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TELEMETRY Chart 1: Comparing Sales & Service Costs by Shelf All Prices = $1 All Margins = 50% Units 4.4 3.9 3.7 SHELF 1 3.5 3.4 2.84 2.90 5% 2% Sales $986 Margin $493 Annual Service Visits 19.5 Weeks of Supply Capacity per item = 10 Number of items= 5 2.25 2.59 3% 2.70 3% Dead Facings 9% Units 4.3 3.9 3.8 3.6 SHELF 2 Capacity per item = 15 Number of items= 10 3.5 3.2 3.1 2.8 2.5 2.2 4.84 5.36 6.00 6.82 5% 0% 7% 10% Weeks of Supply 3.49 3.85 3.95 4.17 4.29 4.69 Sales $1,710 Margin $855 Annual Service Visits 11.0 Dead Facings 0% 3% 2% You would be right if you said Joe's is more proftable 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 frst 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 fxed 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 2% 5% 7% 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 proftability. 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 specifc 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 quantifed 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 May 2013 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 confgurations, promotions and assortment in harmony to manage total proftability. 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 fnalizing 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 reconfguring their warehouse for pre-kitting and fnally 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 VendingMarketWatch.com Automatic Merchandiser 9