Topic: SEVEN-ELEVEN JAPAN IN 2000
Topic: SEVEN-ELEVEN JAPAN IN 2000
This is a Supply Management assignment.
Please read the 7-11 case and answer the following questions,make it clear and brief.
1. Based on the case, you are required to identify the competitive advantages of the company’s supply management
2. Explain the information flow and how information is coordinated (using block diagram and notes) in a computerized purchasing and supply management system for a
3. Analyze the value of implementing RFID in a given application (such as Wal Mart or Home Depot)
4. How to improve the procedure of implementing ERP system in a given organization for purchasing and supply management (similar to the situation in the Hemingway
5. As a purchasing manager responsible for acquiring certain products and services for a given organization, you need to define and specify the “quality” in different
dimensions (for both the product and service requirement.)
SEVEN-ELEVEN JAPAN IN 2000
This article examines the legendary Seven-Eleven Japan in 2000, whose superb demand chain has led to a stock performance that mirrors that of Wall Street darlings like
Dell and Intel, even during the Japanese economy’s slowdown.
Seven-Eleven Japan: Data-Rich System and Agile Logistics
Seven-Eleven Japan (SEJ) is that country’s largest convenience store chain. Under the strong leadership of Chairman and CEO Toshifumi Suzuki, SEJ has been a business
success from the time the company opened its first store in downtown Tokyo in 1974. For the last fiscal year, which ended in February 2000, SEJ’s total sales were
¥1,963 billion (about $18 billion), with record operating revenue of ¥327 billion ($3 billion) and net income of ¥68.2 billion ($620 million). This marked the seventh
consecutive year that SEJ has posted the highest operating income in the Japanese retail industry.
Seven-Eleven Japan enjoys significantly higher sales per square foot or per store than its competitors do. Average inventory turnover time is between 7.0 and 8.4 days,
which means that a store basically turns its inventory about every week. This level of performance has not gone unrewarded. A ¥100 investment in SEJ stock in 1980
would have been worth ¥300,000 in 2000. (Exhibits 3 and 4, respectively, show the company’s significant increase in shareholder value and give key performance
In 2000, SEJ has more than 8,200 stores in Japan, a number that is growing by 400 to 500 every year. The average store is only about 1,200 square feet in size, or
about half the size of a sister Seven-Eleven in the United States. With the size limitation, the typical SEJ store can carry only 3,000 SKUs (compared with, say, a
large supermarket, which can have well over 100,000 SKUs). Sales can be classified into processed foods such as drinks, noodles, bread, and snacks (32.9 percent); fast
foods like rice balls, box lunches, and hamburgers (31.6 percent); fresh foods such as milk and dairy products (12.0 percent); and nonfood items, for example
magazines, ladies’ stockings, and batteries (25.3 percent). SEJ is the country’s number one retail outlet for fast foods, batteries, and ladies’ stockings, and the
number two outlet for magazines and paperbacks.
Effective demand chain management is a key factor behind SEJ’s success. The company has created a solid information system that provides timely and comprehensive
signals about market demand. It also has developed an intelligent process to turn such data into useful information for product replenishment and new product creation.
In addition, the company has built an extremely agile logistics system that supports product replenishment to the stores. In a very real sense, SEJ has sharp eyes to
see what the market likes, a smart brain to quickly develop plans to react to the market preferences, and a fast arm to deliver the plan.
The Sharp Eye and Smart Brain
In 1991, SEJ began using an Integrated Service Digital Network (ISDN) to link its retail stores with the central headquarters. The two-way communication gives
franchisees direct access to the host computer and the central database containing POS (point-of-sale) data and analyses. In place since 1998, this advanced system
integrates store-level information with supply chain-wide data by using new client applications, satellite communications, and Internet connections.
When a customer comes to the checkout counter with a basket of items, the clerk first keys in the person’s gender and age (estimated) on a separate keypad. The clerk
then scans the bar codes of purchased items. These sales data are passed on to headquarters via the ISDN. At the same time, the data are processed by an in-store
computer system that controls all equipment and peripherals in the store. The in-store computer enables both the store manager and SEJ headquarters to update and
analyze POS data simultaneously. Using the real-time on-site information, store managers can analyze the hourly sales trends and stockout rates of all SKUs by customer
groups. Headquarters aggregates the data by region, product, and time, and makes that information available to all stores and suppliers by the following morning.
(Exhibit 5 presents an overview of SEJ’s information system.)
Every Monday, Chairman Suzuki presides over a business meeting in Tokyo attended by 100 corporate managers. In the morning, they review the stores’ performance for the
previous week; in the afternoon, they develop strategies for the upcoming week. On Tuesday morning, the strategic guidelines are presented to SEJ’s operation field
counselors (OFCs), who have gathered in Tokyo. Each OFC is in charge of about eight stores. That afternoon, these field managers assemble in regional meetings to map
out tactics for executing the strategies. A key part of this exercise is to consider local factors such as weather, road construction, advertising programs, and
activities such as sporting events. They also assess any local trends in consumer tastes. On Tuesday night, the OFCs fly back to their regions. The next morning, they
visit their respective stores to deliver the messages developed at headquarters and help them implement the tactics recommended for the week.
The POS data and the feedback from the weekly meetings are summarized in a list of recommended SKUs and tactics for actions. The store manager walks along the store
aisles carrying a hand-held device that can be used to check stock levels and sales trends as well as place orders to headquarters via the ISDN. Aggregated orders then
are transmitted from headquarters to the manufacturers, wholesalers, and distribution centers. Orders for fast food and fresh food items are placed three times a day,
magazines once a day, and processed food items three times a week.
SEJ also uses sales trends in deciding whether to keep or drop an item. Typically, a new product reaches its sales peak within a week or two and begins to decline
several weeks later. When per-store sales drop to a certain level, the product is deleted from the recommended list. The life span of most products is shrinking over
time, and new products are being introduced and older products dropped at a faster rate. Of the 3,000 SKUs carried by each store, about half are replaced every year.
POS data also are used to forecast future consumer trends and to assist manufacturers in new-product development. In the early 1990s, for example, sales of semi-
prepared fresh noodles were going up at the expense of dry ramen (thin-coiled noodles). Spotting this trend early on, SEJ developed a new category of fresh noodles
jointly with the manufacturer, Nisshin.
Seven-Eleven Japan also effectively uses the data to adjust store layout multiple times a day. For example, a store may detect a sales pattern in the sizes of milk
containers sold at different hours of the day. The store manager can rearrange the milk products accordingly so that customers can easily pick up their favorite items
when they visit the store.
The lesson here is that to have the right product replenished in the right quantity at the right time, you need comprehensive data on sales, purchase patterns, and
customer profiles as well as on store characteristics and any local constraints. SEJ makes an intensive effort to collect these data not just through advanced
technology but also through the human effort of headquarters planners, operation field counselors, and store managers. The process may seem laborious: weekly
management meetings, OFCs flying to Tokyo every week and then visiting all of the stores, store managers checking on individual SKUs in order to make replenishments
and merchandising decisions. But the results speak for themselves.
The Fast Arm
In a conventional Japanese distribution system, each manufacturer has its own designated wholesalers, which exclusively distribute its products. But Seven-Eleven Japan
requires frequent deliveries of small lot sizes because of the stores’ limited storage space. For this reason, the company created a “Joint Delivery Program” whereby
product groups in the same temperature zone are cross-docked at a single supplier distribution center (SDC) and delivered in truckloads to groups of stores in
different geographical regions. The SDC is run jointly by suppliers. This consolidation and cross-docking operation has decreased the average number of deliveries to
each store from 70 per day in 1974, to 12 in 1990, and down to 10 per day in 2000.
Store delivery routes and times are painstakingly planned and executed. Drivers are expected to make the delivery within 10 minutes of the established timetable. On
average, they spend one and one-half minutes at a store. If a delivery is late by more than 30 minutes, the transportation company pays the store a penalty equivalent
to the gross margin of the product being delivered. The transportation company maintains radio communications with drivers, and SEJ headquarters keeps a log on all
delivery activities. When an emergency arises, drivers, the store manager, and headquarters communicate with each other to take corrective action.
To handle the uncertainties of traffic situations in Japan, SEJ forces its logistics partner to diversify its vehicle portfolio to include trucks, motorcycles, ships,
and even helicopters. On the day of the Kobe earthquake, SEJ pressed into service seven helicopters and 125 motorcycles to rush delivery of 64,000 rice balls to
earthquake victims in that city (an area in which SEJ has no stores, by the way). Traffic on the Kobe highway that day had slowed to two miles per hour.
Given the importance of frequent replenishments to prevent stockouts, SEJ’s investments in the logistics system are understandable. Without such an agile operation,
the promise of smart replenishment could never become reality.
SEJ’s unrelenting attention to data-rich demand chain management has paid big dividends over the years. To illustrate, the average daily sales per store were ¥366,000
($3,300) in 1977; in 2000 they were ¥681,000 ($6,200). During the same period, average inventory turnover time improved from 25.5 to 8.4 days, while the average gross
margin rose from 24 to 30 percent. It’s important to note that the benefits of SEJ’s system extended throughout the entire supply chain to franchisees, suppliers, and
logistics service providers.
SEJ’s logistics system and data-rich processes have been emulated by competitors like FamilyMart, Lawson, AM/PM, and Sunkus. As a result, the whole convenience store
category in Japan has enjoyed a level of success and growth unmatched in other countries.
Commonalties and Differences
SEJ enjoyed great financial successes as a result of their smart demand chain operations. It also recognized that data are the key to this success and have developed
elaborate information systems to capture POS data to drive replenishment in the demand chains. The comprehensiveness of the data collected at both companies is
particularly impressive. Every store collects and stores data daily, allowing the company to capture and act on day-of-the-week fluctuations. The retailer also keeps
data for an extended period of time to detect trends and seasonal patterns. At SEJ, point-of-sale data are captured hourly, thereby enabling detailed analysis of
demand patterns. In addition, basic customer demographics (age and gender) are collected, along with local events and other region-specific data.
SEJ also uses the data to create knowledge. Replenishments are based on sound analyses of the underlying data, which results in smart decisions. The success of this
approach is reflected in the operating results of both companies.
Thanks to the small number of SKUs and localized product offerings, SEJ can afford to use intensive human inputs and analyses in developing replenishment plans and
making product merchandising decisions. The need to have just the right product in the right quantity justifies the labor-intensive processes and the involvement of
multiple parties in the decision-making. And because of the extensiveness of the data used in these activities, SEJ’s demand chain can be considered to be data rich.
As the SEJ examples clearly demonstrate, demand chain management is both art and science. Although both companies have adopted certain common principles, each has
applied specific techniques appropriate to its respective environment and operating characteristics. Perhaps the most compelling lesson learned from these leaders is
that smart demand chain management goes far beyond cost reduction. It also brings great opportunities for market and sales expansion and for significant shareholder
value appreciation. Put another way, smart data-rich demand chain management is a powerful vehicle for value creation.
As compare SEJ with Longs Drug Stores two companies share many common traits, there are important differences based on their respective environments and physical
characteristics. These underlying characteristics have forced SEJ to focus on different levers in managing their demand chains. (Exhibit 6 compares the environments
and levers for the two demand chains.)
In the case of SEJ, the company must go to extraordinary lengths to ensure that its stores are stocked with the right product to avoid stockouts and eliminate
nonperforming items. To maximize the sales opportunities at each location, SEJ must carefully tailor the merchandise selection to the tastes and needs of the local
market. Additionally, given the limited number of SKUs, the company’s supply base is not as widespread as those of other retail chains.
Long and SEJ: A Comparison
Company Environment Levers
Seven Eleven Japan Tight space constraint.
Highly localized markets.
Smaller number of SKUs.
Proximity to suppliers. Agile logistics to support frequent replenishments.
Stockout cost dominates all other costs.
Intensive attention to replenishment decisions.
Longs Drug Stores Uniform store format.
Wide selection of SKUs.
More geographical dispersion of stores and supply bases. More bulk and batch replenishments.
Need to balance inventory, transportation, and handling costs.
Automated intelligent replenishment decisions.
The costs of stockouts are particularly high in an operation such as SEJ’s. Because of this, the company has developed a sophisticated logistics system that can bring
products to the store at a high frequency and in small quantities. The proximity of the supply bases enables SEJ to consolidate shipments from the multiple suppliers
and cross-dock products to the stores. This approach incurs high logistics costs relative to other retail chains. But because product availability is so important, SEJ
believes that the additional costs are justified.
Emerging e-Commerce Initiatives
Seven-Eleven Japan are participating in new Internet-based initiatives to improve efficiency and customer service. The potential benefits of this initiative are huge.
It is estimated that product flow optimization can potentially free up close to $20 billion in capital industrywide. In addition, new efficiencies in information,
transaction, and money flows are estimated to generate annual industry savings of $5 billion to $7 billion.
SEJ, for its part, is the key player in a “click-and-mortar” model called 7dream.com. This is a joint venture of seven giants of Japanese industry: SEJ, Nomura
Research Institute (NRI), Mitsui, Sony, JTB, NEC, and Kinotrope. 7dream.com offers a large pool of products on its Web site. Customers can place their orders online
and then pick up the merchandise two or three days later at a local SEJ store. An important feature of 7dream.com is the availability of MMKs (multimedia kiosks),
which are located at each SEJ store. Customers without their own Internet connection can use these kiosks to order items not available in the store, thus effectively
opening up valuable “virtual” shelf space. In addition to leveraging SEJ’s brand and existing customer traffic, 7dream.com leverages the company’s existing network of
warehouses, logistics providers, information systems, and suppliers.