Strategic and Operational Due Diligence for Value Creation

When a company (not a private equity one) considers the acquisition of another company, its main goal is to create business leverage by penetrating new markets; search-ing for synergies between the buyer and the acquired company activities; consolidating shared services in order to reduce operational costs, and using the company’s reputation as a business growth engine etc. These goals are formulated as long-term objectives and as part of the business strategy.

However, for a private equity company, the planning hori-zon is much shorter, approximately 5 years. The factors to be taken into account during the acquisition process are therefore different. The EBIDTA is often taken as the

primary goal and this then raises the significance of an operational due diligence process.

This is illustrated by the example of a private equity com-pany which was considering the acquisition of a market leader for construction-industry chemical products. This company had achieved an annual turnover of 300M USD. The estimated potential savings of 10% (30M USD), identi-fied during the operational due diligence process, became the key factor in the decision to bid for the company.

In this article, we want to find out how this type of pre-acquisition operational analysis can justify such a significant investment and why the savings identified played such a great role.

Copyright © 2014 Tefen Management Consulting. All rights reserved.

Strategic and Operational Due Diligence for Value Creation By Tamar Mass


So what exactly is operational due diligence?

When a company considers buying another company within its own industry, the role of due diligence is mainly to verify the data and information provided by the acquired company. The acquiring company uses its experience and knowhow of the relevant market, plus the verified data, to assess the expected impact of the acquisition on its value curve.

As mentioned above, the benefits of the acquisition are not necessarily planned for the short term.

Private equity companies, in contrast, also use due dili-gence to assess the growth potential in EBIDTA (achieved not by synergy and mergers but from stand-alone perfor-mance optimization), with a view to gaining a significantly higher sales value by the time of their exit (timeframe of 5-8 years). Those private equities specializing in asset management, rather than “turnaround” transactions, place an even greater emphasis on a successful due diligence process.

Although we have seen that the main focus is on deriv-ing value from growth, reality does not always meet these expectations. Therefore, in the short-term (investment period), it is much more predictable to aim for cost ben-efits through operational improvements than for growth through revenue increase. Business development is often unpredictable and depends not only on a company’s be-havior or decisions. It is significantly influenced by market trends, consumer preferences and competitors’ behavior. Moreover, cost savings through operational improve-ment are the easiest way to inject cash into the portfolio company. This cash can then be used for growth-related investments.

Operational improvements also have an immediate impact on the organization’s “bottom line”. The implementation of such improvements is controlled by the company, so it is easy to quantify the savings potential with high certainty (regardless of the variability in the market).

So how can we improve the EBIDTA of the acquired company?

Growth in income – the main drawback of this is the lack of certainty. A company’s income depends not only on internal factors, but also on external factors such as customers, competitors and market behavior.Cost reduction – depends primarily on internal factors, meaning that the level of certainty is much higher.

An operational due diligence process that manages to define an applicable plan for significantly increasing the EBIDTA will make a substantial contribution to the private equity’s decision to acquire the company.

“Starting the process”

Stage 1: “Rough and Dirty” – Getting to know the organization The aim of the first phase is to study the organization’s main activities and to identify its key contribution to revenue and expenses. This phase helps to define the objectives and scope of the diagnostic process.

Tools and methods used in the 1st stage: Cost structure analysis – identify operating segments

with high costs for the project’s focus Internal benchmark (between sites) – identify “best

in class” in different categories and examine the implications of bringing others to this level Stage 2: Exploring the organization’s business envi-ronment and its operational and business processesThe second stage focuses mainly on learning the business environment, current market share, growth potential and competitors’ behavior.

Performance

Stage 1: “Rough and Dirty” - Getting to know the organization

Stage 2: Exploring the organization’s business environment and its operational and business processes

Stage 3: Performing an analysis of the core activities

Stage 4: Outputs

Key Competitive Factors

High

relativeValue ofOffering

Low

A B C D E F G


Tools and methods used in the 2nd stage: Market analysis – market share, market demand

trends, competitors analysis Organizational structure analysis S&OP Inventory and procurement management methods Brand power – consumers perceptions,

TOM awareness Trends – category trends, price trends Sales – sales processes, sales policy – SFE*, Customer

segmentation, SKU rationalization (volume & profit), returns volume and policies

Stage 3: Performing an analysis of the core activities The 3rd phase is a thorough analysis of the core activities in the organization, in order to identify potential savings, opportunities for improving efficiency and required invest-ments

Procurement Procurement processes (centralized / decentralized) Inventory levels Contracts with subcontractors and suppliers

examination

Manufacturing Manufacturing processes Value stream mapping

Capacity model

Bottlenecks identification Manpower standardization – organizational structure

& manager-employees ratio Operational excellence (OPEX)

Supply Chain Haulage & distribution efficiency

(scheduling methodology etc.) Driver payment methods Trucks maintenance Loading and unloading processes

Quality Waste QA infrastructure and processes Quality control procedures Lean & 6 sigma

Tools and methods used in the 3rd stage are observations, interviews, benchmark analysis and risks analysis

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Stage 4: Outputs – examples of tools for final analysis

Traditionally, strategic acquisition requires a financial and business due diligence regarding market share, trends and different forecasts. This claims to predict a company’s sta-tus over the short and long term. However, the main draw-back in the traditional financial/business due diligence is the high level of uncertainty in its findings and inferences.

Private equities seeking to acquire a company must be exposed to reliable, high-confidence information regarding the organization’s capabilities, quality and operational abilities and drawbacks. This applies both to the current state of the company and its ability to support future capacities set according to the company’s business strategic plan for growth. In addition, potential buyers must take into consideration required investments, business and operational opportunities etc.

Tamar Mass, Senior Consultant, Tefen Israel

Procurement Revisited

“We are earning big bucks for doing almost nothing”. You might have heard this in the last century when many companies invested little effort and still achieved “rocket” sales. However, this is hardly the case in the current economy. Sustainable sales growth is increasingly per-ceived to be a major bottleneck in corporations. Business success and even survival requires a much more tangible managerial focus on costs, sometimes with the urgency of short time horizons. As various cost-cutting initiatives be-come the norm, the challenge is how to “get more bang for every buck ” invested on such initiative. One of the most efficient and impactful cost reduction levers remains procurement optimization. In many cases,

PE firms invest in mid-market companies whose size, his-tory and managerial background do not usually guarantee the highest standards in terms of procurement practices. Procurement is a cross-functional process, which can significantly impact bottom line performance, and on which it is important to have a “steady grip”.

Over a period of 4-6 months, a procurement optimization program can deliver a quick but tangible P&L improve-ment and enhance the agility of the procurement process, which makes it one of the preferred levers amongst PE firms, particularly in the 2nd half of the investment horizon for growth deals. A target of 8-12% reduction in annual spend on goods and services is reasonable and achiev-able with fast, traceable impact on P&L, and therefore on the EBITDA.


Procurement Optimization –How to “Get more Bang for your Buck” By Valentina Vassilev, Saverio Russo andSi Peng


Symptoms

Based on our experience, companies exhibiting one or more of the following patterns often benefit significantly from procurement optimization:

Long-term relationships with few, local suppliers Order fragmentation across many suppliers and/or

over time Lack of internal technical specifications or over-

specification Low involvement in the buying process by users/

limited control of the spending by the Procurement department

Fragmented procurement functions across the company and buyers performing primarily secretarial role/activities

Absence of formalized processes/procedures and limits on authorization

Absence of forecast and procurement plans periodic/ rolling (re-)elaboration

When facing such context, the benefits of procurement initiatives largely surpass the challenges related to their execution:

Going beyond “Buy the Same for Less”

The objective of a procurement optimization project may sound straight-forward – “buy the same for less”. However, it is never just about knuckling ten cents down with the favorite supplier or getting more cash-back at the end of the year. Instead, the project aims at realizing saving potentials in the short-term while re-constructing an efficient procurement organization (including processes and systems/tools) that guarantees recurrent profits for the longer term. Furthermore, the procurement optimiza-tion team needs to go far beyond the surface, reviewing internal spending patterns and the causes of malpractice, and also analyzing the detailed specifications.

Common goals of procurement initiatives are: Reduce the unitary cost of purchase Optimize the amount of Net Working Capital (NWC) –

stocks, payment terms Review the minimum/optimal necessity

(demand/volumes) for materials, external services, etc. Looking for opportunities to simplify the portfolio of

procured materials/services Define, review and challenge technical product

specifications/service level agreements Shorten lead-times, particularly for “critical”

components Improve/redesign processes (e.g. “core” supply chain

and budgeting/cost control)

Not all Spending Categories are Created Equally

In an ideal world, the joint team will have good quality data of past spending in order to perform quality analysis, execute rapidly and promptly come back with the ex-pected result. However, a more common reality is that of limited data accessibility, lengthy data collection process, low data quality and difficulties experienced by staff when gathering information required for cross-checks, verifica-tions and mistake explanation. Therefore, initial diagnostics are often coupled with extensive data verification, reclassi-fication and cleansing to accelerate the tendering process and guarantee quality output.

Once we have clarity on spending buckets (baseline and patterns) and the specific project goals are determined, the first step is to define the procurement strategies and approach for each spending category identified. To structure an all-round procurement optimization project, 5 groups of levers are commonly adopted1:

Chart 1 – Benefits and challenges of procurement optimization

Focus on practical activities and renegotia- tions, not over-analyzing the spending base

Less complex and faster in delivering EBITDA than process reengineering or manufacturing efficiency; lower resistance than, for example, headcount reduction

Positive and recurrent cash flow and EBITDA impact

Immediate implementation: signature of new contracts, availability of updated price lists, etc.

“Moving” of procurement levers that have remained untapped after years of strong growth focus

Optimization of specifications, towards de-complexity, lean and innovation

Development of standardized tools, “ready- to-use” templates and more accurate and consistent databases

More time-consuming and requiring a higher level of commitment than other optimization initiatives (e.g. workforce reduction) Requires efforts to step outside of comfort zone

– new suppliers and specs, new costs modeling, etc. Need to understand the dynamics across

the supply chain and gain insight into remote markets

+

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efits

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–

(Cha

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1 See the last page for more detailed description of improvement levers


Chart 2 – Main lever types and examples

There is no “one size fits all” approach. Levers should be customized in line with characteristics of each category, such as: size, purchasing pattern, industrial margins, de-gree of commoditization of purchased goods/services. For example, commodities management – including indexing and cost modeling – may be highly relevant for industrial manufacturing companies where the procurement of metal (e.g. steel, copper) makes up the majority of the spending. However, a procurement optimization project for a hospital

network would focus more on demand aggregation, review on specifications, and tender process standardi-zation. Larger or more complex categories often require a formalized tendering process with 2-3 rounds of nego-tiations, while small spending buckets could be tackled with a “quick and dirty”, less formal tender or simple organizational adjustment (e.g. aggregate orders and appoint a central reference for small categories; eliminate unnecessary spending and corresponding roles, etc.).

Traditional Procurement Scout new suppliers and expand the bidders list Negotiate longer payment terms and discounts...

Strategic Sourcing Relationships Eliminate “spot” orders and set-up

frame agreements Develop joint medium-term plans to

enhance efficiency of both parties...

DemandManagement Review/standardize technical specifications Rationalize required quantities/SKUs/SLAs…

Business Process Review Collect and share with Suppliers data

on future demand and try to aggregate orders over time Implement periodic monitoring of

consumption and recur to statistical analysis of spending…

Supply Chain Redesign Review “make or buy” decisions Assess the possibility of tapping earlier

into the value chain/skip intermediaries...

MAIN LEVERS

There is no ready recipe for project execution in Procure-ment, but we have seen the following approaches workin many different industries:

Ensure a thorough understanding of purchasing patterns in all locations and aim at maximum level of volume planning and aggregation that makes operational and financial sense (there could be instances when low volumes or irregular ordering do not merit volume aggregation)

Work closely with technical staff, quality and R&D departments to simplify and optimize specification – there is always room for significant improvement and risks are more often than not perceived instead of real. Test aggressively for new specifications and suppliers. Think outside the box – think about alternative materials and applications, new recipe formulations, etc.. Bench-

mark internally – find the innovators within and transfer best practice across the network

Source across the entire value chain, cutting earlier into it. Remove as many of the middle-men as possible. Consider “non-sources” from other industries and new partnerships of mutual interest – for example, in food industries someone else’s waste is your raw material, or they need only part of the product and you can utilize the rest. Join forces in R&D with suppliers and synergistic non-competitors

Balance between aggressive price squeezing and long- term win-win partnership, which should be maintained by inviting current suppliers to contribute with cost- saving options on top of pricing (e.g. line audits, SKU rationalization, new specifications)

Data requirements definition High level spending

baseline understanding Commodities vs. value added goods/services Recent optimizations As-Is procurement approach Preliminary identification

of opportunities Definition of the financial

target

Data extraction Analytical baselines definition

(extensive re-classification likely) Diagnostics, e.g.

Spending Map breakdown Suppliers’ ABC Orders frequency and Lead-times Brainstorming with experts Focus Categories definition/

prioritization Validate list of opportunities

to tackle

Market understanding First 1-o-1 contacts with Suppliers Tenders preparation

Technical Specifications, Vendor Lists (incl. new suppliers) RFI, RFQ Indexes Offers collection and negotiations

(1 or 2 rounds) Technical verifications Contracts closing Benefits estimation and business

case definition

Benefits reconciliation with budget/inclusion in financial forecasts Definition of monitoring

mechanisms and responsibilities First monitoring of P&L

impact (actual vs. planned) and follow-ups

Chart 3 – Sample approach to procurement optimization2

Initial Scoping

Data collection & analysis

Follow-up and monitoring

Improvement levers implementation & Tender execution

Quick-hits

1 2 4 5

3

2 Quick-hits refer to the opportunities that have a relatively large impact and can be tackled quickly and easily. These are different from the secondary spending categories – small baseline and require more additional effort—which are tackled after the main improvement levers.


Carefully choose timing according to industry logics and market trends (e.g. buying printing services and paper needs to be done when the printing season/ campaign is about to start, i.e. November)

Preparation is half the game won – detailed data analysis (e.g. past spent, specifications, submitted offers) and saving potential estimation prior to negotiation being a key lever to success

Competition is good – invite new suppliers and make the current suppliers aware that they are in competitive tender with international companies Be sensitive when managing communication as certain markets may backfire. It is therefore important to know the landscape before you design tender strategy and be specifically aware in markets with shortage of supply, oligopolies, etc.

Not there until seen in the P&L

Despite the hard work on preliminary analytics, supplier extension and favorable bidding outcome – the project is only deemed successful when we are able to see the impact of the new prices and contracts in the P&L – that is, when first orders are delivered and put in use, invoices paid and supplier implementation is monitored success-fully, as well as the quality of suppliers’ processes and delivered goods/services met.

Show the moneyIntroducing new suppliers, new specifications and materi-als is never easy – dong it in the heat of the high season, for much shorter lead times than the usual – that is what many of your employees will call ”impossible”. The most successful projects are those that witness all team mem-bers “getting their hands dirty” – from personally transport-ing samples to the pilot plants to driving 4-5 hours to a new supplier site for a meeting. And what usually helps with speeding up supplier implementation is “showing the money”. Take the example of new product testing for packaging materials – plant managers are generally reluctant to schedule such testing as it disrupts their daily routine. However, once they are made aware of the € 500k annual savings potential from the new supplier, discussion is over and testing priority is set.

Allow reasonable time for testingWhen we say testing, we do not mean only pre-contract testing – the supplier implementation phase is equally problematic. It is not uncommon to promise the moon on a tender and then deliver sub-par in reality. To avoid this situation, testing specialists should be well informed about the tendering process so that an appropriate testing time frame is budgeted. In fact, what dramatically slows down most tests is not the actual time the product is in testing (sometimes less than an hour) – it is the testing planning

and coordination that is often unnecessarily complex and mismanaged. In many cases, external, “spot” auditing support could be helpful.

Push further – specification de-complexity programAs a rule, suppliers who provide savings while continuing to deliver to the same specifications will be the preferred choice. This helps avoid prolonged testing time and un-expected loss of savings if the end client does not accept the newly proposed specifications, despite the cheaper price (in the case of private label/OEM manufacturers). A specification de-complexity program can go on for several months after project completion and these savings are often considered to be “on top” of the project. In this phase, specifications will be examined and discussed with the marketing team to make sure the new sets meet end client requirements at lower costs. Such extensive savings can often be achieved by the unification of over-diversified specifications and the use of lighter materials or cheaper raw materials.

Keep the pulse of supplier implementationEmployees may think that a procurement optimization pro-ject brings disruption to their business and may then con-tinue working in their old ways once the project finishes. To break this perception, a set of customized tools – such as contracts, price tables, guidelines for suppliers to use by category/sub-group/article, as well as more generic tools, such as contract templates, RFI/RFQ templates, offer comparison model, testing tracker – should be transferred during project hand-over. This not only helps employees autonomously implement the new procurement process but also guarantees sustainable P&L impact in the long-term.

The Culture of Success

Although many companies know roughly ‘what to do’, they quite often fail to achieve it. The most common hurdle is not knowledge or technology, but surprisingly – the mindset, culture and ability to change. A hands-on ap-proach and result-oriented mindset is essential to the successful rollout of procurement optimization projects. Right from the kick-off of the project, the entire company needs to be aligned behind a shared goal that is tangible, broken down into manageable tasks and personalized to speak to the needs and capabilities of specific teams. Ownership of the initiative is a strong enabler and ensures sustainability of the improved practices in the long run. A number of practical ‘savings tracking’ tools should be developed to not only track savings but also to reinforce ownership and responsibility. A good track-ing tool is ideally easy to update, share and it provides key stakeholders with the level of detail needed to get a true pulse check of the project’s success. Buyers must


realize that their ways of sourcing and purchasing may be significantly challenged, relationships with loyal suppliers will have to be disrupted, new and untested materials will be introduced. They will, in other words, be pushed “out of their comfort zone”.

Quick Review

Do’s Challenge existing procurement practices and

declared constraints (e.g. client validation of suppliers/ materials employed, quality differences across geographies/suppliers)

Review demand fragmentation (e.g. in terms of products ranges) and verify required specifications to identify opportunities for review/standardization (de-complexity)

Anticipate new products/suppliers testing/validation (by clients) so as to accelerate implementation process while minimizing the impact on core processes (e.g. production interruptions)

Don’ts Don’t take for granted data received (e.g. price lists,

annual quantity) without cross-checking with actual invoices (report and reconcile inconsistency among different internal data source)

Don’t structure the RFQ before verifying the industrial common practice with suppliers

Don’t accept verbal validation: ensure benefits blessings are written

Conclusion

Procurement is often more art than science – managing all the floating parts of the puzzle is certainly not easy but that is what makes it exciting and challenging. A joint procurement team, with strong commitment, passion and a positive attitude to break the status quo, is half the way to success. The most successful procurement teams we have seen have all displayed the following: they believed in the goal, they were systematic and willing to venture out of their comfort zone, and they worked well with the data – but most of all, they worked well with people, be it suppliers or internal teammates.

Procurement Levers: Zoom-In

8-12% saving in 4-6 months realistic when Supply Chain not recently addressed

Initial “first days scoping” instrumental in assessing potential and defining targets Range depending on industry margins and degree of commoditization of procured goods/services

Main predictors of material saving opportunities

Long term relationships with same (usually local) suppliers, static vendors list Orders fragmentation (weak planning infrastructure) Lack of own technical specifications or over-specification Buyers performing mostly a secretarial/bureaucratic role

Main saving levers: new suppliers and volume aggregation

New suppliers can come from different value chain steps (e.g. foundries vs. distributors)

There may bea need to manage initial resistance

Stronger procurement also as revenue lever (more competitiveness)

Align with testing responsible for new product testing slots to minimize negative impact on current production stream and save time

Valentina Vassilev, Director, Tefen USASaverio Russo, Project Manager, Tefen ItalySi Peng, Consultant, Tefen Italy (Contributor)

Table 1 – Type of levers with detailed examples

Scout new suppliers and expand the bidders list (but limit the no. of suppliers awarded) Consolidate “spending” across different

suppliers/categories and company divisions Negotiate longer payment terms

(impact on NWC) and discounts

Eliminate “spot” orders and setup frame agreements (securing the prices, delivery conditions, etc.) Develop joint medium-term plans to

enhance both parties’ efficiency and create “win-win” situations E.g. Share volume & product mix forecasts, guarantee a stable share of the future demand, execute cost saving initiatives (better logistics/inventory levels, etc.) Gain “preferred” client status from

oligopolistic suppliers Establish procurement alliances:

team up with other players

Review/standardize technical specifications Rationalize required quantities/SKUs/SLAs Balance the price-quality ratio Eliminate budget “contingencies” covering

inefficiencies

Share data on future demand with suppliers and aggregate orders over time Implement weekly/monthly monitoring of

consumption and recur to statistical analysis of spending Review tendering/purchase approval

procedures and enhance platforms (e.g. dynamic on-line tenders)

Review “make or buy” decisions Assess the possibility of tapping earlier

into the value chain/skip intermediaries

Type oflevers

Examples of improvement levers

Traditional Procurement

Strategic Sourcing Relation-ships

Demand Manage-ment

Internal Processes

Supply Chain Redesign

The retail grocery and quick service restaurant industries have not experienced any remarkable changes over the last couple of decades. Technological innovation is also not the first thing that comes to mind when thinking about your local market or favorite lunch spot. However, given the availability of targeted and affordable software and hardware solutions, technology is now being leveraged to provide a foundation for small and mid-size retail chains to grow more rapidly by offering a differentiated customer experience. Using middleware, a technology ecosystem can be custom developed to fit the needs of a growing retail chain. Technology ecosystems are uniquely designed to fit the requirements of a particular organization and can be as broad or targeted as needed. The following article shows us a specific case in which technology is being used to support growth and innovation within the retail space.

The organization highlighted in this article owns and oper-ates approximately 40 natural and organic grocery stores and restaurants, specializing in naturally grown foods, certified organics, plus freshly prepared and specialty foods. They are committed to providing communities with a unique grocery concept: superior service at affordable prices. The company employs approximately 3,000 em-ployees throughout their locations, including the support office. This technology innovation project was led by the company’s Chief Information Officer with close involvement from the VPs of Operations, Finance and Merchandising.

As specified in the company’s mission statement, a cus-tomer’s experience is the most important factor in their organization’s success. To fulfill this mission, a number of innovative technological solutions were chosen to enhance the customer experience, requiring a well-tested founda-tion of support and back-end technology in order to func-tion properly. Since no individual provider was able to meet all the needs of the organization, middleware was chosen to link a variety of software solutions strategically selected to meet a variety of business requirements.


Achieving Growth Support through Technological EcosystemBy Aaron Sachs

The company running the natural and organic grocery stores and restaurant locations was being funded by a Private Equity firm, specialized in distressed and undervalued assets. At the time of the project, the firm had holdings in a variety of indus-tries, including bio-pharma, manufacturing, retail food, trans-portation & logistics, printing and television production. The food retailer’s strategy for its grocery stores and restaurants was to consolidate the various misaligned brand names and business processes into one unified organization with a single headquarters and set of aligned business practices. Tefen’s task was to assist with consolidating and re-generating busi-ness processes within the Operations and Finance functions, in addition to supporting the aggressive growth targets the firm sought to achieve by implementing a new technology eco-system. The project was coordinated directly with the food retailer’s leadership team while keeping the goals of all three parties (PE firm, restaurant & grocery management, and Tefen USA) aligned.

MIDDLEWARE

Account-ing

Portal

Data-base

POS

ProductInfo

MobileApps


Managing Vendor Relations

The core of any retail organization is to sell a product or service while optimizing vendor relationships. Each location maintains between 10 and 25 thousand SKUs (number of different products, a.k.a. stock keeping units), presenting a unique challenge for the buying team. Some regions of the organization may procure 80% of their SKUs from 2 to 5 large distributors while others are only able to procure 40% of their SKUs from these distributors. A company’s vendor community may include hundreds or thousands of individual vendors, particularly in today’s marketplace in which organizations have locations across several regions. Managing a good relationship with each of these vendors can prove to be tedious work, requiring a number of dedicated employees. Therefore, the develop-ment of a solution to automate this business process is a top priority. Through a vendor portal, the data entry work needed to set up and maintain a vendor can be performed by the vendors themselves, saving valuable in-house resources.

Figure 1: Web-based partner portal

An intelligent portal can go way beyond simple setup and maintenance tasks. For example, vendor setup forms can be designed to incorporate specific company needs, such as payment terms. In this case, rather than having internal accounts payable teams negotiating better payment terms with vendors, the portal can require vendors wanting to do business with the company to accept certain terms and conditions. Once a vendor applies for approval, various checks can be automatically performed with results sent to appropriate parties within the organization. Approved vendors are then bucketed together and distributed to various platforms, supporting business functions such as accounts payable and replenishment.

Portals can be leveraged even further to support item setup and maintenance. An accurate database of items is crucial to the success of a retail organization with auto-mated business processes.

The architecture of a retail organization’s database plays a major role in the range of advanced functionalities a company is able to implement. Ensuring that item data is structured in the best way to support all business processes, while keeping the database as simple as possible, is a challenge often underestimated. Initial data architecture requires input from all stakeholders to ensure completeness once the database has been designed. A well-designed database allows organizations to support the automation of key retail business processes, such as reactive menus & shelf tags, automatic re-ordering & replenishment, product information kiosks, etc.

Once the organization’s processes have been designed and approved by all stakeholders, information that is unique to the vendor can be requested directly from the vendor via the portal, to simplify and facilitate data entry. Giving vendors this power, however, increases the chance that data will be submitted in an inconsistent manner. To achieve a clean database, the portal design must promote standardization of information submitted to the organiza-tion. Fields can be restricted by character length, alpha v. numeric, etc… all to make the transition smoother for ven-dors using the portal for the first time. As with the vendor setup process, the item submission process should also be intelligent. Rejecting items that don’t necessarily “fit” with pre-defined criteria may be a good solution to keep a clean item database. For example, in a grocery setting, each category (meat, deli, natural living, etc...) has desired margins to be achieved. By calculating the gross margin of an item upon submission, items that don’t fit with the desired margin of the category can be flagged and cate-gory buyers will be notified when potentially non-profitable items have been submitted.

In addition to an intelligent item submission process, in-dustry data providers should be leveraged to homogenize data, ensuring a clean database. In the grocery retail sector, there are several data providers available who can supply the required information to the organizations. Depending on the agreement with the provider, databases managed by providers can be queried and relevant infor-mation can then be brought into the portal to supplement the data submitted by vendors.

Putting the Data to Work

After a database has been constructed by the vendor community and internal stakeholders, the organization can begin to leverage the data collected and the associated

MerchantApproval

A/PApproval

ApprovalNotification

ProcurementSystem of

Record

Financial & AccountingSystems of

Record

Vendor Application


architecture. For grocery retail companies, this data is the foundation of all procurement processes. In its sim-plest form, grocery procurement begins with a vendor or distributor receiving a purchase order and making a delivery of that purchase order. The store location receives the shipment, and the store and/or support office processes the invoice associated to the purchase order. Though the process seems to be straightforward, severe complexities in the procurement process exist every day, so designing technology to support these processes can drastically improve the organization’s efficiency and control mechanisms.

When engineering efficient processes for an organization, it is best to begin with the ordering process. Though diffi-cult to attain and maintain, perpetual inventory can reduce the number of employees needed for monitoring inventory levels and allow those resources to dedicate their time to other value-adding activities, such as friendly customer service. If inventory levels are out of sync, the entire order-ing process is affected. For example, if a SKU ordered and received by the ordering system is rejected on delivery due to spoilage but not recorded as rejected, the “in-stock quantity” of the item may appear higher than it actually is. Cycle counts and “hole” mitigation1 practices can prove to be useful tools for constantly monitoring the accuracy of inventory levels. These methods also require store as-sociates to spend more time directly on the floor, handling the product. Sales team presence on the store floor is comforting for customers and allows store associates to provide unique product knowledge to the customer.

Equipping store associates with the tools to manage in-ventory is essential to obtain the buy-in of associates and adapt more quickly to new business processes. Mobile scan guns, loaded with the same platform as the POS, allow associates to manage the ordering and receiving processes, plus inventory throughout the store. Items which do not have shelf tags can be scanned and sent to the printer via a mobile scan gun. Shelf “holes” can be investigated to see if an order has been placed or not. Overall, store associates greatly appreciate the mobility and advanced functionality of today’s mobile scanning devices.

Figure 2: Handheld scanning hardware/software

Comprehensive inventory management give stores the luxury of auto-generated purchase orders. Though per-ceived with a slight suspicion by more traditionally minded employees, the use of automation quickly proves itself, by achieving reliable inventory levels, on-time ordering and reduced stock-outs. It is important to note that grocery ordering cannot and should never be completely automated. There will always be a need for manual order-ing and order adjustments; systems should not be trusted blindly to maintain a store’s inventory, and the tacit knowledge possessed by staff should not be ignored.

The next logical step in the procurement process is to build up the process for receiving goods. An automated procurement process is only possible if stores enforce a rule ensuring that they can only receive a product if that item has an associated purchase order. Purchase orders and purchase order numbers are necessary for trace-ability and automation of the procurement process. By implementing a purchasing system with purchase order numbers, users can pull the purchase order up on a hand-held receiving gun at the back of the store. If the purchase order is not known, an item belonging to the shipment can be scanned and all purchase orders including that item are brought up on the hand-held device. Depending on when the purchase order was released, a user can gener-ally recognize which purchase order is intended to arrive that day. With the hand-held device, a user can adjust the quantity received (over or short), and populate inventory stock positions with the delivered amounts. Users can utilize the hand-held device, or the receiving platform, to issue reports on the fill rate of vendors, monitor vendor performance according to this metric, and track accounts payable (even generating invoices/credits if necessary).

Supporting the Front-End with the Back-End

Once back-end software processes have been imple-mented, front-end software and hardware are ready to be installed and trained. The key to the success of retail locations are the employees who represent the brand and project the image strategically chosen by company leader-ship. It is important to implement operational processes that are well accepted and understood by employees so as to avoid resistance and loss of control. Point-of-sale (POS) terminals implemented should be intuitive, quick to learn and with a touch screen. By utilizing tablet computers, cashiers and other store associates quickly understand how to navigate the technology, due to their prior experience with the devices. Through good training and continuous device utilization, users are soon able to ring up customers with various complexities2.

1 Refers to the practice of walking the aisles and checking any shelf where facings are not met. In a perfect world, inventory would never fall below the number of facings and a “hole” in the shelf should raise a flag that inventory levels may be off.

2 Such as items that do not scan (items with PLUs – price look-up codes, such as fruits, vegetables, food by weight, etc.), government sponsored food programs, a variety of payment methods, promotions and discounts, etc…)


Most POS systems now have a cashier reconciliation already built into the software. This is a standard feature given every retail organization partakes in this process. However, one major decision, which the retailer needed to make, was the method by which to reconcile their cash registers at the end of a cashier’s shift. The two most common methods in the industry are cashier account-ability and lane accountability. End-of-day reconciliations are vital to the success of the store, but are not a common task for front-end employees. Cashiers are employed by the store to process transactions and convey a friendly and supportive brand image. However, it is frequently the case, especially at retail locations with many SKUs, that items cannot be scanned or scan incorrectly at the register. The POS system implemented in the grocery store prompts users to enter the item’s information and collect the details of all items which were not found. The prompt is user-friendly and easily trained. The additional time required for store associates to enter the information of a missing item is negligible and generally accepted by the customer. When prices are missing, it is important that cashiers have been empowered with the ability to honor the customer’s request. While giving away an item for free is not ideal (as is the case in some US states), it is often a better option than having a customer leave with a bad shopping experience. With so many choices of where to shop, a bad impression of a retail location could result in a loss of a potentially valuable customer.

Enhancing the Customer Experience with Technology

Retailer’s continually strive to provide the most enjoy-able and seamless shopping experience possible for the customer. To do this, technology can differentiate a retailer from the competition and make the customer experience something unique and memorable. This starts with giving customers a voice. While feedback kiosks are not a novel idea, the kiosks implemented in the grocery stores are sleek tablet devices which are extremely customer-friendly and easy to use. Due to the wide increase in tablet computers, customers are already familiar with the technology and still intrigued by their use. Collecting store feedback at these kiosks is a free way for stores to capture the sentiment of its customer base and improve the customer experience.

As previously mentioned, the POS system for cashiers is tablet-based and user-friendly. In addition to a tablet POS facing the cashier, another tablet device faces outwards, toward the customer. Customers can watch each item ring up and confirm the price; they can see which items are on promotion and which discounts are being applied and finally, they can pay with a card reader linked to the tablet computer and sign the receipt digitally using their finger on

the touch screen. Customers again grasp the technology very quickly and appreciate the slick and modern design. They are no longer corralled into the legacy checkout lanes seen at traditional grocery stores.

Figure 3: Web-based marketing content

Technology in the grocery store is not limited to the physi-cal ‘front-end’ of the store. Scanners are placed through-out the store for easy price checks. If an item is missing its shelf tag or the tag is not clear, customers can simply bring their items to one of the many scanners placed throughout the store and check the prices themselves. This transparency takes some of the decision-making out of the buying process, ultimately leading to increased sales. In the produce section, for example, special weighted scales can be installed to increase the custom-er’s knowledge of the items being sold. Item origins are becoming more and more important to grocery shoppers who want to know whether the produce they are buying is organic and hormone-free. The scales installed in the produce section not only act as a price look-up tool and a scale but, depending on the content collected by the retailer, can also display unique product information, such as country of origin, farm of origin, nutritional informa-tion, recipes, fun facts, farmer bios, etc. The options for selecting which content will be shown to the customer are endless, provided the necessary information has been collected, stored in a content management database, and integrated with front-end store technology.

Figure 4: Online ordering platform

Content can be leveraged in other places outside the store itself. Product features on the company’s website offer an intriguing marketing tool for customers and may lead to more consumers choosing that retailer for their food pur-chasing. In the grocery and restaurant environments, a website can also be used as an online ordering tool. Customers can place their orders online and pick up their


items on-site. Online ordering is not limited to PCs and laptops but can also be developed for all mobile de-vices. Online ordering platforms allow stores to distribute customers beyond the physical location, leading to a less crowded checkout as well as increased sales. This is particularly important in quick-service restaurants where customers don’t want to wait in long lines for their food. By ordering on their mobile apps and computers before arriving to the location, customers can avoid the long lines and pick up their order in a more relaxed manner.

Figure 5: Free standing self-order kiosk

Dispersion of touchpoints within a physical location is equally useful for increasing efficiency. In-store kiosks and interactive walls are fun and unique ways to collect customer orders at various points, other than the stations themselves. Kiosks provide a similar experience to customers as online ordering would, but are accessible through large LED touch screen monitors placed through-out the store. The interactive wall combines several LED touch screen monitors into one touch screen wall which customers can play games on, research product infor-mation, and place orders. All orders placed outside of the stations themselves are routed through a specially designed kiosk distribution systems (KDS). This system consolidates all orders into a single hub and then divides them according to the station that an item belongs to. This “hub & spoke” system is efficient and ensures that the customer’s order is being routed to the appropriate station without the need for additional employees to distribute and communicate the order.

Figure 6: “Hub & spoke” KDS system

Figure 7: Interactive content wall featuring ordering capabilities

Interactive and fun technology makes the customer expe-rience memorable, increases the chances they will return, and creates a “buzz” about the space which will attract more customers. Restaurants can take this further by implementing technology for targeted groups of custom-ers. Two potential groups that can be targeted by restau-rants are families and groups of co-workers. Technology can be implemented to enhance the experience of both these groups and can even target both groups at once.

PizzaStation

GrillStation

SaladStation

SushiStation

CustomerOrder 4

(sushi, grill,salad)

CustomerOrder 3

(salad & pizza)

CustomerOrder 2

(salad & grill)

CustomerOrder 1

(pizza & grill)

KDS


For families with young kids, keeping children interested and active (an eternal task of any parent) will lead to the family staying in the space longer and eventually spend-ing more on products for their families. In the restaurant locations, gaming companies were contracted to develop unique games targeted at kids and families who frequent the restaurant. These companies were given the freedom to re-imagine the delivery of the games to the end-user. In one of the restaurant areas, projectors display interac-tive video games right onto the floor and tables, enabling kids to interact with the space in a novel way. The game projections are large enough to require that children move significantly to participate in the game. This keeps kids active in a safe manner and gives them an activity to take part in, which in turn gives their parents peace of mind.

Figure 8: Kid-friendly gaming

For groups of co-workers, the mobile application devel-oped has a unique feature which allows groups to pay together on one user’s account. The app is designed to enable invitations to be sent to friends, co-workers, and family members, who can then all link their devices. Customers bring their devices to the stations when placing their orders and instead of paying for each order at the station, they are asked to scan the QR code on their de-vice. The items ordered are consolidated on the account of the customer responsible for payment. Customers can then freely and easily add items to the bill. The customer responsible for the bill can pay directly through the app, or, if a participant in the program, can allow the app to charge their linked credit card when they leave the store3.

Figure 9: Screen shot of mobile ordering app

Why Implement all this Technology?

Though it may seem excessive to implement such a wide-array of technology in such a complex web of integration, customers these days have more options than ever with regard to where they shop and eat. Therefore, providing them with a unique and more importantly, effortless ex-perience will keep them coming back and generating the much sought after “buzz”, or word of mouth marketing, that all retailers are ultimately hoping for ultimately hoping for are ultimately hoping for.

Aaron Sachs, Consultant, Tefen USA

3 The app knows when the customer has left the location through a geo-fence installed around the space.

Documents

Strategic and Operational Due Diligence for Value Creation