3 telemetry roadblocks and how to find solutions

You’ve probably read a dozen articles about cashless and telemetry over the past few years. Most of them provide a wonderful story of how technology will allow operators to sell more and service less. The real question is — if the success is real, why are we still sitting in 2013 with less than a few hundred thousand connected machines across an industry of more than 5 million? The answer is simple, for the most part we’ve only heard half the story.

A few years ago an operator from New Orleans, La. was explaining telemetry to a group when he made a simple but prolific statement, “We don’t know what we don’t know.” At the time he was talking about the need for daily sales data. Little did I know, but that statement was one that would be repeated over and over through the years. The story of telemetry 2.0 starts with a few more things we didn’t know, but need to understand, to fully leverage telemetry.

1. We didn’t know how our decisions impact the bottom line.

The concept of profit in vending is straight forward enough — take as much money as possible out of the machine every time you open the door. There are a couple of major variables to manage: pricing and product margins as well as service costs. Simple sure, but truly one of the most complicated problems I’ve ever come across. Why? Because vending is a capacity constrained environment where every decision: equipment, assortment, pricing and even other equipment on site all have an impact on profit. Vending is also unique because our service costs are much higher than traditional retail and because they can vary significantly by item. In a typical retail environment the focus is on gross margin — in vending when we leave out service costs, we miss the biggest variable on profitability. Indeed vending is one of the few places where you can make less money by selling more product. Don’t get me wrong, gross margins matter, but they may vary by 10 to 20 percent between items where service costs can vary by 10 times that.

To explain this concept let’s suppose we have two nearly identical operators, Adam and Joe, located side by side in identical warehouses and are supplied by the same distributor who charges $100 for every delivery. They both have the same total sales and gross margins but Adam sells 20 different products while Joe only sells 10.

Because he carries less inventory of each item, Adam requires a delivery every 4 days while Joe can wait to be supplied every 7 days. Who’s business is more profitable Adam or Joe?

You would be right if you said Joe’s is more profitable because his delivery cost is 43 percent lower than Adam’s (52 deliveries per year versus 91 deliveries for Adam). But what if the distributor told Joe “We have to stop next door for Adam, so we’ll deliver every 4 days instead of once a week”? Joe would obviously tell the distributor he won’t pay for deliveries he doesn’t need.

The common assumption is that telemetry solves this problem but operators still pay for deliveries they don’t need every single day. Why, because telemetry deals with the symptom —when service is required — rather than the decisions that created the need for service in the first place. Bottlers have been aggressive in managing space to sales in cold drink equipment. The problem is snack machines, which trigger the most service calls. Every time operators service a machine because they’re at the one next to it, they’re paying for a service they don’t need.

The causes of excess service costs can be grouped into two pools: service bottlenecks and opportunity costs. Service bottlenecks are easiest to understand and quantify. Every time you go to a machine it costs a relatively fixed amount of money. While we rarely factor service costs into assortment decisions, the reality is that some products have less days of inventory and therefore require more service than others. At the machine level, costs are invariably driven by a handful of items with low days of inventory (the bottlenecks) and if we allocate service costs to those items we would end up with a very different view of overall product profitability.

If that wasn’t bad enough, the bottleneck extends to the entire location. If one machine forces a service, it adds service costs to every other machine that is being serviced prior to its normal schedule. Indeed an increase in sales of specific bottleneck products can drive service cost in every machine at the location. Knowing this puts the challenge into perspective, it’s not about the choice of a single product or facing — it’s how that decision impacts the entire location. The good news is all of this is that service cost can be easily quantified and an effective allocation methodology is all that’s needed to root out bottlenecks.

The second cause of excess services are what I call opportunity costs. These are the cost of decisions we do not make and therefore more of a challenge to quantify. A simple example of an opportunity cost is in chart 1. When we choose to set a machine with one or two candy shelves, what is the impact? Operators all have a rationale for why they set machines the way they do but how often is that rational built on real cost and data analysis? Do we set a planogram or place a certain model on location because we’ve considered all the options? The reality is that working through the daily business challenges and the sheer number of choices doesn’t leave enough time for this kind of analysis, but that doesn’t mean that the opportunities are less real. They are just harder to identify.

We have made great progress. Before telemetry, we lacked the information necessary to understand and identify these costs. However, true success would see us intelligently using pricing, machine configurations, promotions and assortment in harmony to manage total profitability.

2. We didn’t know how hard implementation would be.

Beyond affordability, the number one reason for slow telemetry adoption is that it’s hard. It starts with months of evaluating alternatives, negotiating deals and finalizing contracts. From there it takes weeks of changes to vending management software (VMS) or other systems to gather information and get ready for implementation. Next, operators start installation and testing while they run two separate businesses on different systems, and once that’s complete, they move onto reconfiguring their warehouse for pre-kitting and finally implementing dynamic scheduling and routing into their business. More than likely that means they need to re-think how they compensate drivers. On top of that, since they’re new to it all, there will be plenty of mistakes and reworking along the way. To manage it all successfully operators typically need at least one person to manage the project and extra technicians to handle installation and troubleshooting. Telemetry is not the “plug and play” experience that we get from our smartphones. Success is mainly driven by the commitment of everyone in the business.

Sadly, telemetry is just one of the decisions facing a progressive operator: cashless, consumer programs, multimedia screens, nutritional solutions, video screen and micro markets all compete for time and attention. Each decision is just as complex and has a similar potential for success and disruption. It’s easy to understand why many operators don’t make any bold moves with technology. One project is more than enough for an operator to undertake while managing his or her business. Undertaking more than one is a challenge for all but the largest operators.

The problem here is that customers expect us to do it all, and do it well. So we’re seemingly left in a lose-lose situation: don’t do it well or don’t do it at all.

To succeed, operators need to filter information, streamline decision making, manage implementation, obtain support and control costs. The reality is that no one operator can do it all, so one of the best options is a cooperative approach. An example of this is USConnect, a technology cooperative that takes all of the basic technology needs and bundles them into an affordable package for the operator. Innovative approaches like US Connect are part of Telemetry 2.0 because they help operators solve the challenges of implementation.

3. We can’t invest because we’re not profitable.

I don’t have to explain to any operator the profit challenges we face as an industry. We all know that subtract 1 percent net profit as an industry and a flat marketplace leaves little room for investment. Beyond that, we have suppliers trying to recoup an industry-specific investment across a small user base (read high hardware and service costs). Topping off the perfect storm is fragmentation. With more than 7,000 operators and hundreds of different technologies fighting for a limited amount of capital and operator attention it’s a wonder we’ve made it this far.

The answer is a dose of reality and planning. Operators need to recognize an investment in connectivity is an investment in their business’ future. Route efficiency can drive 5 plus points to the bottom line, so it’s not unreasonable to invest part of that savings in connectivity. For technology suppliers, that means to stop looking at their product as the solution, but components of a larger ecosystem. To be successful we need to fund everything (hardware, cashless, consumer programs, telemetry, VMS) and the solutions need to work together out of the box. Without both a cost effective and connected solution we’ll fail to achieve the usage rates needed to spark the next generation of innovation. In the end, the answer is scale and commitment, either we make it work together or we continue to advance at a snail’s pace.

The other piece missing from almost every discussion is the consumer. How are we working to meet their current needs? While we were selling essentially the same product for 40 years the world changed. The idea of people walking around with a couple singles in their pocket waiting for a vending machine is a thing of the past. In a world of no cash, instant gratification and social feedback we might as well be selling typewriters door to door. Continuing to do nothing takes us further down the path to irrelevance. Operators have some of the most valuable retail possible with direct access to some 100 million employees, students and visitors every day. Our ability to develop a strong connection with the consumer is the key to unlocking new revenue. However we can never expect to get there unless we take the first step with telemetry.

Recap

Telemetry 2.0 isn’t a product or solution, it’s a way of thinking and moving forward. After working with telemetry for a few years and looking at the data, it’s obvious that there is more opportunity than we expected, but also major hurdles to moving the industry forward. Telemetry 2.0 is about working through the difficult choices. It doesn’t challenge the principles of dynamic routing and scheduling, but looks at how to ease implementation and improve results. This requires all of us to look at the most basic business decisions with a new lens and seek out products and solutions that can increase our relevance with consumers.

 

About the Author

Jim English is the founder and CEO of Sprout Retail, which provides data and consumer services for the vending industry. He can be reached at jim.english@sproutretail.com.

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