. Store Managers do not set the item prices. This benefit requires communication of in-store information to regional or headquarter personnel responsible for priceing. To reflect this difficulity, we have applied a factor to benefits in the summary: Easily attained in-store benefits are 100%. Benefits that might require a higher level of discipline, manager sophistication,etc but are still principally contained within a store, are factored at 70%. If the benefit requires coordination with personnel beyond the store to attain, it is factored to 40%. If you can follow along at the bottom, you see reported the Gross Benefit summation for each level of automation and the factored level. Note that because of all the additional significant benefit areas that have been achieved, the factored level scanning benefits is greater than the original projection even though achievenment on the specific benefit areas has generally been much less than originally projected. What does this mean? | |
Before we can know the true bottom line, we need to net out the expenses of each level of automation. In this we use Depreciation (covers cost of acquistion), Regular Maintenance, Taxes and Insurance, Headquarter Application Programming expenses to use the data, and the telecommunications costs. Summing the costs and netting them against the Gross Factored Benefits, we get net benefit that range up to slightly over 2% of sales for a communicating Scanning System. | |
Now rather than just consider this in traditional payback or return on investment terms, let's look at how this impacts the financial operation of your business. To do this we're using this economic model: Return on Sales times Asset Turnover equals Return on Assets. That number times the Equity Ration equals the Return on Equity. If we put industry average numbers in for each term it works out to slightly under 20% Return on Equity for the Supermarket Industry. Of course you can substitute the nunbers for your company. | |
Applying the net benefits from the levels of automation to the model, it shows us that benefits doen't really start to jump until there is communication of information out of the store and used to staffing, pricing, merchandising. When scanning is added there is another significant jump so that a communicating scanning store can potentially more than double the industry average for return on equity. | |
In summary this shows us that automation can enhance financial results. The benefits are real and can be most significantly achieved with communications and scanning. |
As was earlier noted, this presentation received immediate official acceptance and recognition. But, although everything had been stated as a % of sales to avoid comments such as "my stores are larger or smaller", we still got resistance in the form, "my stores have more/less produce", "different pricing policies", etc. After about two weeks we started applying the results in a new manner. An IBM Systems Engineer from Toronto assisted in developing an on-line program/tool that operated like an electronic spreadsheet. Those were almost unknown in 1977. The model became known as SPIFI, Supermarket Performance Investment Financial Indicator (the SE came up with the name) allowed anyone to take the starting position in this presentation and adjust any of the numbers and then see the results. It was demonstrated at the FMI show the following Spring and installed on the IBM internal continent-wide sales assistance tool, HONE, so that any sales/system engineer could develop "What If's" with his prospect/customer.
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