7-11 JAPAN

TABLE OF CONTENT

Executive Summary 1

1. Case Background 2

2. Facilities* 3

3. Transportation* 5

4. Information* 7

5. Inventory* 10

6. 7-Eleven in the United States* 11

7. Conclusion 11

Appendix 1 12

Appendix 2 13

*Note:

The content (page 3 to 11) is based on questions 1, 2, 3, 4 and 6, page 88 of the textbook “Supply Chain
Management: Strategy, Planning & Operations” by Sunil Chopra & Peter Meinld (Pearson Education, 3rd
Edition).

• Generally, questions 1 and 3 are answered by four categories of “Facilities”, “Transportation”,

• Questions 2 and 4 are answered mainly in section 3 “Transportation”.

• Question 6 is discussed in section 6 “7-Eleven in the United States”

The case study reports about the Supply Chain Strategy of Seven Eleven Japan (SEJ), the largest
convenient store operator and franchisor in Japan.

Seven Eleven Japan provides several helpful understanding about achieving supply chain strategic fit in
the convenient store industry. In this industry, responsiveness of the supply chain is the most important
factor.

Firstly, SEJ has a set of facilities that are strategically responsive. Its facilities are decentralized in terms
of both location and capacity. The report also discusses about the benefits and risks involved.

Secondly, SEJ’s transportation system is not only relatively efficient but also responsive and capable of
rapid-replenishment. The system is a cross-docking transportation model with goods flow through
distribution centers. Advantages as well disadvantages of the model are discussed.

Thirdly, SEJ invested in a powerful information system that allows rapid and efficient communication.
Point of sales data are utilized to bring about a competitive advantage and a smooth cooperation of with
suppliers. Features, benefits and risks associated with the system have also been discussed.

Fourthly, SEJ practices an inventory management strategy that place great importance on freshness and
choose to reduce flow time instead of holding more inventory to be responsive.

Furthermore, the report discusses about the recent moves of SEJ to duplicate the supply chain structure
in the United States.

1. CASE BACKGROUND

1.1 Seven Eleven Japan (SEJ)

SEJ is the largest operator and franchisor of convenient stores in Japan. Since its establishment in
November 1973, SEJ has been growing quickly. By July 2007, SEJ has 11,704 stores in Japan. In July 2007,
7-Eleven also became world’s largest retail chain store with more than 32,000 stores all over the world .

1.2 Purpose

This case study, by examine the supply chain strategies of SEJ, aims to offer understandings about supply
chain strategies in the convenient store industry. With those understandings, several insights about how
to achieve strategic fit in this industry can be gained.
1.3 Strategic Fit in the convenient store industry

To achieve strategic fit in this industry, firms must understand the customer needs, demand uncertainty
and supply chain capabilities. After that, firms must develop and direct their strategy to fit with the
requirements from customer and the supply chain.

Below are some characteristics in customer needs and supply chain requirements in this industry.

• Batch size: Usually small to medium

• Response time that customer can tolerate: Medium to short. Customers usually expect to
conveniently get the item they want in short time

• Variety: Moderately important

• Service Level: Medium to high

• Price: Higher than large supermarkets and wholesale malls

• Product innovation: moderately important

2. FACILITIES

Apparently, in the convenient store industry, responsiveness is a key factor of the supply chain.
Moreover, SEJ places much more emphasis on the freshness of the produce it sells. Therefore, SEJ
facilities were designed to support a high level of responsiveness.

2.1 Location

In terms of location, it is easy to notice that SEJ locates its stores extremely close to the customers to be
responsive. For example, 48% of SEJ’s customers live within 500 meters from the stores, and 63% within
1000 meters. 53% of customers come by less than five minutes of walk or drive . In order to achieve that
short distance from its customers, SEJ had to develop a dense distribution network. Stores are managed
through a system of clusters. There are around 50 to 60 stores in a cluster. Stores in a cluster are
concentrated closely to each other in specific areas in a market dominance strategy. A typical SEJ’s Store
serves an area within 500 meters radius of it. As stated in its 1994 annual report, the market dominance
strategy offers several benefits such as higher efficiency of the system, brand awareness or competitive
strength. That is the reason why although SEJ is the strongest convenient store brand in Japan, it has
covered only 70% of Japan prefectures.
2.2 Capacity

Although the number of SKUs that SEJ keep is not high, its facilities are highly capable. SEJ’s stores are
small facilities (average area of 1200 square feet) capable of stocking only around 3,000 stock keeping
units (SKU) while large supermarkets can store more than 100,000 SKU’s. However, as said above, SEJ’s
stores form a dense network of 50 to 60 stores per area. That helps boost the capacity of SEJ stores
many times. In other words, the small scale of one SEJ store is to serve a very small area (500 meters
radius), which is not more than the capacity of the store. More importantly, a massive collection of such
small stores in a specific area has created a huge capacity for the network. Furthermore, the variety of
product this system can process is also extended when SEJ places great emphasis on freshness and
continuously change its product mix. SEJ replaces about half of its 3,000 SKUs each year. Goods are
retired as soon as sales decline.

With such high capacity clusters, it can be concluded that the degree of utilization is not maximized. Low
degree of utilization reduces lead-time and minimizes disruption delay. Obviously, cost of the goods is
higher with low utilization, however the benefits of the market dominance strategy seems to be able to
offset the cost incurred.

Therefore, it can be said that SEJ has implemented decentralization not only in its location and
distribution but also in its capacity.

The high responsiveness of SEJ is also reflected through a relatively small order size from the stores and
high level of customer service. The small batch size is due to the limited space available in an SEJ Store.
That is also a reason for the introduction of the SDCs. Everyday small orders from the stores are
transmitted, consolidated and delivered in full truckloads from the SDC to every store. Deliveries are
made many times a day, keeping the items fresh and sufficient thus offering great service level.

2.3 Conclusion

SEJ’s facilities are truly responsiveness driven. What SEJ is doing with its facilities configuration are
match with the strategic direction that a convenient store supply chain should take. SEJ facilities have
been decentralized in terms of both location and capacity to be closer to the customer and offers higher
responsiveness. Small batch size and continuously changing product mixed integrated in the facilities are
other factors that improve responsiveness. SEJ’s facilities have been doing a great job to be responsive
and be next to customers wherever they need it.

However, it is important to notice some risks associate with those practices. For example, the strategy of
decentralization and market dominance may not be efficient. Especially when the market is not so
populated like it is in Japanese cities. Moreover, locating the stores too close to each other may caused
certain amount of cannibalization. Besides, customers in this case may not buy from one store
consistently but change from store to store over time. That may contribute to the inaccuracy of demand
forecasting of stores.

3. TRANSPORTATION

SEJ’s transportation has been successful. It has achieved a high level of responsiveness yet an acceptable
level of efficiency.

3.1 Design of transportation network

Unlike a conventional Japanese Distribution system, SEJ does not allow direct store delivery in Japan but
executes a Joint Delivery Program in which its products must flow through the Distribution Centers (DC).

As can be seen from Figure 1 (Appendix 1), after receiving orders from the store managers and starting
production to fulfill the orders, the suppliers begin to deliver the products to the designated DCs.
Manufacturers and wholesalers are assigned certain areas to deliver the products. After the items have
reached DCs, they will be sorted out by stores and delivered in a full truck to the stores. Another
important factor that helps reduce the lead-time and number of deliveries further is the temperature-
based joint delivery system. In this system, SEJ’s products are grouped into 4 groups of different
temperature. Products that are in the same temperature group will then be handled and distributed in
the same truck.

The above transportation process is usually managed by third party delivery companies. SEJ keeps close
communication with the delivery company. Distribution schedules are also planned carefully. The
number of deliveries made in a day depends on the freshness requirement of the items. For example,
rice balls are delivered 3 times a day. The timing of the deliveries are communicated with the logistic
party and must be followed (with 10 minutes error).

The joint delivery program has brought to SEJ many benefits. Firstly, with the density of the SEJ stores,
direct delivery may result in inefficiency. It requires many trucks going through many routes and
different trucks from different suppliers have to arrive at the stores many times. By designating a
destination to consolidate the incoming items, SEJ can reduce the number of deliveries per day.
Moreover, with the introduction of the temperature-based system, deliveries per day are further cut
down to 11 per day. Before the implementation the 2 methods of operation, the average number of
deliveries to each store was 70 per day. The number of trips decreases means transportation cost and
communication cost are cut down; and the system is more efficient.

Secondly, the limited space of the SEJ’s stores requires deliveries in smaller batch size. Therefore, if SEJ
use direct store deliveries, the cost for transporting many small batches may increase sharply yet may
not be reliable. Consolidating the orders for each store solves this problem effectively. SEJ can have a
reliable delivery schedule with minimal number of trips. Moreover, delivering in full truckloads also
improves the efficiency of the system.

Besides, ordering lead-time is also reduced by a great amount. For direct store delivery, since different
trucks of different suppliers for different types of items have to arrive one by one at the same store,
more time is spent on just loading, unloading, checking and communicating between them and the
stores. The risk for traffic delay will also be minimized if the number of trips to stores decreases.

An important feature of the joint delivery program is that the DCs do not hold inventory. DCs in this case
are just designated points of “pick and pack” to consolidate the orders of SEJ’s Stores. Therefore, the
system helps SEJ reduce cost of holding inventory significantly.

3.2 Choice of transportation mode

Apart from the design of transportation network, firms can also achieve responsiveness in the choice of
transportation mode. Using faster and usually more expensive modes of transport is a way to improve
responsiveness. Another way to be more responsive is to diversify the modes of transportation. For
example, SEJ has included motorcycles, ships and helicopters to diversify its transportation portfolio.
Diversification helps reduce the risk of breakdowns caused by disruption in certain mode of travel. The
drawback is that extra cost may incur to maintain and operate the portfolio.

3.3 Conclusion

The implementation of DCs system has streamlined the transportation of SEJ sharply. It has provided
cost savings through elimination of inventory holding cost. Besides, and more importantly, it makes the
distribution system of SEJ more responsive and flexible by utilizing faster and cheaper routing and
accelerated product flow.

Generally, there are still risks associated with the strategy of micro-matching supply and demand using
rapid replenishment like what SEJ is doing. Firstly, rapid replenishment may be expensive, thus it can
hurt firms’ profit margin. Secondly, risks can come from the uncertainty of the traffic condition. More
importantly, for rapid replenishment and delivery on demand, one disruption event can even affect the
whole area. Thirdly, the threat may as well come from competition. For example, if a store is located
next to a large supermarket that is efficiency driven and can offer cheaper price, then the SEJ stores may
lose sales. Similarly, if SEJ choose to sell products of which demand is too elastic, SEJ may not be able to
compete. Lastly, micro-matching demand and supply can be efficient and lean, but demand can
sometimes fluctuate largely and SEJ may fail to predict such changes. For examples, during festivals,
social events, or natural disasters SEJ may not be able to react quickly because of the fluctuations in
demand and the limited stock kept in the stores.

As for direct store delivery (DSD), it can still hold true in some situations. For example, DSD can be used
in the areas that do not have many stores concentrated. Moreover, for items that are bulky, heavy or
expensive, DSD might be a good choice because extra handling activities (loading, unloading, security,
quality assurance…) are costly.
4. INFORMATION

Information is one the most effective tools of SEJ to improve its responsiveness. It connects effectively
the stages of the SEJ supply chain and provides valuable insights on demand and strategic operations.

4.1 Information System

An illustration of SEJ’s information system is shown in the Appendix 2. As can be seen from the Appendix
2, the hardware configuration of SEJ includes several main components.

• Store Computer (SC)

SC is the center of the store Information System (IS). It connects to the ISDN, Electric Order System,
Graphic Order Terminal and Scanner Terminal. It can track store inventory, sales, orders and analyze
POS data.

• Integrated Services Digital Network (ISDN)

ISDN is an information network that links several thousand stores. ISDN provides a 2-way and high-
speed channel of communication, which has significant impacts on the process of collection and analysis
of POS data as well as feedback gathering.

• Scanner Terminal (SC)

SCs streamline the process of inventory management by helping store managers check orders.

• Graphic Order Terminal (GOT)

GOT is a tool to place orders and maintain access to a detailed analysis of POS data at the same time for
ordering insights.

4.2 Information Collection

The above hardware setting has to collect all the POS data. Moreover, the staffs also collect gender and
estimated age of the customers. After collected, POS data are analyzed to find out useful information
such as hourly sales trend for individual items, scrap trend analysis, stockout ranking, sales trends for
new product and hourly sales trend by customer profile.

Such complete information system helps create much more responsiveness for the stores. For example,
the analysis of hourly sales trend by items and by customer profile can help a store manager determine
which type of customer buy what at what time. With the information in mind, the store manager can
order differently throughout the day, or can rearrange the products on the shelves many times a day.
Moreover, the ordering process is also streamlined significantly. After collected, the POS data are
analyzed by the store computer and ordering insights are offered. The orders are transmitted to the
suppliers within 3 hours.

4.3 Push versus Pull

Clearly, SEJ’s supply chain is more like a pull system. And SEJ’s information system supports the pull
strategy effectively. For example, ordering process is streamlined so that an order, after being analyzed
from the POS data, can reach the suppliers in 3 hours on average. Information travels both upward and
downward quickly enough for the pull strategy.

4.4 Coordination and information sharing

Information sharing is also an important strategy that SEJ relies on to be more responsive. Data about
life of products or hourly sales of the new products are used to determine the product mix of a store.
SEJ also actively shares information with the suppliers to suggest them on product development
strategies. Many of SEJ’s manufacturers now rely on the information shared and tend to work with SEJ
before the launch of a new product. Suggestions about the changing taste of the customers are
sometimes crucial to new product development to anticipate the changing demand.

4.5 Forecasting

Because of the huge amount of data collected and the short ordering lead-time, SEJ’s stores forecast
frequently but over very short period. Therefore, the accuracy of the forecast is improved.

4.6 Enabling Technologies

SEJ invested heavily in its IS, the goal is to streamline the operations and obtain valuable insights to be
more responsive. For example, with the use of Scanner Terminals, delivery time is now sharply
shortened because delivery trucks do not have to wait for store managers to check the goods.

4.7 Conclusion

SEJ is a good example of firm taking advantage of modern technology to streamline their processes and
become more responsive. A pull strategy is most likely responsive; however, it must be supported with
information technology so that the orders can be processed in a very short period. Frequently collected
and analyzed information also allows a closer forecast horizon and thus more accurate. Firms can also
be more responsive by sharing information with suppliers to anticipate and satisfy customer demand
more effectively.

However, there are risks involved in this strategy. Firstly, a pull system might not be able to deal with
great fluctuation in demand for example, during social events, festivals or natural disaster. Secondly,
usually the investment in IS is not low and without strong capital position and profitable prospect, firms
may not benefits enough from this investment. Thirdly, recording and sharing information with other
parties may create negative opinions from customers who think that doing so violates their
confidentiality.

5. INVENTORY

Interestingly, SEJ does not hold much inventory on hand. SEJ’s inventory is mainly the inventory on the
shelves. In the joint delivery program, there is no inventory in the DCs. Moreover, the level of inventory
in transportation is also low because the transportation lead-time is considerably short.

The low level of inventory can cause surprise since one of the strategies that firms can use to increase
responsiveness is stocking more inventory. However, if we look at Little’s Law:

I=D*T

(I = inventory; D = Throughput; T = Flow-time)

The reason for the low level of inventory yet high responsiveness of SEJ lies in the fact that the flow time
of goods through SEJ is very short.

Clearly, the emphasis on freshness in SEJ’s inventory management practices has stimulated it to
continuously shorten its flow time and improve its responsiveness. Several key products of SEJ have a
very short internal shelf life and have to be delivered many times a day. For example, boxes of bento
(traditional Japanese rice) are delivered 3 times a day. Coffee is another short life product with just 1
hour.

From the example of SEJ and Little’s Law, we can conclude that there are two ways to achieve
responsiveness of the supply chain. The first traditional way is to hold more inventories as safety stock,
cycle inventory, seasonal inventory… The second way, which SEJ is implementing, is to streamline
operations and achieve a very short flow time by investing in transportation, network, information
system and supplier relationship. Obviously, the second way helps firms reduce inventory cost and
operate more efficiently. However, the traditional way may still hold true in some cases because there
are certain risks associated with the strategy to reduce flow time. Firstly, there is a risk of lost sales
because of stockout. The risk is more severe in the industries where the cost of stockout is much more
expensive than the cost of holding inventory. Secondly, firms may not be able to deal with emergency in
which a large amount of goods is needed. For example, natural disaster such as earthquake, tsunami
may occur.

6. 7-ELEVEN IN THE UNITED STATES

6.1 Pros:

• 7-Eleven USA will have a successful model to develop and study.

• The introduction of CDCs concentrates on a competitive advantage of 7-Eleven. That is the

• There is opportunities for 7 Eleven to be more efficient

6.2 Cons:

• It may be hard to negotiate with wholesalers and suppliers to deliver to CDCs instead. However,
there is still a need to standardize and have every supplier deliver to the CDCs because doing so would
improve efficiency.

• America’s population distribution is not as dense as that of Japan. Therefore the strategy of
market dominance may become too inefficient. However, if there is just a few stores in a cluster, the
operations of CDCs may not be as efficient as they are in Japan.

• 7 Eleven USA may face more competition from the efficiency driven companies in USA since
there are more space available and the population distribution is less concentrated.

7. CONCLUSION

It can be said that SEJ has achieved considerable strategic fit in its industry. The focus on freshness and
responsiveness is the right direction for convenient stores. However, the process of improvement and
innovation must go on continuously because the industry is getting more and more competitive. SEJ
should further fine tune its supply chain and look into the areas of the risks involved to solve the
problems. Moreover, I think SEJ should as well establish its presence in more areas so as to seize the
market before its competitors can expand.
References

1. Chopra, Sunil and Peter Meindl. 2007. Supply Chain Management: Strategy, Planning &
Operations. 3rd Ed. Pearson Prentice Hall.

2. Whang, Seungjin 2001. Seven Eleven Japan. Stanford Global Supply Chain Management Forum.
SGSCMF-003-1998 (Rev. 2002)

3. Lee, Hau L. "The Triple-A Supply Chain." Harvard Business Review 82, no. 10 (2004): 102-112.

4. "Cross docking & Cross Dock Applications." Benchmark Logistics LLC.