CASE Analysis: Seven-Eleven Japan Co. Essay

The case describes how seven eleven has successfully established an innovative business model. Toshifumi Suzuki, CEO of Seven eleven Japan (SEJ), described Seven Eleven Stores as: â€Å"Stores where you can find a solution for any of your daily life’s problems. We always try to plan and design a store in such a way that our store neighbours, in particular, can get whatever they need at any time they want† SEJ, headquartered in Japan, leads the world wide seven Eleven chain, which had 24,912 stores in 18 countries in March 2003.In 2003 ranking of retailers by market value, SEJ was number one in Japan. Since its establishment in 1974, SEJ has never experienced a fall in income or profits. With 9,757 stores as of May, 2003, SEJ is the largest CVS chain in Japan. Its stores feature the same basic designs: large, highly visible sign in green, red and orange, a large store window, much brighter than average lightning and a spotlessly clean store. SEJ identifies their customer orientation, offering not only a rich assortment of products but total comfort to customers, as the source of SEJ’s rise to the top of the Japanese retail industry. Industry Background The Japanese Distribution System Prior to 1974: Traditional Japanese retailing consists of a conservative, multi-tiered system that combines large numbers of small wholesalers and retailers into complex exclusive networks. These networks are not based solely on economic efficiency but also on tight human relationships. The wholesale to retail level ratios (W/R) is measure of layers within distribution system. W/R ratio 1992 1998 US 0.98 – Japan – 2.3 Although the development of information technology in the industry has gradually improved the efficiency of the distribution system, small-to-medium-sized retailers owe their existence mainly to the multi-tiered and vertically integrated structure. Retail Business Environment The Japanese retail sector is still dominated by small retailers. Firms with one to four employees make up about 70% of the total number of stores. In these small shops, CVS still accounts for only 3.2% of all stores and only 5% of total sales Because of Japan’s small land area, most Japanese retail stores have too little space to maintain a wide assortment of products in either the store or inventory. These small, local â€Å"mom-and-pop† stores typically lack both managerial know-how and planning skills. In addition, given their limited size, they are often unable to bear large inventory risks and thus have to rely on manufacturers and wholesalers to bear part of that burden. Legal perspective Japanese government enforced in 1974 the Large-scale Retail Store (LRS) Law which regulated the business hours of larger outlets. Initially applied to stores over 1,500 m2, it was later extended in 1979 to stores with an area of over 500 m2. The law mandated that stores close by 7 P.M. each day and remained closed at least 30 shop days per year. Fueled by heavy pressure from abroad, the deregulation trend caused the LRS law to be changed in 1990 and practically abolished in 2001. While operating its large stores under the LRS law, Ito- Yokado, a parent company of SEJ, launched a new retail business based on small regional stores, which can effectively co-exist with large stores. As a result, CVS chains prove that small stores can compete against larger retailers by improving the efficiency and productivity of their franchise and continual striving to meet customer needs. Because of the density of the store network, CVS chains are not only places to sell products, but are also becoming an important part of the social infrastructure. Seven-Eleven Japan Ito-Yokado, a parent company of SEJ, was founded by Masatoshi Ito in 1964 as a 66-square-foot family clothing store in Tokyo. After starting a new chain of super stores offering a range of food and clothing products, he expanded his business into other distribution areas such as restaurants, department, discount and convenience stores. By 2002, the Ito- Yokado group was one of the largest retail groups in Japan with  ¥5,574 billion ($41.6 billion) in sales and 114,600 employees. Toshifumi Suzuki negotiated directly with Southland, then owner of Seven-Eleven, to bring the convenience store concept to Japan. Japanese consumers were generally more sensitive to product and service quality, more fickle and less price-sensitive. Therefore products had to be fresh, and the turnover rate very high. To meet such customer requirements within the constraint of limited shelf and storage capacity, it was necessary to forecast customers’ demand by the time of purchase, the store location and the weather. Providing the customer with well-targeted, differentiated products 24-hours a day, 7-days-a week was critical. As of 2003, SEJ is the largest convenience store chain with  ¥2,213 billion ($17.5 billion) revenue and 5,061 employees. Its market value of $21,721 million and consolidated net income of  ¥82,825 million ($690 million) are the highest in the whole of Japan’s retail industry. Strategy SEJ practice of continuous item control and well-organized delivery system, and the heavy use of information technology (IT). The basic mission of an SEJ store is to provide solutions for all the problems of everyday life. Each store offers a variety of high-quality products and services that are required daily or on an emergency basis to make life easier and more â€Å"convenient†. The two main reasons for the failure of existing retailers. They ignored: 1)  the importance of convenience to the customer and 2) the quality of the products and the service. SEJ developed some key principles to define a quality convenience store. 1. Reduction of lost opportunity: A missed opportunity to sell an item because it is out of stock is one of the most serious problems in retail business in terms of disappointing customers as well as missing the actual profit. 2. Effective Item Control and Well-Planned Product Supply Management: The American practice of keeping large inventories of a wide variety of products could not be applied in convenience stores in Japan where shelf and storage space are limited and maintaining a large inventory is prohibitive. SEJ pursued a strategy of supplying products in high demand with a rapid turnover rate and eliminating dead or slow-moving products through item-by-item analysis. The well-organized analysis and frequent replacement contributes to SEJ’s high product supply efficiency. 3. Commitment to Customer Satisfaction with Original Product Development and Friendly Service:SEJ not only sells manufacturers’ products but also researches customers’ potential needs. SEJ uses this research to provide original products at reasonable prices (such as a lunch boxes and prepared foods) Merchandising The store space available for a Seven-Eleven franchisee is, on average, only 110 m2. The items kept in stock and on the shelf are precisely selected for the targeted customers and product quality is kept high. Product turnover is high, and goods are always new and food fresh. SEJ discovered that customer loyalty was driven more by specific items than by item categories. To meet the demand and achieve such tight item-by item control, SEJ implemented the POS (Point of Sale) system in 1982, whereby storeowners could identify customer trends and enhance product differentiation. SEJ introduced its POS systems to collect sales data used to improve merchandising and the item-by-item control process. For instance, the cash register would not open  until the operator pushed the account button indicating the gender and estimated age of the customer. This information from the POS system was used for consumer trend analysis. Store Network Expansion SEJ considers its market dominating strategy of high-density, clustered store openings to be the key to efficiency and stability. The advantages of the market dominance strategy are: Improved brand awareness Increased customer visits to the stores Boosted distribution efficiency Enhanced productivity of franchisee-support services Improved advertising effectiveness Franchise Strategy Approximately 60% of SEJ stores were modified from old family owned stores (e.g., liquor or rice stores). The relationship between franchiser and franchisee is one of reciprocal obligations. The franchisee is an independent business which gives SEJ royalties and a long-term commitment, and concentrates on the tasks of selling and effectively managing inventory. The royalty that the franchisee pays to the franchiser is 43% of its gross profit. In exchange for their long-term commitment and royalties, SEJ provides franchisees with service from field representatives called Operation Field Counselors (OFC). Each of about 1,300 OFCs supervises between seven or eight stores, providing (i) advice on store operation and ordering and (ii) information on the portfolio of available items and on sales methods. This person-to-person contact with store managers is a key element of the SEJ franchise system. Each OFC visits each store at least twice a week and spends at least two hours providing adv ice and information. Such a close relationship not only motivates franchisees but also supports company-wide brand image and promotional strategies. Outsourcing Policy SEJ is known for its outsourcing policy and ability to manage supplier relationships. The rationalized distribution system crafted by SEJ created conflict within the traditional wholesale system. Over time, however, SEJ’s  system has proved highly reliable and efficient, covering everything from raw procurement to product deliveries. The collaboration between SEJ and the business partners includes shared information systems and know-how about operations management as well as quality control in the food manufacturers’ factories and delivery centres. By 2002, the company had built a network of 223 distribution centres and 195 factories dedicated to fast food production, all of them created and operated by wholesalers, suppliers and forward agents. Information Systems Strategy Daily, Seven-Eleven stores serve a total of 9.5 million customers, process five million order transactions and send 35 million sales transactions to the information systems centre where sales data is collected, integrated and analysed. The decisions have to be based on well-analysed hypothesis, order and validation. Information technology (IT) for SEJ is merely a method to support the cycle. SEJ prefers to outsource most of its information systems management to external service providers due to the speed at which the information technology market moves. This strategy allows the information systems department of SEJ to focus on developing a systems vision that fits with the business strategy, while the rest of the information systems management is outsourced. The department has evolved into a more strategic organization that links needs from stores with top management and proposes innovative system plans. SEJ regularly explores opportunities to gain first mover advantage by trying out state-of-the-art technologies: the first POS system in Japan in 1982, the first major use of Integrated Service Digital Network (ISDN) in 1991, etc. Operation Infrastructure Total Information Systems SEJ has continued to develop total information systems. In June 1999, the fifth generation total information system, in which SEJ invested  ¥60 billion ($500 million), was released in collaboration with 14 companies including NRI, NEC, Toshiba TEC, etc. High efficiency, maintainability and reliability of the total network system: The system connects 70,000 computers in stores, at headquarters and at supplier sites through satellite telecommunications, exclusive lines, ISDN and mobile networks via the most appropriate telecommunication technology. The combination of ISDN and satellite telecommunications realizes 45x faster speeds at 35x better cost performance. Terminals are constantly monitored and software and configuration can be updated remotely. The most critical systems such as online ordering and accounting systems are backed up at physically separated locations in Yokohama and Osaka. And in earthquake-prone Japan, satellite telecommunication provides an extra layer of safety. The system, now shared by 10,000 stores, is considered highly reliable due to the crisis management planning and high service levels. The store information system which encourages all store staff to participate in ordering: SEJ provides stores with multimedia information such as pictures, video, audio, text and numerical data, which is used by all employees in Seven-Eleven stores. The system platform shared with business partners: SEJ provides its business partners—vendors, distributors and manufactures—with a common infrastructure consisting of 1,800 terminals at 1,100 locations. The applications on the platform vary depending on the partner’s business: raw material ordering system, inventory management, production management, automated sorting system, for example. The broad system infrastructure facilitates collaboration among SEJ allies by improving the efficiency of delivery through the sharing of order, sales and inventory information. And finally, sophisticated analysis system which eliminates intuitive decision-making . Electronic Commerce Business SEJ categorizes its electronic commerce (EC) business into four major groups: 1) financial services, 2) Internet shopping site, 3) public and regional  services, and 4) in-store intelligent copy machines. Financial Services (settlement, finance, and card service): Launched in 1987, Seven-Eleven hasdeveloped the payment acceptance service whichprovides customers with a convenient means to paytheir bills 24 hours a day, 365 days a year. Affiliatedcompanies number about 1,500 and the types ofpayment are mainly utilities: electricity, telephone,water, rent, and mail orders. This business has beensuccessful with 144 million yearly transactions witha total value of  ¥1.15 trillion (about $12.8 billion)and a 20% annual growth rate. Internet Shopping Site: 7dream.com, a subsidiary of SEJ, provides the internet shopping site by utilizing SEJ’s existing operating infrastructure in its EC activities. SEJ also ties into other internet sites and provides payment acceptance and pick-up service at the retail stores. Goods purchased via the Internet are picked up at stores 24-hours a day or delivered to customers’ homes, raising the value of Seven-Eleven stores and enhancing convenience for customers. Public, civil and regional services: SEJ’s meals-on wheels service, named Seven Meal Service, offers prepared meals and cooking ingredients to regional customers. Order can be made via the Internet. SEJ plans to expand its public services at stores via its EC platform so that customers can obtain civil services. In-store intelligent copy machines: Multipurpose copy machines at Seven-Eleven stores are connected the Internet and enable customers to print event tickets and documents created by customers at home as well as to pay for pre-ordered airline tickets. With the capability to attract 1,000 customers per day per store, SEJ is pursuing synergy between the existing retail and EC business units to encourage potential Internet users to visit Seven-Eleven stores and become new customers. SEJ also provides its EC platform service for EC partners with functions such as authentication, database, settlement, and distribution. Temperature-Separated Combined Distribution System Since 1976, SEJ has been developing a streamlined distribution system to efficiently integrate product supplies. The company established the Combined Delivery System, whereby the same kind of products coming from different suppliers can be centralized into 223 Combined Delivery Centres (CDCs). The combined distribution system allows products from different suppliers to be loaded on the same trucks for delivery to Seven-Eleven stores. Combined distribution consolidates product shipment from manufacturers to stores at similar optimum temperatures. In 22 years, SEJ has reduced the average number of vehicles visiting each store from 70 a day in 1974 to ten a day in 1998. Delivery routes and time are also well organized to maintain high efficiency. Competitors SEJ is the largest CVS chain in Japan in terms of the number of stores, sales, and net income followed by Lawson, C&S, Familymart, and Ministop. These top-five companies dominate the market with almost 90% market share. All four competitors operate franchise businesses with store networks expanding all over Japan. Competitors are increasingly investing in EC business to compete and establish dominance in a new area. In 1997, Lawson began implementing multimedia terminals in stores to gain first mover advantage. Lawson also tries to differentiate itself in the Internet shopping site named @Lawson by launching new services such net coupons, which was rare in Japan in 1999. Future Vision The company strives to achieve the maxim â€Å"the retail business should always keep up with change of customer demands† with three principles. 1. Responsiveness to changing customer needs and continuous improvement of customer services 2. Manufacturing retailer 3. The combination of demand chain and supply chain management with the common platform. Case Questions: 1. A convenience store chain attempts to be responsive and provide customers  what they need, when they need it, where they need it. What are some different ways that a convenience store supply chain can be responsive? What are some risks in each case? As In this increasingly competitive world, the whole concept of convenience stores from the existing concept of retail outlets have emerged to improve competitive advantage of businesses by enhancing customer service and by providing him with superior quality of products and experience. However, attaining this competitive advantage comes with added costs and risks. As responsiveness towards a customer’s demands increase, a convenience store chain gets exposed to greater uncertainty and risks- the risk of not having timely supply of essential goods, system breakdowns etc. A convenience store may deal in both perishable food items like processed fast foods and non-perishable items( life of more than 1 month) like frozen foods, magazines, beverages, and other consumer items like soaps, detergents etc. It is critical for any convenience store to have a tightly linked supply chain system for perishable items that need to be supplied to the final stores on daily basis. This distribution system ought to be flexible and highly responsive to alter delivery schedules depending on customer demands. The following are some ways that shall make convenience store supply chains operating on market dominance strategies more responsive- Local capacity: The convenience store chains can provide local cooking capacity that is, live counters at the stores and assemble foods on demand. The Inventory could be stored as raw material under controlled conditions at the stores and be supplied by the distributors at regular intervals. This would eliminate the need to supply fresh and fast foods from the to the outlets thrice a day thus bringing down the transportation cost of the entire distribution system and would add certainty to the production and distribution schedules. This strategy of selling fresh foods to customers would also enhance customer confidence in the brand. This is seen at the U.S. fast food restaurant franchise Subway where dinner and lunch sandwiches are assembled on demand. The main risk with this approach is that capacity is decentralized, leading to poorer utilization. High level of integration- One way of insuring more responsiveness is by further decentralizing the entire system. This can be attained by dividing each region further into  zones and having production plants in each zone nearer to each convenience stores. This would increase the set up cost for the parent company but in the long run but would also inhance the flow of information and service among the stores, suppliers and distributors thus increasing customer responsiveness and satisfaction. Local inventory: Responsiveness to customer demands can also be attained by having inventory available at the store at all times. This allows for the centralization of cooking capacity. But the main disadvantage of this way is not delivering fresh foods to customers thus increasing customer dissatisfaction and need for extra storage space. Rapid replenishment: Another approach is to set up rapid replenishment and supply the stores what they need and when they need it. This allows for centralization of cooking capacity, low levels of inventory, but increases the cost of replenishment and receiving. 2. Seven-Eleven’s supply chain strategy in Japan can be described as attempting to micro-match supply and demand using rapid replenishment. What are some risks associated with this choice? The main risk for convenience stores to adopt a supply chain system that works on rapid replenishment strategy is the potentially high cost of transportation and receiving at stores. The suppliers and factories are centrally located but the stores are scattered all across the city. So the company’s effort to supply fresh foods multiple times a day to all the stores increases the transportation costs. This one aspect can be taken care of by probably decentralizing the authority to produce fresh foods at convenience stores itself. Also, the fact that goods get unloaded multiple times a day reduces the store efficiency and increases customer dissatisfactions due to reduced services and frequent disruptions. This tends to fade away the customer’s experience at the store. Sudden breakdown of the information system or the transportation system connecting the stores to distribution centre and suppliers would also bring the functioning of the entire system to a halt leading to customer inconvenience and the resulting loss in sales. Thus convenience stores that attempt to micro-match supply and demand using rapid replenishment must take extra precautions to ensure timely delivery of goods, proper functioning of the information and transportation system, and customer’s convenience 3. What has Seven-Eleven done in its choice of facility location, inventory management, transportation, and information infrastructure to develop capabilities that support its supply chain strategy in Japan? Seven-Eleven Japan has chosen to operate a highly responsive operation and has chosen a supply chain design that supports this strategy. Their facility location choices are to saturate an area with stores, thereby making it easy for customers to shop and their own delivery trucks to move from store to store to replenish inventory. Seven-Eleven’s inventory system is run on an information system that transmits directly to the supplier and distribution centre; goods are produced using a pull system to replace what has been sold during that delivery period. The transportation system is flexible to maximize responsiveness while also achieving efficiency. All choices made by Seven-Eleven are structured to lower its transportation and receiving costs. For example, its area dominance strategy of opening at least 50-60 stores in an area helps with marketing but also lowers the cost of replenishment. All manufacturing facilities are centralized to get the maximum benefit of capacity aggregation and also lower the inbound transportation cost from the manufacturer to the distribution centre (DC). Seven-Eleven also requires all suppliers to deliver to the DC where products are sorted by temperature. This reduces the outbound transportation cost because of aggregation of deliveries across multiple suppliers. It also lowers the receiving cost. The information infrastructure is set up to allow store managers to place orders based on analysis of consumption data. The information infrastructure also facilitates the sorting of an order at the DC and receiving of the order at the store. The key point to emphasize here is that most decisions by Seven-Eleven are structured to aggregate transportation and receiving to make both cheaper. 4. Seven-Eleven does not allow direct store delivery in Japan but has all products flow through its distribution centre. What benefit does Seven-Eleven derive from this policy? When is direct store delivery more appropriate? Direct store delivery (DSD) would lower the utilization of the outbound trucks from the Seven-Eleven DC. It would also increase the receiving costs at the stores because of the increased deliveries. Thus, Seven-Eleven forces all suppliers to come in through the DC. DSD is most appropriate when stores are large and nearly-full truck load quantities are coming from a supplier to a store. This was the case, for example, in large U.S. Home Depot stores. For smaller stores it is almost always beneficial to have an intermediate aggregation point to lower the cost of freight. In fact, Home Depot itself is setting up these intermediate facilities for its new stores that are often smaller. In case of seven eleven, the benefit of delivery through its own distribution centre is total control of the system, aggregation of demand and minimal disruption at the retail outlets. If several suppliers tried to make two or three deliveries every day, it would detract from the store manager’s abil ity to provide customer service. Each of these suppliers would likely prefer their own way of doing things, their own inventory system, truck size, etc., which would make things more difficult for the Seven-Eleven system. The demand and production data would have to be shared rather than residing on Seven-Eleven’s system from cradle to grave. For items that cannot be prepared quickly, pull production may not provide the responsiveness that Seven-Eleven desires. In this case, the DC concept allows pooling of inventory which increases their overall service level while minimizing total system inventory of those items. Direct store delivery might be more appropriate if the items being delivered do not need bulk broken at a DC, have special handling requirements (lottery tickets, newspapers, or alcoholic beverages), or the supplier has a system that is consonant with Seven-Eleven’s (perhaps a regular bread run that has an information system that integrates with Seven-Eleven’s). 5. What do you think about the 7dream concept for Seven-Eleven in Japan? From a supply chain perspective, is it likely to be more successful in Japan or the United States? Why? 7dream makes sense given that Japanese customers are happy to receive their shipments at the local convenience store. From a logistics perspective, online deliveries can piggy back on Seven-Eleven’s existing distribution  network in Japan. Deliveries from the online supplier can be brought to the DC where they are sorted along with other deliveries destined for a store. This should increase the utilization of outbound transportation allowing Seven-Eleven to offer a lower cost alternative to having a package carrier deliver the product at home. The primary negatives are that 7dream will use up storage space and require the store to be able to retrieve specific packages for customers. One can argue that the concept may be more successful in Japan given the existing distribution network of Seven-Eleven and the frequency of visits by customers. Online delivery is able to link with the existing network. The high visit frequency ensures that packages are not occupying valuable store shelf space for a long time. Also, the frequent visits ensure that the marginal cost to the customer of picking up at Japanese Seven-Eleven is small. The 7dream concept allows e-commerce sites to use Seven-Eleven stores as drop-off and collection points for Japanese e-commerce customers. It has been extremely successful; a recent survey revealed that 92 per cent of the customers of one e-commerce company preferred to have their items shipped this way. It seems likely that this concept would work only for high density urban areas; It is being established in congested, less-safe urban areas for a service like package delivery. Suburban customers in the US would likely find it incredibly inconvenient and avoid it unless home delivery was not possible and the alternative was to pick up a package (for example, one that must be signed for) at the local carrier’s office. This is less likely to be the case in the United States. 6. Seven-Eleven is attempting to duplicate the supply chain structure that has succeeded in Japan in the United States with the introduction of CDCs. What are the pros and cons of this approach? Keep in mind that stores are also replenished by wholesalers and DSD by manufacturers. The supply chain structure for the US market can be close, but it can never be exactly as it is in Japan, and will probably not operate as smoothly as in Japan. Some of this is attributable to the culture and the corporate culture. Regardless of how like-minded supply chain partners claim to be, it would be extremely difficult to duplicate the collective spirit that  permeates Seven-Eleven Japan. The disadvantages of this system is that Seven-Eleven in the U.S. would probably have to run two system depending on whether the area could be treated as a dense urban location or a suburban or rural outpost. The cost of running the Seven-Eleven Japan system in middle-America would be prohibitive. The U.S. consumer in that region has too many alternatives that have 24 hour operations and are within a short drive. The difficulty of duplicating the Japan supply chain structure in the United States follows primarily from the much lower density of U.S. Seven-Eleven stores. This is compounded by the fact that Seven-Eleven stores are getting both direct store deliveries as well as wholesaler deliveries to its stores. Setting up its own DCs does not allow Seven-Eleven to get the same level of transportation aggregation as it gets in Japan. Its own distribution system would help more if all wholesaler deliveries and direct store deliveries were stopped and routed through the DC. Even then, having its own distribution system would add much less value than in Japan given the lower density of stores and larger distance between stores. Perhaps a hybrid system can be applied in select markets to test the system’s efficacy in the U.S. 7. The United States has food service distributors that also replenish convenience stores. What are the pros and cons to having a distributor replenish convenience stores versus a company like Seven-Eleven managing its own distribution function? The advantage of someone else replenishing stores is primarily cost; less transportation, material handling, and labour costs for your own system. Depending on how supply and reordering operations are designed, it might be possible for the distributors to perform the aggregation/demand smoothing function with minimal intervention by the individual Seven-Eleven franchise. One can contend that a distributor brings much more value to the table in the United States relative to Japan. Given the lower density of stores, a distributor is able to aggregate deliveries across many competing stores. This allows a distributor to reach levels of aggregation that cannot be achieved by a single chain such as Seven-Eleven. The disadvantage of the outsourced replenishment service is an overall loss of control, an increased  number of deliveries to each store, and the difficulty of integrating information flows across disparate systems. Also, Seven-Eleven is unable to exploit having a large number of stores. In fact, it may be argued that going through the distributor has Seven-Eleven subsidize deliveries to competing smaller chains that may also be using the same distributor