Download I.J. Green Engineering and Management, Vol. 1 No. 1, 2012

International Journal of Green Engineering and Management Vol.1 No.1 2012
Reengineering of Large Discount Store: ASNR-SP (ASN Replenishment Specific
Purchase) Business Model
Paik, Sihyun*
Park, Jin**
* [email protected] : Department of Management Information System, A University, CHINA
** [email protected] : School of Business, BBB University, U.S.A.
Abstract
Recently, ASN (advanced shipping notice) service has been applied to ordering system in some large
discount stores in Korea. ASN is a supply service system in which the products are supplied not by the
package of items but by the item itself. But many suppliers are not adopting the service strategically.
This paper suggests a direction for the ASN service - ASN replenishment (ASNR) method, and a new
business model - ASN Replenishment Specific Purchase (ASNR-SP) model. The main beneficiary of the
ASNR is the suppliers, and that of ASNR-SP is the retailers including the large discount stores.
The reengineering of supply processes in the large discount stores will be proposed along with it. The
supply process analysis is made in two different ways, first using EPC (event process chain) method, and
second using ACM (activity chain model) method. In the former, the supply process is analyzed based on the
events, and in the latter, based on the activities.
Keywords: supply chain; reengineering; inventory; business model; large discount store; lot size
1. Introduction
Some years ago, a book titled ‘Lean Thinking’ ignited a greater interest in how to avoid waste in SCM. As
more related books were published, firms have tried very hard to find ways of reducing waste and creating
values. The recent re-publication of Hammer and Champy’s (2004) ‘Reengineering the Corporation’
demonstrates that more firms are showing interest in this area, because it presents one of the major
methodologies of improving business processing.
Some of such attempts adopted by large discount stores include the rearrangement of supply timing,
capable-to-promise (CTP) service, and advanced shipping notice (ASN) service. Those firms have also
experienced major changes such as the introduction of ‘Super supermarket’ (SSM) business models, and
mergers and acquisition for the expansion into new markets.
Recently, some large discount stores in Korea have adopted ASN service in part of their operations. ASN is
a supply service system in which the products are supplied not by the package of items but by the item itself.
As a result, ASN can reduce the amount of inventories (Paik, Hong and Rim, 2008). The introduction of the
ASN service would mean great changes in processing within supply chain management (SCM), and bring
about new profit opportunities. It would also mean another need for reengineering of business processing.
Even though it has been about two years since the ASN service was first introduced in Korea, not many
suppliers are adopting the service. In this paper, a direction is suggested for the ASN service: the ASN
replenishment method (ASNR). It is a new method adopted by large discount stores. The reengineering of
supply processes in large discount stores will be proposed along with it. Then a new business model with the
ASN service for large discount stores will be proposed: the ASN Replenishment Specific Purchase Model
(ASNR-SP). The supply process analysis is made in two different ways, first using ‘event process chain’
(EPC) method, and second using ‘activity chain model’ (ACM) method. In the former, the supply process is
analyzed based on the events, and in the latter, based on the activities.
2. Related Research
The essence of ASN is the ‘ordering odd lot,’ or ordering less than the regular lot size. In the past, items of
same goods were packaged into boxes and the boxes with bar codes affixed were shipped. However, with the
ASN service, items of different goods are packaged into a box, and the box affixed with a bar code and a list
of goods in it will be shipped. The distribution center and the store are notified before the box with items of
different goods is sent to them so that they can count the items rapidly. Figure 1 shows the concept of the
ASN service and its process.
*Corresponding Author : Paik, Sihyun,
e-Mail: [email protected]
I.J. Green Engineering and Management, Vol. 1 No. 1, 2012
Since the concept of the ASN service is still not very well-known, and large discount stores adopt the
service only partially, no research on the ASN service has been done. However, there are some books and
research papers available regarding the importance of ‘ordering odd lot.’ Hammer and Champy’s
“Reengineering the Corporation” pointed out that Procter& Gamble (P&G) and Wal-Mart were exploring the
possibility of supplying items without placing orders. In ‘Lean Thinking’ (Womack and Jones, 2006),
Womack and Jones maintain that the average inventory could be reduced by ordering odd lot. Jung (2005)
also explains the ‘pull policy’ in which inventories will be replenished by regular orders. Paik et.al. (2008)
also used the concept of ‘ordering odd lot’ when he was introducing the demand control chart. It is an
inventory system in which the inventory is managed by ‘every period full replenishment’ (EPFR) system and
demand is not forecasted. However, the discussion was limited to theoretical aspect of how to reduce
inventory levels.
Originally, the ASN service was first introduced because the order lot size was too big in the large discount
stores. Even though it is not easy to generalize due to the different demand rates for different items, Paik
(2008) has shown, based on the observation of one-year’s sales data of do-it-yourself (DIY) products, that
each box contained about one-month’s inventory in it. He has shown that the inventory level could be
reduced by 50% using ‘ordering odd lot’ (Paik, Hong and Rim, 2008).
For the ASN service, large discount stores record product information such as supplier, store, and product
list in the bar code (see Figure 2). The same information is sent to distribution center, where it is printed as
the check list. The store manger inspects various items in the box based on the check list. There have been
studies where RFID is used in this process (Paik, 2009). The current ASN service is at its beginning stage
and used mostly for the reduction of inventory costs. However, if the service is applied strategically, it could
bring about the cost reduction in store management, and the resulting profit increase. At the same time, the
ASN service could simplify the supply process and make the system management and maintenance easier. It
could further contribute to the realization of a business model of large discount stores.
Figure 1 Process of the ASN service
3. Supply Process and ASN Replenishment (ASNR) Method
Some large discount stores in Korea currently use the ASN service partially in the automatic ordering system.
In the automatic ordering system, orders by the box are made by the store automatically when the inventory
level reaches a certain level. If the ASN service is used, suppliers can deliver less than lot size. For example,
if a box contains 10 units, the ASN allows orders less than 10 units. Even though the main objective of
adopting the ASN service is to reduce inventory costs, suppliers currently use the service to deal with
inventory shortages, left-over inventories, re-supply of temporarily out-of-stock items, and combing of
small-volume orders for cost reduction. Even though supplier could reduce inventories by the ‘ordering odd
lot’, their adoption of the ASN service is still limited because it is cumbersome to package individual items,
and also they do business with the large discount stores using the direct purchase method (or regular
purchase method), in which they get paid not by the sales volume but by the supplied amount.
I.J. Green Engineering and Management, Vol. 1 No. 1, 2012
If we use the ASN without placing order, that is the ASNR, instead of the existing ASN service under the
automatic order system, we should be able to manage the store more efficiently and avoid the profit
reduction.
3.1. ASNR Method
The automatic ordering system currently used by large discount stores results in frequent out-of-stock
problems, which is closely related to profit reduction and loss. Corsten et al. (2003) showed that out-of-stock
problems arise 8% of the time. The authors’ analysis showed that major reasons for the out-of- stock
situation include the failure to place order (33%), the failure to replenish (22%), and in correct forecast of
demand (18%).The loss due to the out-of-stock problem is about 3.4% of revenues of sellers and 2.6% of
revenues of suppliers. It was shown that Metro, a German company, could reduce out-of-stock problems by
11% by adopting RFID (Hardgrave et.al., 2008). RFID was also shown to reduce the loss due to out-of-stock
problems by $2.8 billion for Wal-Mart(Hardgrave et.al., 2008). It was made possible because the adoption of
RFID could improve the replenishment system from the back room storage to store display. Corsten et al.’s
analysis showed 22% of out-of-stock issues are due to the failure to replenish. Hardgrave et. al.’s analysis
showed 21% for the same reason.
The adoption of the ASN replenishment method that is presented in this paper could reduce the out-ofstock problems that are related to the failure of placing an order (33%), failure to replenish (22%), and the
incorrect forecast of demand (18%).
The effect of the ASN replenishment method will be explained by first explaining the concept of
replenishment and comparing it to similar concepts.
(1)The ASNR and Automatic Ordering System: A solution to the failure to place order (33%)
According to the automatic ordering system, an order is placed automatically to the supplier when the
safety stock (reorder point) is reached. However, the ASNR does not require the safety stock. Inventories
will be replenished considering the sales even without the order from the seller. Therefore, we can avoid
the out-of-stock problems due to the failure to place an order by the seller (33%).
Figure 3 Comparison of Replenishment and Supply
(2) The ASNR and Supplying As Much As Is Sold: Identifying the quantity of lost items
The distinction between replenishment and supply should be clearly made. To supply as much as is sold
means that 10 units should be supplied when 10 units are sold. However, when the replenishment method
is adopted, it is possible to supply 15 units when 10 units are sold. Consider the case shown in Figure 3.
Suppose there is a display stand for 5 units, and that two units are sold and one unit is lost. If we supply
as much as is sold, two units will be supplied. However, replenishment requires the supply of three units
because the display should have five units in stock. Therefore, every time the items are replenished, we
can identify the number of lost items. In doing so, we can always equate the electronic inventory in the
computer with the real inventory on hand, and thus reduce costs by making the efforts to identify the lost
items unnecessary.
3.2. Supply Process Based on the ASN Replenishment Method
ACM is a process analysis method in which the business process is modeled in terms of activities of the
members in the chain (Trienekens and Hvolby, 2001). ACM aims at optimization of tasks and the use of
resources. ACM correlates the tasks between the activities and the information systems in the order process
I.J. Green Engineering and Management, Vol. 1 No. 1, 2012
within the company or the supply chain. The activities in the supply chain are connected from the viewpoint
of the customers in the sequence when they occur to describe the process. Here the activities represent the
collection of coherent tasks. ACM is basically composed of four chains – product development chain, order
chain, stock chain, and shop floor chain (Trienekens and Hvolby, 2001). In this paper, focus will be placed
on the order chain in SCM, as is shown in Figure 4.
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5. Conclusion
Recently, as the price competition gets more fierce among the large discount stores, there have been many
changes in the market, such as the market expansions through M&A and SSM (super supermarket) business
models. Also, distribution and IT firms have spent a lot of money and energy in developing RFID technology
and introducing other new technologies. At this point, a new business model for the large discount stores and
its efficient operation is urgently needed.
In this paper, a new and improved business model is presented – the ASNR-SP method. This business
model is an attempt to reduce inventory costs and administration costs. It is also an attempt to improve the
efficiency of supply process. The advantages of the proposed business model are summarized below.
Large discount stores
-Reduction in purchase costs (Specific Purchase, 5% of annual sales
revenues)
-Reduction in periodic renewal costs (ASNR)
-Various ways of adopting RFID system (ASNR)
Suppliers
-Avoiding loss due to out-of-stock
-Reduction in lost items due to the reduction in base inventory (ASNR)
-Transfer of responsibility for the lost items (Specific Purchase)
Since the ASNR-SP method presented in this paper entail ordering odd lot or small order lot size, the time
required for the inspection could increase. However, by equating the electronic inventory with the real
inventory on hand stores can make accurate decisions. Also stores can save lots of inventory costs and
administrative costs by avoiding out-of-stock problems and making renewal unnecessary. The end result of
the proposed model such as inventory cost reduction, simplification of system and administrative cost
reduction are contributing to the environmentally friendly GSCM (green supply chain management).
To maximize the effect of RFID, many researchers are making efforts for the realization of ordering odd lot.
In order for the ASN service to be used effectively, we need support from IT technology. Also needed is the
research regarding the ways of bundling products efficiently when it is difficult to supply odd lots and to
investigate ways of allocating odd lot products for the mixed bundle.
References
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study’, Supply Chain Management: An international Journal, Vol. 14, No. 3, pp223-233.
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the Causes, and the Efforts to Address Retail Out-of-Stocks’, International Journal of Retail &
Distribution Management, 31(11), pp.605-617.
Hardgrave, B.C., Langford, S., Waller, M., and Miller, R. (2008) ‘Measuring the Impact of RFID on Out of
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