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The business case for point of sale systems relies on improved inventory, lower transportation costs

Point of sale (POS) systems can improve demand forecasting and inventory optimization. The ROI can be huge, but it demands a strong business case to justify the hassle and expense.

To optimize inventory with better visibility into demand, manufacturers are increasingly mining the reams of data that come from store point of sale (POS) systems. But the effort adds costs in IT, labor and data management that are hard to justify without a clear, quick return on investment.

"So you get POS data? What do you do with it, and what do you gain from it in other parts of your supply chain planning process?" asked Tim Payne, a research director at Stamford, Conn.-based Gartner Inc.

"You've got the best possible source of true consumer demand."
Tim Payne
Research DirectorGartner Inc.

Successful implementers often use their newfound control over inventory to improve vendor-managed inventory (VMI) programs and collaborative planning, forecasting and replenishment (CPFR). "You've got the best possible source of true consumer demand," Payne said. "The fine tuning you can do to your replenishment process in terms of getting product through is huge."

By making sure shelves are stocked with its product, a manufacturer can realize stronger revenue uplift from promotions and prevent customer defections to competitors. Then it can start to look for new ways to optimize inventory at distribution centers and other points along the chain.

How to get point of sale system data

Manufacturers don't usually have to invest in POS systems, which are the retailer's responsibility. "The real question is [whether] the retailer [can] provide the POS data [and] in what time frames," said Steve Banker, service director for supply chain management at ARC Advisory Group in Dedham, Mass. "Can they get it, can they get it clean, and can they get it frequently?"

A truly demand-driven supply chain requires at least weekly frequency, Banker said. The communication channel used by the retailer must also be accessible by the manufacturer. Electronic data interchange (EDI) and Web portals are common mechanisms.

Will the data cost anything? It depends on the retailer and how important the manufacturer is. "With the people who are best at supply chain -- people like Walmart -- it's free," Banker said.

Some IT investment is inevitable, and the analysts agree that a demand signal repository (DSR) is usually a prerequisite. "It's a huge amount of data," he said. "It's really not feasible without a DSR."

But most DSRs are daunting projects that require building a data warehouse and cleansing data sources to conform to formats that can be analyzed. So DSRs are typically undertaken only by giant consumer-goods makers such as Procter & Gamble, whose revenues are measured in billions of dollars and which can recover their costs in months with small-percentage improvements in sales or inventory.

A good example is lawn and garden manufacturer Scotts Miracle-Gro, which runs a DSR from Vision Chain alongside its SAP and Manugistics platforms. By boosting its demand signals to better coordinate promotions and inventory with its top three retailers -- Home Depot, Lowe's and Walmart -- Scotts saved millions of dollars, according to Boston-based AMR Research. The company increased inventory turns from 1.8 to 4.4 while cutting inefficient inventory moves by 42% and rework by 45%.

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But what can smaller manufacturers do?

Major retailers maintain portals for accessing their POS data -- Walmart's Retail Link, for example. The problem is the data needs lots of massaging to be useful, and companies that sell through multiple retailers might have too many portals to visit and emails to read, according to J.C. Young, vice president of operations at Pandigital, a maker of digital photo frames. For Young's four-person sales-support team, the process was "very time consuming," he said. One solution: software as a service (SaaS) versions of DSRs and EDI platforms like the one Pandigital gets from SPS Commerce. By centralizing POS data in an online "community," such services claim to take most of the IT maintenance and integration off the manufacturer's hands.

With or without a DSR, more data requires more people to clean it up and analyze it, Banker said. A number of vendors specialize in applications for analyzing POS data and other demand signals and coordinating them with inventory systems.

For example, ToolsGroup recently extended its Vendor Demand Sensing suite to VMI locations -- typically distribution centers and retail shelves – with new POS demand-sensing software. Joe Shamir, the company's CEO, said that by using daily POS data to regionalize aggregated national forecasts, manufacturers can replenish stores daily. Other benefits include fewer specially expedited orders and lower safety stocks.

Store perpetual inventory systems are a problem for demand forecasting, according to Shamir, because shrinkage and other factors diminish their accuracy. Many products have "lumpy" or intermittent demand that can't be predicted from historical patterns. "You can't say, 'Oh, I've had stock-outs, so I have to replenish,'" Shamir said. "It's already too late." Without POS data to show what's really happening in the store, retailers tend to over-replenish from the distribution center. "This is pure bullwhip effect, and it costs you huge amounts of inventory."

Closing the sale with POS

"What you're selling is better demand-supply matching, particularly around promotions and new-product introductions," Banker said. "If you want to have supply chain demand visibility, you would need to be getting visibility into the retailer's distribution center and stores, and what's selling out of the stores. You get that from the POS."

C-level executives should also be shown how a POS demand-signal initiative can help the manufacturer become, or remain, a "category captain" to its largest retailers.

Demand planners and supply chain managers can both benefit. Sales and marketing teams, especially category managers, can analyze data by demographics and regions to redirect promotions to higher-volume stores. Inventory managers can carry demand signals upstream to eliminate excess goods and labor in distribution centers and warehouses.

Payne said the No. 1 selling point is more sales through improved on-site inventory availability. Next are lower shipping and transportation costs for meeting retailer service levels.

A common pitfall, Banker said, is that DSRs and other POS-driven initiatives will be "balkanized" and fail to achieve the companywide collaboration that is a prerequisite of success. "This has to be driven down from the C-level, and it has to be done in a uniform way," he said. But each department should still have a window into the data that suits its particular needs.

Lack of focus is another risk, Payne said. The solution is to identify a narrow pilot that provides a quick win and a learning experience. "Get something in and get it working."

Next Steps

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