I was talking to the president of a magazine and paperback distribution company today about the evils of scan-based trading–that peculiar financial/technological relationship that retailers like Wal-Mart, Target and Kroger's (as well as KMart, if it ever pulls out of its death spiral and deploys it past the stores piloting the technology) use to squeeze the blood out of the supply-chain stone .

Here's how it works:

Once upon a time, a distributor or supplier would deliver goods to a retailer, and invoice them for them. The retailer would take ownership of the goods, and sell them; the two parties would negotiate compensation for unsold or damaged inventory, but the inventory was carried on the retailer's books.

With SBT, a retailer doesn't take ownership of the goods until they're sold; the distributor doesn't get paid until a product gets sold and is scanned at the the register. An invoice gets generated when the scan info is sent to the supplier/distributor by an electronic message at the end of the day.

This is great for retailers–they lose the financial risks of carrying inventory, and pass those costs back to the supplier. They don't pay for anything that doesn't get scanned (so anything that gets shoplifted, mis-scanned or otherwise leaves in an undocumented fashion gets deducted from the supplier's take). And the retailer can see daily what's selling, using that information to drive supplier restock and cut off products that aren't making their numbers.

Often, the retailers also place display responsibility on the suppliers too–they have to come in and set up displays, handle restocking and otherwise maintain their products in-store.

So WalMart and Target are effectively in the real estate business–they take a cut of the sales on products for letting them sit on their shelves.

You could see where this could be unpopular with suppliers. It gets even more unpopular when the retailer's software doesn't correctly credit them with sales.

More to come on this….