Industry Update
Editorial Article19 April 2002

V-Commerce: Understanding Vending Machine Technology - by Michael L. Kasavana, Ph.D., CHTP

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V-Commerce

The potential impact of automatic merchandising (i.e. vending) on the hospitality industry may be significant as innovative smart machines, seamlessly integrated with property management systems, possess the capability to enhance guest services while reducing labor cost and increasing profitability. As the labor market remains challenging, hospitality management may seek alternative product delivery methods to maintain guest services and profitability. Given the technological advancements in automatic merchandising and vending information systems (v-commerce), hospitality practitioners should consider using vending equipment in innovative ways to exceed guest expectations. V-commerce is capable of improving productivity, expanding guest services and presenting a platform for competitive advantage. It is time to consider unattended points of sale as a mainstream hospitality information system application, not as an auxiliary function for outsourcing.

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During the past few years, the vending industry has been inundated with hardware devices designed to tightly control unattended transactions, software applications governing inventory replenishment and sales reconciliation, and netware for wide area connectivity (wired or wireless) for real-time data sharing. Historically considered a low-tech industry, the introduction of sophisticated automation has revolutionized the vend channel.

Vend Operators

Advances in equipment technology and computer software are giving vend operators more control of their business. These tools are providing benefits in many operational areas, including: route management, service scheduling, cash accountability and product selection. For most operators, accountability at the route and/or machine level is a top priority in choosing application software. The ability to choose a more profitable product mix is usually further down on the list of most operators' priorities. This is mainly because there is often a misconception between popularity and profitability. The long-term impact of promoting less profitable items, can be dysfunctional. While only a small percentage of vend operators have begun to utilize much of the newer technology, the trend is quickly shifting. Change is occurring in the form of V-commerce.

V-Commerce

V-commerce technology devices provide an increased number of unattended points of sales with online transaction processing capability. Such developments represent a significant cost containment strategy for the historically labor-intensive hospitality industry. V-commerce is the term used to describe the nearly unlimited range of advanced automatic merchandising technology application opportunities available to the vending industry. For decades vending equipment has been a hidden or auxiliary operation in the hospitality environment. Few operators have noticed vending machine reliability, efficiency or opportunity. As the labor market remains tight, replacement of staff with sophisticated unmanned distribution technology may begin to appear more attractive. Why shouldn't a guest be able to insert a room key into a vending machine so that transactions can be posted to a folio? What about delivery of upscale snacks or quality foodservice products via machine? Why not dispense towels and market health products poolside without requiring an attendant? How about breakfast delivery mechanisms for budget properties? As the potential for numerous applications become more apparent, v-commerce initiatives are expected to propel automatic merchandising into the mainstream of hospitality business applications. Decisions concerning machine content and fulfillment reside with development of a plan-o-gram.

Plan-o-Grams

Initially product manufacturers introduced sample plan-o-grams as a means of providing a simplistic way for sorting category databases into product selections. Software companies now offer plan-o-gram modules and sales analysis tools as an aid to better, more informed product selections. Despite the fact vend operators tend to recognize the conceptual benefits of plan-o-gram mappings, management has been resistant to widespread implementation. Since vend operators have historically empowered route drivers to select a majority of the products for their routes, there is hesitancy to change these practices and have the product manufacturer or distributor make product decisions. To fully implement plan-o-gram mapping, for example, a distributor may be required to adjust its warehouse organization to more closely parallel system requirements. Plan-o-grams are typically organized according to location type (office, schools, factories) and/or machine configuration (32-select or 45-select). The amount of support work required will depend on how frequently and to what degree the plan-o-gram changes (weekly, monthly, quarterly).

Most plan-o-gram maps are composed of two types of products: core products and cyclical products. Popular and profitable items are deemed "core" and simply are constant inclusions on successive plan-o-grams. Items that move on and off the plan are labeled "cyclical" and may or may not be included in the next plan-o-gram. To date, most plan-o-grams are calculated on a monthly to quarterly schedule basis and the ratio of core products to cyclical products can vary considerably.Full row and column tracking with historical sales data is used to determine core products and to predict future product movement. A plan-o-gram analysis basically enables projections based on item-level financial data to determine product rotation groupings. Plan-o-grams provide a tool to ensure better selling items are in all machines. When product accountability is added to a plan-o-gram the vend operator becomes capable of managing product categories, a macro-level practice known as category management.

Category Management

Like some restaurateurs, vend operators may choose products (menu items) based on sales, not profitability. In the mid-1990s, companies such as Nabisco Inc., Frito-Lay Inc., Hershey Foods and M&M/MARS began educating operators about category management, product selection processes, and product specific strategies. Category management (CM) is an approach by which manufacturers, distributors and/or suppliers manage groups of products efficiently with respect to pricing, merchandising, promotion and availability (product selection). The goal of CM is to increase sales and profitability through coordinated efficiency at both route and warehouse levels by assisting vend operators with space optimization (most dollars from fixed space), while satisfying consumer demand.

It is not commonly known that, for the most part, vending machine product offerings are selected by route drivers, based on their experience or gut feelings, rather than by using any systematic, fact-based information. Their attempts to fill the machines simply with as much product as possible, cause warehouses to saturate stock keeping units. In other words, their decision on product selection in limited vending machine space might not always meet consumer preferences. Consequently, consumers may walk away from the machines.

CM is an important concept because it provides a basis for improvement in overall contribution margin by focusing on consumer behavior, rather than solely on buyer-to-seller transactions. Understanding consumer behavior allows operators' to make decisions that include a sound product mix (e.g. candy, snacks, beverages, coffees, etc.) as well as a planned item rotation to enhance revenue opportunities. Category management is critical to vending since machines have limited space, compared to other retail channels.

Basically, category management provides vend operators with the ability to choose appropriate product categories, allocate slots/spirals/space effectively, develop a profitable product mix, while providing a blueprint for machine menu planning.

Automating Category Management

Category management is essentially a four-step process: 1) category identification, 2) space allocation to categories, 3) product selection and 4) menu cycle rotation. Category identification simply involves delineating available item categories (e.g. snacks, beverages, candy, etc.) across all possible choices. A determination is then made as to which product categories will be represented in a specific vending machine. Space is allocated accordingly. Product selection within categories is important to maximizing sales and profitability. By identifying types of products, such as core products and cyclical products, flexibility and variety can be achieved.

Vend operators are aware that not all items or categories are traffic generators or profit generators. Vendors often carry items that are low in margin, low in sales and low in demand and may not know it! Vend operators need to understand how each core product, primary product and rotational product contributes to the sales mix and profit portfolio.

Advanced Technologies

While some vending operators have migrated to a cabled, network-centric system, the advancement of wireless technology has emerged as an attractive alternative. Wireless applications possess tremendous potential for the vend industry, an industry that desires mobility, flexibility and reliability in enterprise-wide operations. Vending practitioners dissatisfied with the constraints and complexities of hard wiring are migrating to the convenience of design portability and user mobility that wireless technology solutions provide. Operators already have begun benefiting from the evolution of such devices as hand-held terminals, personal digital assistants, smart paging units, global positioning systems, telecommunication links (telemetrics), proximity transponders and related devices.

DEX Standards

DEX is an acronym for Data Exchange and is the abbreviation for DEX/UCS which stands for Data Exchange Uniform Code Standard. DEX is the key to technological advancements in the vending industry worldwide. Since DEX/UCS recently received international consensus support, industry experts believe this will further facilitate a movement toward consistent data formatting. In the past, machine manufacturers varied in how data exchange transmissions occurred. Now DEX designers and equipment engineers have agreed on a common linkage. While not all vend operators demand identical informational output, machines will possess similar data capabilities for delivering consistent reports. For example, common data set elements in the DEX standard are number of bills held in the bill stacker, quantity and denomination of coins stored in the coin box, machine inventory, and product sales tracking. Given recent DEX developments, coupled with the fact that vending machines have an average life of 10 years, it may take a generation of new machine installations to fully realize the DEX potential. Many industry practitioners claim DEX provides an indisputable, auditable accounting method for actual cash collections, units sold, and product price.

During the past decade, the National Automatic Merchandising Association (NAMA) established a communication protocol for the electronic retrievable of machine-level information via data polling. As a consequence, vending machines are now manufactured as DEX-enabled and are often labeled as DEX-compliant. Basic DEX extraction includes sales, cash collections, product movement (sales mix) and related information. DEX data retrieval can be accomplished via three distinct polling modes: 1) local polling, 2) dial-up polling or 3) wireless polling.

Local polling incorporates a hand-held device (or pocket probe) designed to plug connect to a machine-based DEX-port. Once the connection is established, the device is used to download transactional data. A typical DEX data download (machine to hand-held device) takes approximately five seconds. Field collected data is later transferred from the hand-held device to a central office computer for processing and analysis.

Dial-up polling (telephone line), and wireless polling enable remote access to DEX data without requiring a physical presence at the point of transaction. Once a valid connection is established, DEX data can be collected to evaluate and analyze. DEX-enabled handhelds plug into a vending machine port and automatically download stored data. While most information deals with sales, there are several important elements of auditing. For example, how much cash should be in a machine at the close of a sales period? A route driver, unable to view the DEX electronic record, will have cash collections compared against the machine-level electronic record.

A DEX-enabled machine relies upon a DEX add-on to enable a handheld device to be plugged into the back portion of a vending machine. The vending machine then communicates its unique identifying number and stored data is extracted. An important element of this data is the machine's service history, including the last date the machine was serviced. Once the route driver transfers DEX information to the handheld and in turn relays it back to headquarters, an audit can be performed. Since captured data is not accessible or editable by the route driver, cash accountability is assumed accurate and complete. Also, the ability to track product information at the machine level enhances productivity as a route time is improved and manual data entry is eliminated.

DEX specifies a data format to enable all different types of machines and machine models to communicate electronically in a similar manner. The DEX information available includes: sales, cash collections, product movement and other vending machine activities. Additionally, the DEX specification contains a standard for reporting error codes for payment validation, jams and other operational problems, all of which use ASCII text blocks for report generation.

The main benefit of line-item tracking is accountability and machine menu development. A DEXBuzzBox system operates through a wireless transmitter installed in a DEX-equipped vending machine that transmits machine-level data to a receiver (BuzzBox) in the route driver's truck. The BuzzBox may be equipped with a portable printer and a hand-held computer. The BuzzBox can be used to determine which machines at the location require service (which do not) and generates a detailed pick list for the driver to restock the machines prior to entering the facility. The driver's productivity is enhanced as there is only one trip into the building.

Cashless Vending

Consumers appreciate convenience, and cashless vending offers convenience. Cashless payment has proven to increase customer spending and attract new customers — without costly security overheads associated with cash. Cashless payment options include credit and debit cards, cellular handsets, RFID, payphone cards and electronic purse or smartcards. Cashless transactions require authorization that likely requires the use of telemetry. Telemetry is defined as the technology of automatic measurement and transmission of data by wire, radio or other means from a remote source. For vending, telemetry usually refers to the use of telecommunication equipment to complete a network topology. Cashless transactions may not be the most important advantage telemetry offers, but cashless systems do represent one of telemetry's most obvious benefits. In addition, once connectivity is achieved, vend operators will be able to transmit sales information, change selling prices, and monitor inventory and machine functions/malfunctions remotely. Telemetry offers improved product accountability, reduced cash liabilities and enables quicker transaction times. Convenience translates into higher sales, while improved efficiencies should result in more profitable operations. Some cashless vending machines are also equipped with an innovative feature called e-Port. E-Port is an interactive media screen that can project advertisements or online news content as an enticing draw for consumers. The e-Port package includes a card reader, an interactive media monitor and remote monitoring service.

According to manufacturers a machine can be equipped with a credit/debit card reader for several hundred dollars. With $10 to $15 per month needed for the telemetry, experts claim the full cost can be recovered within a year for many vending locations. Card system providers report field tests have shown these readers boost sales by 20 to 30 percent. Participating vendors agree. In addition, card purchases create an electronic trail of what was purchased, when and by whom. Also, cashless transactions are faster, avoid change deployment and simplify cash accountability. Cashless systems can also feature loyalty rewards and gift cards and purchase points.

Future Applications

Wearable computers, not just authorization chips, form the basis for an innovative set of communication and reporting applications some vending operators are contemplating. Body-worn technology suggests powerful applications capable of significantly impacting both on- and off-premise services including route management, data mining, product replenishment, menu engineering, and labor productivity. In addition, the recent proliferation of vending company web sites, supporting a variety of online opportunities, provides a solid base for expansion into sophisticated online purchasing, virtual private networks, training and other web-based applications, including cyber-wallets or e-wallets and information portals.

Summary

The hospitality industry faces a challenging labor market. A popular but seldom considered mainstream opportunity exists in the application of unattended points of sale, better known as automatic merchandising. Advanced electronic capabilities that enable remote machine monitoring, mobile phone activated purchases, and card-based transactions are being rapidly adopted. As telemetry applications and cashless transactions alter the vending landscape, hospitality management would be wise to investigate the potential benefits of vended operations.

Michael L. Kasavana, Ph.D., CHTP, is NAMA Professor in Hospitality Business School of Hospitality Business Michigan State University. Kasavana is also a member of the HFTP Communications Editorial Advisory Council

Related Links:

Vending Technology - Trade Journal Websites

Vending Technology - Software

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Vending Technology - Hardware

The Bottomline, published bimonthly, is the official publication of HFTP, and is received by HFTP members as a member benefit. The editorial content of The Bottomline is determined by a team of experts. Members of the HFTP Communications Committee represent a variety of industry segments and areas of expertise in accounting, finance and technology. Besides the magazine's six regular issues, two special issues are published yearly. The Bottomline is an HFTP member benefit and is only received regularly by members. Go to www.hftp.org to get more information on HFTP membership.

Based in Austin, Texas, HFTP is the professional association for financial and IT personnel working in hotels, resorts, clubs, casinos, restaurants, and other hospitality-related businesses. The association provides continuing education and networking opportunities to more than 4,300 members around the world. HFTP also administers the examination and awards the certification for the Certified Hospitality Accountant Executive (CHAE) and the Certified Hospitality Technology Professional (CHTP) designations. HFTP was founded in 1952 as the National Association of Hospitality Accountants.

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