Professional Documents
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7 Eleven
7 Eleven
Operations
Logistics an Supply Chain Management
This description of Seven-Eleven Japan was written after discussions with executives at Seven-Eleven Japan. The time spent by them is gratefully acknowledged. Michael Kligers efforts in setting up the meeting with Seven-Eleven are gratefully acknowledged. Some of the information used in this case is from a report written by Michael Kliger for the GIM Japan class (1995).
This note was written by Sunil Chopra, Professor of Operations Management, Kellogg Graduate School of Management, Northwestern University. This writeup has been prepared as a basis for class discussion. Copyright 2000 by Kellogg Graduate School of Management. To order copies, call (847) 491-3603. No part of this publication may be reproduced without the permission of the Kellogg Graduate School of Management.
Seven Eleven
and Ito-Yokado (52%). IYG acquired 70% of Southlands common stock for a total price of $430 million. Financial data for the different segments of the Ito-Yokado group demonstrates why Seven-Eleven Japan is worth a detailed study. Even though it contributes under 7% to the groups revenues from operations, it contributes over 47% of the groups operating income. Over the last ten years, Seven Eleven Japans revenue has grown on average by 12.6% annually and its net income has grown by 20.9% annually. Seven-Eleven Japan has managed to improve its return on sales (RoS) from 11.7% in 1984 to 25% in 1992. Over the last two years, the RoS has decreased somewhat to 23.8 % due to the economic recession in Japan. Based on its annual sales, Seven-Eleven Japan is the third largest retailer in Japan. However, measured by ordinary profits, Seven-Eleven Japan is the largest retailer in Japan, even larger than its parent company, Ito-Yokado itself. With its 5,523 stores, Seven-Eleven is the largest convenience store chain in Japan. It is closely followed by Daiei CVS with 5,045 stores.
Comparison of retail outlets by number of stores Type of Retailer Retailer Food Retailer Convenience Store 7-Eleven Japan Number of stores 1,591,186 622,751 19,603 4,629 % of total stores 100% 39.1% 1.2% 0.3%
While it is a small part of the overall retail outlets, Seven-Eleven Japan is a significant part of the convenience store outlets. Its share of this market has in fact grown since 1991. This growth has been very carefully planned exploiting the core strengths that Seven-Eleven Japan has developed in the areas of Information systems and Distribution systems.
Seven Eleven
Adhering to their dominant strategy, Seven-Eleven opened the majority of the 417 new stores in areas with existing clusters of stores. However, geographically Seven-Eleven Japan has a limited presence. They have stores in less than half (21 out of 47) the prefectures within Japan. However within prefectures where they are present, stores tend to be dense. The distribution of Seven-Eleven stores within Japan is contained in Figure 2. Less than 1 out of 100 applicants is awarded a franchise (a testament to their profitability). The franchise owner is required to put 3 million Yen up front. Half of this amount is used for preparation of the store and training of the owner. The rest is used for purchasing the initial stock for the store. Seven-Eleven has an active ongoing relationship with the franchises. Forty five percent of total gross profits at a store go to Seven-Eleven with the rest going to the store owner. The responsibilities of the two are as follows: Seven-Eleven Japan responsibilities: 1. 2. 3. 4. 5. 6. 7. Development of supply and merchandise. Providing the ordering system. Cost of system operation. Accounting. Advertising. Installation and remodeling of facilities. 80% of utility costs.
Franchise owner responsibilities: 1. Operation and management of store. 2. Hiring and paying staff.
Seven Eleven
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service attracts millions of additional customers every year. This service was started in 1987 and more than 10 million bills were paid using this service in 1994. In April 1994, Seven-Eleven began a service to accept installment payments on behalf of credit companies. The major thrust for offering these services is to make Seven-Eleven stores more convenient places to shop. The Integrated store information system at Seven-Eleven allows it to offer such information and accounting based services.
The role of each piece of hardware is detailed below. The Graphic Order Terminal is a hand held device, and has a wide screen graphic display that is used by the store owner/manager to place orders. The items are recorded and brought up in the order in which they are arranged on the shelves. The store manager/owner walks down the aisles and places orders by item. When placing this order the store manager has access to detailed analysis to POS data related to the particular item (from the store computer). A listing of the analysis available is given in Table 5. The store manager then uses this information when placing this order. The order is directly entered into the terminal. Once all the orders are placed, the terminl is returned to its slot, at which point the orders are relayed by the store computer to both the appropriate vendor and the SevenEleven distribution center.
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The Scanner Terminals read bar code and record inventory. They are used to receive product coming in from a distribution center. This is then automatically checked against a previously placed order and the two are reconciled. Before the scanner terminals were introduced, truck drivers waited in the store till the delivery was checked. Currently, the driver simply drops the delivery in the store, and a store clerk receives it at a suitable time when there are few customers. The scanner terminals are also used when examining inventory at stores. The Store Computer is linked to the ISDN network, the POS register, the graphic order terminal and the scanner terminal. It communicates between the various input sources, tracks store inventory and sales, places orders, provides detailed analysis of POS data (see Table 5), and maintains and regulates store equipment. In 1993, Seven Elevens ISDN network handled 200 million bits of sales data per day or 7 billion bits over the year. The network completely integrates information among stores, distribution centers, suppliers, and the headquarters (see Figure 4). The information network further improves the ordering process, inventory control, merchandising mix, and the efficiency of store operations as well as the distribution system. To better understand the functioning of this information network, consider a sampling of daily operations. As soon as a customer purchases an item and pays at the POS register, the item information is retrieved from the store computer and time of sales automatically recorded. In addition the cashier inputs the age and sex of the customer. To do this (s)he has five register keys for the categories: under 13, 13-19, 20-29, 30-49, 50+. This POS data is automatically transmitted on-line to a host computer. All sales data collected by 11 p.m. is organized and ready for analysis by next morning. The data is analyzed on a company wide, district, and store basis. The analyzed and updated data is sent back to the Seven Eleven stores via the ISDN. Each store computer automatically updates its product master file to analyze its recent sales and stock movements. The main objective of the analysis is to improve the ordering process. Table 5 gives a complete overview of the results of the analysis provided by the store computer. All this information is available on the Graphic Order Terminal used for order placement. A major benefit of the information system is that it has allowed Seven Eleven stores to better match supply with demand. The information system has allowed store staff to adjust the merchandising mix on the shelves according to consumption patterns in the course of the day. For example, popular breakfast items are stocked earlier during the day while popular dinner items are stocked later in the evening. The identification of slow and non-moving items allows a store to free up shelf space that can be used to introduce new items. Over 50% of the items sold at a Seven Eleven store change in the course of the year. Part of this relates to seasonality of demand and part to new products. When a new product is introduced, the decision whether to continue stocking is made within the first three weeks. Each item on the shelf contributes to sales and margin and does not waste valuable shelf space.
Seven Eleven
offer short replenishment cycle times. This allows a store manager to accurately forecast sales corresponding to each order. Seven-Eleven currently offers the stores three times a day delivery of all rice dishes (which comprise most of the fast food items sold). Bread and other fresh food are delivered twice a day. The distribution system is flexible enough to alter delivery schedules depending on customer demand. For example ice cream is delivered daily over the summer but only thrice a week at other times. The replenishment cycle times for fresh and fast food items have now been shortened to under 12 hours. A store order for rice balls by 10 am is delivered before the dinner rush. As discussed earlier, the store manager uses a graphic order terminal to place an order. All stores have been given cut-off times for breakfast, lunch and dinner ordering. When a store places an order it is immediately transmitted to the supplier as well as the distribution center. The supplier gets orders from all Seven-Eleven stores and starts production to fill the orders. The supplier then sends the orders by truck to the distribution center. Each store order has been separated so the distribution center can easily assign it to the appropriate store truck using the order information it already has. The key to store delivery is what Seven-Eleven calls the Combined Delivery System. At the distribution center, delivery of like products from different suppliers (for example milk and sandwiches) is directed into a single temperature controlled truck. There are four categories of temperature controlled trucks: frozen foods (-20C), chilled foods(5C), room temperature processed foods, and hot foods (20C). Each such truck makes deliveries to more than one retail store. The number of store per truck depends on the sales volume. All deliveries are made during off-peak hours and are received using the scanner terminals. The system works on trust and does not require the delivery person to be present when the store personnel scan in the delivery. This has cut down on the time spent at each store during delivery. This distribution system has enabled Seven-Eleven to reduce the number of vehicles required for daily delivery service to each store, even though the delivery frequency of each item is quite high. In 1974, 70 vehicles visited each store every day. Now only 11 are necessary. This has dramatically reduced delivery costs and enabled rapid deliver of a variety of fresh foods. Seven-Eleven has a total of 45 distribution centers (DCs) for combined delivery of rice dishes (20C) and 38 distribution centers for refrigerated items (5C). These DCs handle all the fast food and fresh items. None of these DCs carry any inventory. They merely transfer inventory from supplier trucks to Seven-Eleven distribution trucks. These items are delivered from a total of 152 companies and 201 plants. The transportation is provided by Transfleet Ltd., a company for the exclusive use of Seven-Eleven Japan, set up by Mitsui and Co. The outline of the combined distribution system is shown in Figure 6.
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TABLE 1
For fiscal years ended February 28/29 Net Sales (Billion Yen) Revenue (Billion Yen) Ordinary Profit (Billion Yen) Net Income (Billion Yen) Net Income per share (Yen) Dividends per share (Yen) Number of stores
For fiscal years ended February 28/29 Net Sales (Billion Yen) Revenue (Billion Yen) Ordinary Profit (Billion Yen) Net Income (Billion Yen) Net Income per share (Yen) Dividends per share (Yen) Number of stores
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1400
1200
1000
800
600
400
200
10
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11
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Sales analysis of product categories over time SKU analysis Analysis of waste or disposal Ten week sales trends by SKU Ten day sales trends by SKU Sales trends for new products Sales analysis by Day and Time List of slow moving items Sales analysis by product categories Analysis of sales and number of customers over time Contribution of product to sections in store display Sales growth by product categories Evaluation of merchandising
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Figure 6
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Figure 7
Year Inventory
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 12.3 11.1 10.9 10.6 10 9.4 8.8 7.9 7.7 7.8 7.7
Days of Inventory
14 12 10 8 6 4 2 0 1984 1985 1986 1987 1988 1989 Year 1990 1991 1992 1993 1994 Average Inventotry
Inventory
14
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Year 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Sales/store 485 502 506 508 524 545 564 629 669 682 669
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