402 bcoIahNG AND MANAGING THE SUPPLY CHAN E The Great Rebate Runaround ‘Ah, the holiday shopping season: Santa Claus, reindger—and rebate hell. Those annoying mail-in offers are everywhere these days. Shoppers hate col- lecting all the paperwork, filling out the forms, and mailing it all in to claim their $10 of $100, But no matter how annoying rebates are for consumers, the ‘country’s relailers and manufacturers love them. From PC powerhouse Dell to national chains Circuit City and OfficeMax to the Listerine mouth- ‘wash sold at Rite Aid drugstores, rebates are prolifer- ating. Nearly one-third of all computer gear is now sold with some form of rebate, along with moze than 20% of digital cameras, cameorders, and LCD TVs, says market researcher NPD Group? 1 Stinehficld, a 30-year veteran of the rebate 16, ateulares that-some-400-mitlion-tebate are offered each year. Their total face value: $6 billion, he estimates. Office-products retailer Staples says it and its vendors alone pay $3.5 million in rebates each week. ‘TAX ON THE DISORGANIZED. Why the rage for rebates? The industry's open secret is that fully 40% of all rebates never get redeemed because consumers fail to apply for them or their applications are rejected, estimates Peter S. Kastner, a director of consulting firm Vericours. That trans- lates into more than $2 billion of extra revenue for retailers and their suppliers each year. What rebates do is get consumers to focus on the discounted price of a product, then buy it at full price. “The game is obviously that anything less than 100% redemption is free money,” says Paula Rosenblum, director of retail research at consulting firm Aberdeen Group. . ‘The impact on a company's bottom line can be startling, Consider TiVo. The company caught Wall Street off guard-by sharply feducing its first-quarter loss to $857,000, from $9.1 million in the same period last year. One reason: About 50,000 of TiVo's 104,000 new subscribers failed to redeem inail-in rebate offers, reducing the company's expected rebate expense by $5 million, TiVo says it generally sees lower redemption rates during the Christm: shopping season, when consumers may be t00 diss tracted to file for rebates on time. ‘Credit this bonanza for retailers and suppliers pa to human nature. Many consumers are just too laz forgetful, ot busy to apply for rebates: Cal ita tax the disorganized. Others think the 50 cents, $50 “WAS FROSTED" But many consumers—and state and federss authorties—suspect that companies design the rules keep redemption rates down. They say companies oo ‘on complex rues, filing periods of as litle as a wes repeated requests for copies of receipts, and fong deta in sending out checks fo discourage consumers ft coven attempzing to retrieve their money. When the ce does arrive, it sometimes gets tossed in the trash ‘tlooks tke junkemvail— zd ‘These obstacles don't stop Chuck Gleason, rebate junkie, he has redeemed dozens of rebates the high-tech and electronics gizmos he buys. But ting his money, be says, sometimes drives him cra ‘On Nov. 7, 2004, for example, the 57-year reeyeling company bought 2 TiVo digital vie recorder for $300. TiVo promised that a $100 relia ‘would arrive in six to eight weeks if Gleason mailed and nothing happened. By Februa xno sign of his $100, despite repeated follow- he threatened to file complaints with state and eral officials. But TiVo’s rebate processor, left him even more exasperated: “Because your requires further research, your e-mil warded to a special team,” said an e-mai] froma tomer-service agent named Sophie. Finally, on Mar, 29, more than 14 weeks al bought his DVR, his check arrived. “I was fax he says. Source: Bian Gro, Busines Meek Online, November 23, ‘eorrbusiesswesk com/maginaiaD5 939629744 ¢"BREAKAGE" AND "SLIPPAGE" Citing privacy restrictions, TiVo officials dectined to discuss the case. But the company says it regrets any inconvenience and recently changed its rebate pro- cess to include a printable sign-up form at tivo.com to cut down on handwaiting errors. Parago also declined to discuss the incident but said errors are « rare among the “tens of millions” of rebates it pro- cesses each yeat Indeed, processors and companies offering rebates insist that there is no intentionel effort to deny them, a move that Stinchfield, who is the chief executive of ‘Orono (Minn.} consulting firm Promotional Marketing Insights, says would be akin to “brand suicide” Rather, ‘companies say, the rales are aimed at stopping fraud. Rebate processors won’t provide estimates for the ~anrount of frauct they encounter, bu Yourg America week, ‘Corp,, the nation’s largest processor, says it now moni- delays tors 10,000 addresses suspected of submitting bogus ‘from rebates. ‘eck ‘The quest for buyers who don’t end up collecting a rebate has spawned special industry lingo. Purchases by consumers who never file for their rebates are called “breakage.” Wireless companies that pay 100% rebates on some’cell phones, for example, rely in part on “breakage” to make money. Rebate checks that are never cashed are called “slippage.” on, A tes on vt get mazy, arold metal COMPLAINTS HAVE SOARED One processor, TCA Fulfillment Services in New Rochelle, N.Y., published a “Rehate Redemption Guide” for its corporate customers several years ago. It cited the low redemption rates that companies could expect after hiting TCA: just 10% for a $10 rebate on 3 {$100 product, and just 35% for a $50 rebate on a $200, product. “If you are using another fulfillment company, ‘add 20% to these redemption rates” says the char. Lewisville (Tex.)-based Parago bought TCA’s ‘customer list list December and disavaws that guide. It says it can't estimate cutrent rates because clients don’t provide the company with sales data, TCA founder Frank Giordano did not respond to several calls and a letter requesting comment. Consumer-product makers such as Procter & Gamble pioneered rebates in the 1970s as a nifty way to advertise small discounts without actually marking the products down. In the’90s, their popularity soared as computer makers and consumer-electronics com- panies pitched them as a-way 10 move piles of PCs, CHAPTER 1s: SMART PRICING 403. cell phones, and televisions before they became obso- dete. The value of rebates jumped, t00, from a couple ‘of bucks t0 $100 or more. ‘With more companies plugging rebates—and more dollars at stake for consumers—complaints have soared. Gripes filed withthe Council of Better Business Bureaus have tripled since 2001, from 964 to 3,641 last year. But processors say that number is stil tiny eom- pared with the vast number of claims they handle, REGULATORY SCRUTINY David S. Bookbinder files many of the complains. ach year the 40-year-old computer technician claims more than 100 mail-in rebates, He figures those deals save him—and customers of his computer-repair business, Total PC Suppor, in Revere, Mass —as much, aS S20 ANGY BHU WeRKS OF Waiting, He UsAllY calls customer-service numbers to hunt down his check. I the representative alleges that paperwork was wrong of asks for more time, he automatically files complaints with the Better Business Bureau, the Federal Trade Commission, and the state attomey general, Regulators are intensifying their scrutiny of the industry. In October, New York Attorney General Eliot Spitzer settled a case with Samsung Electronics America. The company agreed to pay $200,000 to 4,100 consumers who were denied rebyes because «they lived in apartinent buildings. Samsung's rebate program, according to Spitzer's office, allowed only ‘one rebate per address, and the form didn’t have a space to list apartment numbers. Samsung did not respond to requests for comment, Meanwhile, in Comnecticat, officals are investigat- ing ads that list prices only after rebates—a marketing scheme prohibited in the state. Attorney General Richard Blumenthal won't disclose the names of the refailes, “If consumners are compelled to jump through hoops to receive the rebate, or are denied rebates for iMlogical or arbitrary reasons, that adds fuel to our “NO INCENTIVE" ‘Some regulators are using novel tactics. On Nov. 7, Massachusetts officials filed suit against Young America to demand that it submit to an audit of $43 million in uncasbed rebate checks. The com- pany, headquartered in Young America, Minn., Kept that amount of money from 1995 to mid-2002 fn return for changing its clients lower fees, it says.404 esianns AND MANAGING THE SUPPLY CHA ‘Massachusetts officials believe that keeping uncashed checks. could. be.an. incentive. to. deny. legitimate redemption claims. “It's almost like the old bait and switch,” says Massachusetts State Treasurer Timothy P.Cahill. Young’ Ameriga is fighting back, In written responses {0 questions from BusitiessWeek, CEO Roger D. Andersen stands by the company's policy and says retailers and suppliers sometimes prefer that it keep uncashed checks. ‘That keeps Young ‘America from having to send them back and then tumn around and collect its fee from clients. “Young America receives the same fees whether a submission is valid or invalid” he says. “We have no incentive to increase invalid rates.” UNIFORM RULES” "The backlash against mail-in rebates is pushing somte. ‘companies to drop them. Best Buy plans to phase them cuttin two years. At Staples, mail-in rebates were the No. astomer complaint for years, says Jim Sherlock, ~-director-of sales-and-mnerchandisingSo.a-year-ago,the red Framingham (Mass.) company switched to an online system called EasyRebates that customers use to file for rebates and track their progress. Staples says waiting times for payments have been cout from about 10 weeks to as little as four, and rebate complaints dropped by 25%. “Breakage” also dropped line in unclaimed by as much as 10%, but that d rebates is offset by better fraud prevention it says. ‘The fulfillment houses are also overhauling their systems, While it won't disclose figures, Parago says ithas invested “tens of millions” of dollars in com- pater technology, So nov, computers, not customer- service agents, validate most of the claims. Then consumers receive e-mail updates and can check Web sites such as RebatesHQ.com to ‘monitor claims. Before, says Parago Chief Financial Officer Juli C. Spottiswood, getting a rebate update was a “big black hole.” With biltions of dollars at stake, bids to set uni- form rules for rebates have met a ferocious response. Last year, California State Senator Liz Figietoa introduced « bill requiring companies to grant cus- tomers at least 30 days to apply for a rebate, mail checks within 60 days of receiving an application, ‘and standardize the paperwork and, personal data needed for a claim. "REGULATION IS WARRANTED" ‘Telecom giants SBC Communications and TMobile and the California Manufacturers & Technology ‘Assn, quickly mobilized. They argued that Figueroa’s bill would drive up costs and increase fraud by cutting down on the proof required for a rebate. After pass ing the California House and Senate, the bill was vetoed by Governor Arnold Schwarzenneger. Now, Figueroa, a Democrat, is evaluating whether to reintroduce the bill in January. “This is an area where regulation is warranted,” she maintains. Despite the crackdowns and efforts at reforms, bly never be much fi “In a perfect world, c Sal rebates to go away.” says Stephen Baker, direct industry analysis at NPD. “However, they want the best price that they can get. Those two things are fundamentally going to be at odds.” CASE DISCUSSION QUESTIONS 1. This article describes one reason manufacturers ‘ight want to offer rebates rather than decrease 7 wholesale price. Explain why this ean be viewed as an example of customized pricing. 2, Even if all rebates were redeemed, why might manufacturers still want to offer rebates rather | than decrease wholesale prices? 3, Why do you suppose that Best Buy, rather than 37 one of Best Buy's big suppliers such as Sony oF Panasonic, is considering eliminating rebates?‘Supply Chain Whirl |Five years ago, Whirlpool began an effort to turn ‘around its global supply chain. The company is seeing esults, bat it’s not done yet : TThe supply chain at Whirlpool Corp. in 2000 was froken, Indeed, a manager there at the time quipped that among the four major appliance makers in the US,, Whirlpool ranked fifth in delivery performance. “We had too much inventory, t00 litle inventory, rong inventory, right inventory/wrong place, any combination of those things,” says J. B. Hoyt, who ‘was then supply chain project director. He says # sales vice president approached him one day and sitid he'd accept even worse performance from sup- ply systems if they would just be consistent rather than wildly bouncing back and forth between good «nd poor production and shipping plans. So in 2001, Benton Harbor, Mich.-based Whirlpool embarked on a multiproject global overhaul of its supply chain systems. The metaproject remains a ‘work in progress today, with a number of systems yet to be rolled out and some major technical issues to be resolved, But managers at Whittpoo! say its suecess to date—including huge improvements in customer service und reduced supply chain costs—is providing the psychological and financialimpetus to drive the remaining systems work, Whirlpool CIO Esat Sezer says that by 2000, the company had grown by acquisition and geographic expansion to the point that old systems, stitched together by spreadsheets and manual procedures, couldn't cope with the exploding complexity. “Our supply chain was becoming a competitive disadvan- tage for us,” he says, Availability—the percentage of time a product is in the right place at the tight time—was an unacceptably low 83 percent, even as inventories remained too high overall ‘The homegrown supply systems were primitive and not well integrated with the company's SAP ERP system, which had been installed in 1999, oF ‘with a legacy production scheduling system, Sezer says. And they weren’t integrated with the systerhs ‘of major wholesale customers or suppliers of parts and materials, “The plans we were creating weren"t linking back into reality.” he says. In particular, Sezer says, supply chain systems weren't fine-grained enough, nor were they very good at juggling priorities and constraints except through slow and cumbersome manual methods Often, they would optimize locally—a single prod- uct line at one location, for example—but not forthe supply chain as a whole. Source Gray He Antes, “Supply Chin Whi” Compre Worl Soe 6, 2008, 405Implementation Planning Horizon, : FIGURE 14-10 Copablities required to achieve supply chain excellence. 2, Tactical planning determines resource allocation over shorter planning periods such as weeks or months. These systems include * Supply chain master planning coordinates production, distibution strategies, and storage requirements by efficiently allocating supply chain resources to mani- ‘ize profit or minimize systemwide cost. This allows companies to plan ahead for seasonality, promotions, and tight capacities * Inventory planning determines the optimal amount of safety stock and how to best postion inventory in the supply chain, Strategic network design and tactical planning collectively represent the network planing process described in Chapter 3. Optimization is applied in all these cases to enerate effective strategies 3, Operational planning systems enable efficiencies in procurement, production, distribution, inventory, and transportatior-for short-term planning. The planning horizon is typically daily to weekly and the focus is on one function; that is, each system focuses on only one function, for example, production. Therefore, these intra ase esearecaneaeseessaccarsreuosacns~~ upetform their peers (CHAPTER te: FORMATION TECHNOLOGY AND BUSINESS PROCESSES 433. 12-28 month Lower Dopende on expertise Flexbity Lower Highest Complexity Lower Highest Quaity of solution Lower Not sure Fito enterprise ower Hiahest Saf raining ‘Shorter Sortost ‘SUMMARY Suceess in supply chain management IT depends on a combination of applying busi ness processes and new technologies in a way that is most effective forthe business, We show evidence that companies who a We identified the four ma 1, Information availability on each product from production to delivery point. 2, Single point of contact. 3. Decision making based on total supply chain information. 4. Collaboration with supply chain partners 1 goals for IP: How are the four major goals achieved? More importantly, what is the impact of achieving these goals on the logistics manager? First, standardization of processes, communications, data, and interfaces brings about cheaper and easier methods to impleanent the basie infrastructure. TT infrasteuc- . ture will become more accessible for companies of any size and in the future will work across companies in an almost seamless way. This will allow access to IT and integration of the systems at every level of the supply chain—therefore, there will be ‘more information and tracking of products at each level. New technologies such as, RFID will allow products to be tagged and tracked through the supply chain and will be as easy to locate as 2 Federal Express package, ‘Second, data display and access in various forms are becoming more integrated in systems that do not require any specialized knowledge. This makes system interfaces, ‘more inwitive and relevant to the task at hand. Portal interfaces described inthis chapter are one such example. Third, various systems will interact in « way that will blur the current boundaries; SOA will allow easier integration and, as a result, systems purchased as “best of breed” by different people at various levels in the organization will become better integrated and use common interfaces. Similarly, there will be «-protiferation of applications that can plug into a company’s enterprise system to provide specialized functionality. The third goal will be achieved through development of decision-support systems and intelligent agents that are mote sophisticated, rely on real-time data, and are interoperable. Finally, electronic commerce is changing the way we work, interact, and do business. E-commerce provides an interface to businesses andl government that allows ‘meaningful data comparison, and transactions that follow through with error checking ‘anc! correction capability. It enables access to data that exist in government, educational,434 cesicnns ano mannaive THE SUPPLY CHAIN and private databases and the ability to modify or comect these data, Private (and public) e-marketplaces now allow buyers to integrate their suppliers into their information systems. Inthe future, businesses will be able to expand their intercompany transactions into ‘more sophisticated applications that can perform some basic processes and pass the {information on to other applications. In process as complicated as supply chain man- ‘agement, systems that not only perform their own function but also alert others in the system will be especially beneficial to fulfil the four goals we have outlined. ‘These topies are addressed in detail in Chapter 15. We end with a quote from Lou Gerstner, former IBM CEO (see [127): “The payoff from information technology is going to be in making transactions and processes ‘more effective and efficient, s0 it’s not about creating a new economy, it’s not about creating new models of behavior or new models of industry. It’s about taking a tool, a powerful tool, and saying, ‘How can I make my supply chain more effective and efficient, how can I make my purchasing process more efficient, how can I make my internal employee communications more effective and efficient, how can I as @ governtient deliver services to constituents more efficiently and more effectively?” DISCUSSION QUESTIONS 1, What are the major challenges facing supply chains that can be aided by IT? 2. What i the impact of on supply chain management IT? 3. How can ERP vendors take advantage of Internet technology? 4. Compare the capabilities required to achieve supply chain excellence (sce Figure 14-10) according to a. Decision focus. , Data aggregation level, «Time to implement, 4. The number of users involved in the analysis.