U.P.C. Scanning Benefits

[Note, a presentation with 27 individual charts was constructed after a survey of achieved benefits from installing scanning systems.  The Charts are in the book but here we excerpt the text from around those charts starting with the Chart 22 which layed out the structure for the Benefits Summation]

 
Chart 22
 
Levels of Automation

Before we sum up the benefits, let's consider the many checkout alternatives open to grocery stores today. There is more than one type of automation.

At the simplest level there are stand alone ECRs, essentially an electronic equivalent of the electro-mechanical cash register.

Next we have the inter-connected ECR. These machines are able to share subtotals, but generally have limited data storage for price lookups, etc.

The first system level is the minicomputer ECR. These can handle a large PLU file, check authorization files, etc. At this point I'd like to factor in another new technology that is now available, the ability to electronically transfer information from the store to a regional or headquarters location to assist them with their operations. So the next level is a communicating ECR (You won't be surprised that all IBM key entry systems are of this type.)

The next technology jump is to add scanning, which provides detailed item movement capability. and at the highest level the communicating Scanning system such as the IBM scanning system.
 

Chart 23
Benefits Summary
This is a summary of the previous listed benefits. Each of the benefits in the summary is achieved today at some scanning store. There is no store that is achieving all the benefits, but every benefit included is being achieved by some store somewhere.
 
Since we collected details about how the benefits occur, we can and have appropriately assigned partial benefits to stores with less than a full communicating scanning system capability. For example the electronic scale accuracy benefit occurs 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 benefits are more easily achieved. Some benefits require coordination between different parts of the chain to achieve, Price Strategy for example; Store Managers do not generally set the item prices. This benefit requires communication of in-store information to regional or headquarters personnel responsible for pricing. To reflect this, 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 achievement on the specific benefit areas has generally been much less than what was originally projected. What does this mean?

 
Chart 24
Cost/Investments
Before we can know the true bottom line impact, we need to net out the expenses of each level of automation. In this we use Depreciation (covers cost of acquisition), Regular Maintenance, Taxes and Insurance, Headquarters 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.

 
Chart 25
Profitability Model
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 Ratio 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 numbers for your company. 
(Note: this idea came from attending the IBM President's Class a year earlier.)
 

Chart 26
Impact on Profitability
Applying the net benefits from the levels of automation to the model, it shows us that benefits don't really start to jump until there is communication of information out of the store and used for staffing, pricing, merchandising. When scanning is added there is another significant jump so that communicating scanning stores can potentially more than double the industry average return on equity. The return to shareholders stays in the 19 -20% range until communications takes it to almost 24%. But U.P.C. scanning makes it jump to more than 35% and adding communications can raise that to 41.5%

Chart 27
Summary
In summary automation can greatly enhance financial results. The benefits are real and can be most significantly achieved when communications and scanning are part of the system.
[End of Presentation]

 
The presentation was well received. The message seemed to have been communicated that scanning was a very profitable investment. After the presentation I had lunch with friends, Ron Nuti, the POS Coordinator from Dominick’s, and Henry Morris whom I’d come to know from the meat project at Giant Foods. We were joined by two gentlemen from Burroughs checkstand, Don Ernsberger and Dan Hurley, and by Lou Koewler from Toledo Scale. We talked about the compatibility of the scanners and other register components with checkstands. There were only a few questions about the benefits presentation, mostly on the make-up of the stores and types of merchandising plans that the chains that were included used. I took this to mean there were no significant surprises, but they were still going to want to shade the conclusions based on differences between the stores in the study and their own stores. On the airplane ride home that afternoon I recalled the business games we had played to learn principles of running a business seven years earlier in the “Marketing in the Seventies” course IBM put on for all field Marketing Representatives. Would it be possible to create a gaming environment to consider the benefits of U.P.C. Symbol scanning? I decided I’d call Dave Clutter again sometime in the next few days.

The best evidence of the acceptance of that presentation came the following day in Raleigh when Tommy Tomlin told me he had just received a call from Tom Wilson, the McKinsey & Company consulting partner responsible for McKinsey’s contract with the U.P.C. Council. Tom Wilson asked Tommy to tell me that my presentation had been adopted as the official benefit analysis of the U.P.C. Council. It was now the official justification doctrine of the industry and as such would either lead people to switch to scanning checkouts or stay with key entry solutions. In hindsight it was probably most significant that unlike the prior studies, it pointed to the value of the information scanning systems provided to their marketing and management managers and reduced dependency on physically achieved and other in-store benefits. It way underestimated the informational value, but it recognized that most of the value was in the information. This would drive an industry historically run by high school graduates to incredible new levels of sophistication.