Supply Chain Management in Seven-Eleven Convenience Store Chain

Summary:

The case discusses about the operation of the world’s largest convenience store chain Seven-Eleven in Japan, and the way it became Japan’s top leading super market chain. Seven–Eleven started its operation in Japan in November 1973 under an area licensing agreement between Ito-Yokado Co., Ltd., and The Southland Corporation. With more than 15,500 stores worldwide, Seven-Eleven Japan Co., Ltd (SEJ) franchises 6,900 stores in Japan and most of the remaining stores located in North America. SEJ has maintained the top position in convenience stores in Japan for twenty years since it opened its first store in downtown Tokyo in May 1974 under the strong leadership of Mr.

Suzuki (Chairman and CEO of SEJ).

The retail chains total sales including franchise stores in 1997 were $16 billion with record net profit of $550 million, making it the largest retail chain store in Japan. It also had the highest average sales per store per day among the three leading convenience store chains SEJ, Daiei Convenience Systems and Family-Mart.

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SEJ's commanding market position and outstanding performance has been largely due to its pioneering innovation in rationalizing Japan's convenience retail industry. The convenience store concept is brought to Japan by Southland Corporation, which provides SEJ with the necessary know-how to get started. However, SEJ's innovation in supply chain management soon placed it far ahead of Southland in both profitability and business process technology.

Question Answer:

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?

Answer:

A convenience store can be more responsive by doing exactly what Seven-Eleven Japan is doing; many locations, rapid replenishment, appropriate technology deployment, and an equally responsive supplier.

As responsiveness increases, the convenience store chain is exposed to greater uncertainty. A convenience store chain can improve responsiveness to this uncertainty using local capacity, local inventory and rapid replenishment. Local capacity is the convenience store chain that can provide local cooking capacity at the stores and assemble foods almost on demand. Inventory would be stored as raw material. Local inventory approach is to have all inventory available at the store at all times. This allows for the centralization of cooking capacity. Rapid replenishment 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. The risks associated with this system are the costs coupled with demand uncertainty. If demand patterns change dramatically, or the customer base changes, then Seven-Eleven is left with an operation that is not needed. In Seven-Eleven Japan’s case, multiple operations might be shuttered if an apartment building or large employer shuts down or relocates. 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?

Answer:

Micro-matching supply and demand using rapid replenishment assumes that each store will repeat the same demand pattern on a daily basis. The tour bus phenomenon, where a group of unanticipated customers comes to the store and buys all of a type of product will cause difficulty for regular customers. During such an event, the store will likely stock out and customers may visit the next Seven-Eleven site down the block to make their purchases. Some of this demand may permanently shift, causing a local ripple; the replenishment may be excessive at one site and insufficient at an adjacent site for the next cycle. Another possible issue would result from delays in transportation; although deliveries are scheduled for off-peak hours, a disruption in traffic flow will result in low service levels for the next wave of demand. 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?

Answer:

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 center (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 though its distribution center. What benefit does Seven-Eleven derive from this policy? When is direct store delivery more appropriate?

Answer:

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. 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?

Answer:

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 percent 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; we can see it 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. 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.

Answer:

Combined distribution centers is methodology of supply chain, where distributors supplies the ordered products to the centralized unit of a company and then, from where company further supplies the inventories to its diverse situated outlets. With practice of CDC, the quality of the products supplied along the supply chain can be verified and control from single centers, which reduces the supervision and controlling cost.

Advantages:

I. Improved economies of scale: All the items required for the stores diversely located can be tracked to assign distribution center, doing this leads to have economies of scale for the procurement and distribution. When products purchased in bulk from the manufacturer, it leads to enhance buyer’s power, ultimately leading to minimizing product cost along with reduction of procurement cost. Along with procurement, economies of scale can also be achieved for distribution of the products along the supply chain.

II. Supervision and control for products and supply chain: With the practice of CDC, the quality of products supplied along the supply chain can be verified and control from the single centers, which reduces the Supervision and controlling cost.

III. Reduce the workload at the store: When the inventory is delivered only once a day, this shall make life easy for staff as they shall have schedule time to spend on inventory management, hence they can provide much of their remaining time completely focusing on customer need and customer satisfaction.

IV. Lower inventory management cost: Inventory management, is considered to be one of the difficult task in supply chain management. Inventory management incurs huge cost, which can be reduced by practicing CDC.

V. Improve distribution efficiency: To provide customers with worthwhile products, CDC can be use to deliver goods on right time as required and minimized cost. In the concept of CDC, the efficiency of distribution is to be the primary consideration in the delivery of goods. By increasing efficiency, it is naturally expected to increase profits for the company.

Disadvantage:

I. Difficult to control effectively: It is difficult to control effectively as the process dependent on one distribution center.

II. Difficulties in implementing distribution: the number of products to be distributed to the shops at the same time is a little difficult for the suppliers of the product, considering the amount of the existing store is so many in the different areas.

III. Inflexible distribution system: Delivery of the inventory is made in a fixed time schedule under CDC; the supply chain cannot be modified as per change in requirement.

IV. Higher dependency: When CDC is practiced the outlets get dependent on the centralized warehouse, the failure to receive the inventory in time leads to lower sales for the outlets. With the goal of introducing "fresh" products, 7-Eleven introduced the concept of combined distribution centers (CDCs). During this period, DSD by manufacturers and wholesaler delivery to stores
also continued. As a result the revenue and inventory turnover of seven-eleven increase compared to Japan.

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?

Answer:
Pros :

I. The responsibility to Manage the distribution system is entirely shifted to the distributor from 7-11. II. Cost effective comparing to managing own distribution function.

Cons :

I. Less control over replenishment cycles and/or quality of items. II. Less responsive than having own distribution function.

Conclusion:

With the help of models like Combined Distribution Center (CDC) and Door Store Delivery (DSD) incorporate better, more valuable supply chain network expecting solid store chain ground. Moreover, adaptation of IT implementation incurs a substantial use for Seven-Eleven. The company in its business services can require precise infrastructure within their distribution centers enabling effective information flows and streamline supply logistics. Thus right logistics and collaboration upon providing imperative business operation benefits considering the majority of customers worldwide.