FELICITY

Supply Chain Management

Leader: Sultonkhan Maksumov u1711069

Other members: Akbar Abdurakhmonov u1711056

Bekzod Juraev u1711011

Discussion topic: Analyze an existing logistics process and suggest improvements

Executive summary:

Logistics is admitted to be one of the most influential players in any supply chain and those

companies who have succeeded in harnessing logistics power, turned it into their main operational

tool against its rivals. In this day and age when people are in great concern about their time, there

is no need to say that no competitive advantage can be as reliable and log-lasting as the firm’s

efficient logistics strategy. To satisfy the needs of people who are cash-rich and time-poor, any

firm that wants even only to survive has to possess the responsiveness the customers want. There

seems to be many such companies which have realized this trend on time and thanks to this have

achieved ineffable success in their industry. The best illustration of such companies perhaps would

be the company headquartered in Japan – Seven eleven in that this company delved into making

the most efficient use of the power of logistics so deeply that eventually even with the riskiest

strategy in nature have reached its today’s praiseworthy success. This report is exactly aimed at

discovering literally the recipes that the company in question uses to seduce and entice its

customers.

1. Introduction
In this paper, not only did we give information about the industry, but at the same time we have

employed almost everything we have learned in this course to analyze the industry and provide

insight into how it operates this successfully having applied one of most sophisticated strategies

of being responsive not sacrificing efficiency. We will first look at the history of establishment of

the company, and learn where the name ‘Seven Eleven’ came from, also how originally being US

company became Japanese company. Our team have identified where the strength of Seven Eleven

Japan (SEJ) lies on, and accounted it for five main factors: uniqueness of its store network, just in

time inventory and replenishment policy, state of the art information system, innovative

distribution system and far-reaching franchise system. At the end, there is a discussion of several

minor issues that SEJ needs to consider. Finally, the report is brought to a close by reciting our

findings after analyzing the supply chain of Seven Eleven Japan.

History

Seven-Eleven brand was of the Southland Company of America, founded in 1927 in Texas, the

name of the Seven-Eleven came from the year 1946 when its business hour was from 7 am to 11

pm. Seven-Eleven Japan was founded by Masatoshi Ito. He started his retail empire after World

War II, when he joined his mother and elder brother and began to work in a small clothing store

in Tokyo. By 1960, he was in sole control, and the single store had grown into a $3 million

company. After a trip to United States in 1961, Ito became convinced that super-stores were the

wave of the future. In 1972, Ito for the first time approached the Southland Corporation about the

possibility of opening Seven-Eleven convenience stores in Japan. After rejecting his initial request,

Southland agreed in 1973 to a licensing agreement. In exchange for 60 percent of its total sales,

Southland gave Ito exclusive rights throughout Japan. In May 1974, the first Seven-Eleven

convenience store opened in Tokyo. On October 24, 1990 the Southland Corporation entered into

bankruptcy protection, and asked for Ito-Yokado’s help. On March 5, 1991, IYG Holding was

formed by Seven-Eleven Japan (48 percent) and Ito-Yokado (52 percent). IYG acquired 70 percent

of Southland’s common stock for a total price of $430 million.

2. Store network

Seven-Eleven Japan’s success as we have already mentioned is mainly due to the design and

management of its supply chain, its business purposes is to provide customers the products they

want when they need. From strategic point standpoint one of the core objectives of the company

is to seek micro balance between supply and demand through the regional, seasonal, and daily

schedule. Store location plays irreplaceable role in realizing this. SEJ’s prevailing strategy is to

open numerous stores in a concentrated manner, thus literally conquering the market it enters. The

company leverages distinctive features of this approach in primarily four ways: economical

distribution, brand awareness, prevent entry by competitors, and improved efficiency in guiding

franchised stores. Close-to-each-other stores enables distribution of goods through milk run route

to the store, hence reduces transportation costs. Walking in the streets of Japan, you will be able

to see the signs of Seven-Eleven in every corner of the city, this will create visual perception in

customers’ minds. Considering the high density store networks of SEJ, it is difficult for new

enterers to gain market share, their entrance into the market is blocked to some extent. The

guidance of each store is assigned to one operation field counsellor (OFC), who visits the stores

he is apportioned at least twice a week to give professional instruction and assistance to store

managers, therefore if the stores are located near to each other, the administration costs will be

lower, frequency and quality of guidance will be enhanced.

3. Inventory policy

As we know there is a tradeoff between transportation and inventory, and cutting costs on one

increases expenditure on the other. Seven Eleven has been able to use transportation segment

brilliantly and keep inventory proximate to zero. Stores are replenished at least three times a day

and this short lead time eliminated the necessity for safety stock. The information system allowed

Seven-Eleven stores to better match supply with demand. Store staff can adjust the merchandising

mix on the shelves according to consumption patterns throughout the day. For example, popular
breakfast items are stored earlier during the day, and popular dinner items are stocked later in the

evening. The identification of slow or nonmoving items allowed a store to convert shelf space to

introduce new items, thus they employed full space utilization. When a new product is introduced,

the decision whether to continue storing it is made within the first three weeks. Each item on the

shelf contributed to sales and do not waste valuable shelf space.

4. Information system

Seven-Eleven Japan uses a very responsive replenishment system, as was stated earlier, which has

been available with the assistance of an outstanding information system to ensure that products are

at offer when and where customers need them. Seven-Eleven Japan attributed a significant part of

its success to the total information system installed in every outlet and linked to headquarters,

suppliers and the Seven-Eleven distribution centers. The use of information systems of 7-11 can

better maintain the balance of supply and demand of the store. It uses an integrated service digital

network (ISDN) to link all the stores. ISDN plays a strategic role in the company’s store

management, product development and distribution process. Linking more than 5000 stores, it

became one of the world’s largest ISDN system. The system is processing the day's sales data

before 11 o'clock every night, so that the second day's morning will be the analysis of the business

data. In the succeeding paragraphs, we will elucidate some hardware used in the stores and their

role in Seven-Eleven’s supply chain.

4.1 Graphic order terminal (GOT)

This is a handheld device with wide screen graphic display used by the store owner or manager to

place orders and which keeps track of inventory. When placing an order, the store manager has an

access to the detailed analysis of Point-of-sales (POS) data related to the particular data. By using

this figures, the store places an order which is directly pass into the terminal. Once all orders are

placed, they are relayed by store computer to appropriate vendors. GOT is used to save labor and

time and cost. Accordingly, it reduces costs involved by fastening replenishment cycle.
4.2 Scanner Terminal (ST)

These scanners read bar codes and record inventory. They are used to receive products coming in

from distribution centers. Before ST is introduced, truck drivers waited in the store until the

delivery is checked by manual inspection. Once they are introduced, the driver simply drops the

delivery in the store and a store clerk receives it at suitable time when there are fewer customers

in the store. ST also fastens replenishment cycle by efficiently inspecting incoming merchandise.

4.3 Point-of-Sales (POS) register desk

The POS system enables real-time tracking of each merchandise sold. Each store strictly adheres

to the system to eliminate dead stock. Information collected by the POS system is indispensable

to product development. Because the POS collects data about customers. As soon as a customer

purchases an item, the customers goes to the cashier checkout, the cashiers will scan the bar code

firstly, and offer the customers a quote. After paying, the cashier will firstly input the amount paid

by the customers. Then according to their estimate of age and gender, they press buttons above the

POS which blue is for men and pink is for women. After checkout the data is passed through the

network to the headquarters of the mainframe computers. So operations field counselor (OFC) and

store headquarters can get instant updated data information and data analysis of customers'

demand. Hence, the main objective of POS is to track data about customer for further product

development. In addition, through this hardware, products and time data, the speed of the

headquarters mastering the customer demand is greatly improved. It can help to forecast the sales

trend timely every day, to adjust the price, tally and distribution activities. Every day, headquarters

analyze and update data and send it back to the stores via the network every morning. All this

information is available on the graphic order terminal with the objective of improving order

placement.

Furthermore, the using of multimedia to carry out the distribution of goods is also a major feature

of 7-11. Through the satellite communication system, stores can send multimedia advertising,
weather forecast and cloud charts, and even electronic products to the store. In this way, Seven-

Eleven can achieve the multimedia information, product sales and distribution of multimedia. In

the 7-11 weather forecast, it actively explores the sales of food and weather correlation. The

information system will collect weather reports five times every day, so that the local store can get

a reference. Based on the weather forecast, the convenience store can master the weather

conditions in advance. According to the weather conditions, Seven-Eleven can select the number

of distribution of goods and optimize the distribution route.

5. Distribution system

Distribution is the last link between producers and consumers in the supply chain. The speed of

distribution efficiency unswervingly affects the degree of customer satisfaction. Seven-Eleven

distribution system tightly linked the entire supply chain. All stores are given cutoff times for

breakfast, lunch, and dinner ordering. When a store places order, it is transmitted straightaway to

the supplier as well as distribution center. The supplier starts production to fill the orders as soon

as it receives orders from all Seven-Eleven stores, this means that all the suppliers base their

forecast on the actual customer data as a result leading to the removal of ‘bullwhip’ effect, we can

see that all the players in the supply chain are focused on boosting supply chain surplus, and not

just their own profit. Orders then are sent by truck to distribution centers (DCs). This way, the

goods arrive at the stores just as are needed – (just in time delivery). The key to efficient delivery

is what SEJ call the combined distribution system. SEJ establishes combined distribution centers

categorized by product type and temperature in each area. At the DCs also, deliveries of like

products from different suppliers are loaded into single temperature controlled truck this ensures

that each product is kept at an optimum temperature at every stage from production to delivery to

the store. There are four categories of temperature-controlled DCs and trucks: frozen foods, chilled

foods, ambient temperature products, and warm foods. Warm and chilled foods are delivered three

times daily, whereas room-temperature products are delivered once a day. Frozen products are

delivered three to seven times a week, depending on the weather. All deliveries are made during
off-peak hours contributing to traffic and noise reduction. In addition, the company developed an

innovative delivery system called “pooled delivery”. Pooled distribution is a form of shipping

similar to less than truckload (LTL) that allows Seven-Eleven to ship numerous products along

with a number of orders using a single truck. This strategy leads not only to aggregation of orders,

also contributes to curbing CO2 emissions. Furthermore, none of the DCs carry any inventory,

they merely transfer goods freight from supplier trucks to Seven-Eleven distribution trucks.

Adoption of combined distribution delivery has succeeded in substantially reducing the number of

delivery trucks used from 70 trucks per day, per store to approximately 9. Before it was the

manufacturer who delivered goods to every store, which was very unproductive. Now, with this

new strategy all manufacturers have to do is to deliver the products to DCs by truck-load (TL)

trucks taking advantage of economies of scale, and from there they are distributed to every store

using less-than-truck-load (LTL) trucks.

6. Problems

6.1 High implied demand uncertainty.

The implied demand uncertainty in Seven-Eleven stores can arise because of many reasons.

Firstly, on a regular basis, stores introduce new products. About 100 products are introduced each

week. About 70% of the items sold at stores are changed in the course of year. For newly

introduced products, there is a difficulty of anticipating demand, thus, there is higher demand

uncertainty for them. Until headquarters of Seven-Eleven collects enough data to identify demand

trend for those products, Seven-Eleven may lose some of its profit because of possible high

forecast errors. Secondly, special events near stores can increase demand for specific products

abruptly. For example, nearby baseball game can increase the demand for beer and chips. In this

case, stores have to respond to customer needs, otherwise they will lose certain profit. In such

responsive supply chain, it might seem natural to have such high demand uncertainty and perhaps
further investments in research and development projects may bear fruits. However, for now

because of these problems, Seven-Eleven is losing millions of dollars every year.

6.2 High transportation costs

Although Seven-Eleven possess technologically advanced and inside out transportation system

which does not detriment efficiency much, responsiveness comes at cost. In order to minimize

lead times, it has to provide regular traffic of trucks to DCs to accomplish which costs are

unavoidable. Seven-Eleven’s transportation cost has large share in its total cost. No matter how

hard it tries it seems that there will always be extra costs for being responsive to customer desires,

because these costs reside in the nature of this strategy.

7. Franchise System

All the triumph Seven-Eleven has attained today would probably not be feasible if it were not for

its franchise network, because it is difficult just for one company itself to build an invincible

empire of over 53 000 convenience stores globally. Seven-Eleven developed an extensive

franchise network to support its corporate philosophy – ‘Co-existence and Co-prosperity’. As we

have revealed franchise system is of vital importance to Seven-Eleven since it is greatly

contributing to the expansion of the company. To keep the decent balance and control over its

brand reputation and the company itself, business operations and roles are plainly divided between

the headquarters and the franchised stores, and everything is based on a highly transparent

accounting system. Headquarters prepares a comprehensive support system to enable franchisees

to concentrate on store operation and sales. In exchange for 43 percent of gross profit, headquarters

builds product development and delivery system, provide POS ordering system, consulting

service, accounting service and audit service, install and remodel facilities and cover cost of

electronic data processing and promotion (advertising) costs, pay 80 percent of utility cost and 15

percent cost of disposing unsold items. In turn, franchised store is in charge for recruiting

employees – hiring and paying, ordering products, maintaining store appearance – cleaning stores,
providing customer service and cover 20 percent of utility cost and 85 percent cost of disposing

unsold items. As is clear headquarters does everything to provide the franchisee every support, so

that it can concentrate solely on store operations. To further safeguard the efficiency and

competency of the franchised stores, headquarters assigns personnel they call ‘operations field

counselor’ to each store, as was stated earlier, who provides appropriate support in accordance

with the operational situation of the franchised store. There are two types of contract agreement:

type A and type C. Under both conditions the agreement term is 15 years, and 80 percent of utility

expenditure is paid by the headquarters and 20 percent by the franchisee. The difference lies on

the ownership of the store and deposit upon signing agreement, in type A agreement the store is

possessed by the owner and the owner has to deposit 3,075,000 yen this includes – 525,000 yen of

training fee, 1,050,000 yen for store opening and preparation charge, and 1,500,000 yen

investment in store opening, whereas in type C agreement the store belongs to the headquarters

and operated by the business owner who has to deposit 2,550,000 yen – 525,000 yen of training

fee, 525,000 yen for store opening and preparation, and 1,500,000 yen investment in store opening.

8. Findings

During the time we were studying the supply chain of Seven-Eleven, we have come up with our

findings and related them into what we have learned so far. In the following lines, we will examine

them in greater details.

8.1 Supply chain coordination

A closer glance at the Seven-Eleven’s supply chain reveals that there is an apparent sign of well-

structured supply chain coordination which is aimed toward maximizing overall supply chain

surplus. This can be seen in information sharing process between the stores and the suppliers

though point of sales register desk as a result the forecast of demand is not hurt by bullwhip effect.

Besides, amongst Seven-Eleven and its suppliers there is no incentive problem, they have aligned

goals to maximize total supply chain surplus to attain this objective they divide roles between each
other and share resources, for example, Seven-Eleven’s strategy takes the role of being responsive,

while its suppliers explore economies of scale and achieve maximum efficiency, thus acting in

accordance with the overall objective.

8.2 Replenishment policy

This report also discovered that the company we have studied implements continuous review

policy in that sales data is processed every night and analyzed in the next morning to look for any

patterns. Moreover, we have learned that although the stores do not carry almost any inventory,

product fill rate is 100 percent due to fast replenishment strategy – 3 times a week, also there is no

necessity for safety stock to counter unforeseen demand due to very short lead time – not even a

day. Of course, all these gains are thanks to IT which plays an integral part in almost every stage

of supply chain

8.3 Strategic fit

Finally, for a firm to thrive, it is imperative that all functional strategies must support one another

and the competitive strategy of the firm. Seven Eleven stores replenish their shelves three times a

day, which indicates that the company’s strategy is inclined to be responsive to customer needs

very quickly, this implies that every participant of its supply chain should be cooperative with each

other. Seven-Eleven supports this by having stores at every corner of the market it operates in.

But, if any of actors try to make their own planning, replenishment period will be longer than

expected which leads to empty shelves on stores which harms the brand reputation. Despite some

difficulties at the beginning, Seven-Eleven has been able to overcome all the obstacles and achieve

strategic fit between its competitive strategy and its supply chain strategy by acting as the leader

of the supply chain. It manages to assign roles to different stages of supply chain to ensure

appropriate level of responsiveness. Its success can be related to the excellent fit among its

functional strategies.

References
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BUSINESS PERFORMANCE AS AN EMBEDDED FACTOR OF

DIFFERENTIATION MECHANISM : A CASE STUDY OF SEVEN-ELEVEN

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