Selected Retailer in Tesco - Case Study Example

 TESCO –SUPPLY –CHAIN MANAGEMENT -A CASE STUDY Table of Contents S.NO HEADING PAGE NO 1 Introduction 3 2 Buyer Supplier Relationship in TESCO 5 3 Supply Chain Management 8 4 Customer Loyalty Card 11 5 Relationship Marketing 12 5.1 TESCO’s Green Clubcard Points for reemploying bags 14 6 Financial aspect of buying 15 7 Theories of Buying (Retail). 15 8 Conclusion 18 9 List of References 19 1. Introduction According to Seth and Randall (2005), on the international level, Tesco is one of the top food retailers and Tesco is the 3rd largest grocery retailer on the global level as on date. According to Burt and Sparks (2003), in UK, Tesco has become presently a number one retailer. Now, it has expanded its operations to Asia and across Eastern Europe. (Gustafsson et al 2006:121). Tesco is one of Europe’s largest retail chains and is a business group well known for proper assimilation and application of exhaustive customer information to optimize its customer’s profiles due to its most advanced data technology application. Its customer data –base includes not only details about its client’s interests, and but also contains of an assorted variety of other food-associate services and non-food services and products and also the life-style and demographic details of its shoppers which include total dollars expended on food products in its stores and the customer response to its product promotion and allied programs. (Shajahan 2006:205). For the first time in the year 2005, Tesco achieved the thirty percent market share in the grocery market in UK.TESCO is the first retailer in UK to report revenues more than £ 2 billion. This is really astonishing as this means that every £8 spent by UK shoppers, about £1 will be spent in Tesco stores. TESCO during 2008/09 recorded net sales of £ 1.9 billion and its profit during the year touched a new height of £ 109 million. TESCO online shopping website is the top five most visited retail websites on the global level, and it attracts about 3.3 million visitors on a weekly basis. TESCO is distributing about 12 million catalogues during a year and receives about 475,000 orders per week. It has the most effective distribution system and has about 2000 home delivery vans and offers employment for more than 20000 individuals. (Wade-Gery 2009). Source: (Wade-Gery 2009). Tesco’s online retail sales are on the increase on an annual basis. Total online sales by adult population were just 17% in 2003, which jumped to a whooping figure of 62 percent in 2010. Though, Tesco’s online sale is only 7% of total retail sales of UK, but there is a still bright prospect for growth potential in this sector. (Wade-Gery 2009). Source: (Wade-Gery 2009). TESCO’s online business is not only large but also rapidly developing. Online business adds more revenue to Tesco, and it has a competitive advantage as a multi-channel offers are being made. TESCO online business is of low capital intensity in nature but with high returns. Further, the online grocery market presents plenty of growth to Tesco as Tesco has penetrated about 3% of overall online grocery market in UK but only about 6.7% of Tesco’s grocery sales are made through online. Source :(Wade-Gery 2009). In this research essay, I am going to do extensive research on TESCO’s, UK’s no 1 retailer, buyer supplier relationship , supply chain management , relationship marketing etc . 2. Buyer Supplier Relationship in TESCO There should be a great incidence of data and information exchange between the supply chain associates which is a prime obligation for the efficient execution of a competent transportation administration system (Yasin, Small & Wafa 1997). Nowadays, internet technology is playing a crucial role in this pivotal area. Accurate and timely exchange of information is of more vital part in this procedure. Supplier’s performance will be depending upon the information sharing strategies between the trading partners. (Walton & Marucheck 1997). Efficient usage of e- commerce has the prospective to enhance the products' distribution strategies of both the supplier and the buyer in the provinces such as decline in delivery lot size, inventory optimisation, reduction in the invoice and purchase orders. An accurate customer demand forecasting will be a vital success element in guaranteeing cooperative associations between trading associates. Tesco’s E-commerce expertise is having major effect in this area. In supermarket industries, effective forecasting and supplier reliability is considered to be more crucial because of the decaying or perishable nature of the majority of the products on sale. For example, substantial cash flow will be reduced in cases of overstocking a product while under supply reflects poor customer service and gaps on the shelves. Customarily, supermarkets used EDI in case of their larger suppliers and relied on customary paper associated initiatives to administer small scale vendors. Reaping the benefit of the open norms' technology of the Internet, large supermarket chains like Tesco are now linking with smaller suppliers. For instance, Tesco has facilitated distant vendors to access all relevant data from all of its locations, to provide news on service levels, and to offer news about dispatching of products to specific retail stores. Such innovative technologies usage will have its direct impact on the operation of both the supplier and the customer. (Shin 2005:110). In supply chain management, contracts in the form of license agreements that include the purchase of a right to employ an asset like new technology for a particular period of time are being entered between trading partners. Further, supply arrangement includes contract for the sale of one supplier’s output to another and thus, the contract is providing long-term security by tying suppliers and customers to specific prices and quantum. Tesco is gaining so much influence that they can almost have a say on their supply contracts by dictating manufacturers what to produce, how to produce and how much it should charge for it. This transforming balance of power in the production value chain has been now altering the strategies in the supply chain management of big supermarkets around the world. (Daft, Murphy & Willmott 2009: 160). Tesco is paying more concentration that its products are to be sourced more fairly and responsibly. By maximising the numbers with its global non-food suppliers, Tesco is trying to build stronger relationships with them. Further, Tesco has improved the eminence of suppliers' audit, and it has now about seven hundred thirty approved independent auditors around the world for carrying out audit in their suppliers’ plants. (Tesco Annual Report 2009:19). In case of any grievances from suppliers, Tesco aim to negotiate and resolve the same through positive deliberation and if necessary, through support of its Code Compliance Officer appointed under the UK Government’s Statutory Supermarket Code of Practice. Further, through its annual Supplier Viewpoint Survey, Tesco encourages its suppliers to forward their feedback on their relationship with the Tesco. During the year 2009, Tesco surveyed more than six thousands suppliers and in excess of 90% of them concurred with that Tesco pays them on time, is dedicated in catering for the customer needs, and it treat them with the respect. (Tesco Annual Report 2009:31). Tesco is paying special attention that workers from its supply chain enjoy fair labour standards by demanding all of its suppliers to follow Ethical Trading Initiative (ETI) and should guarantee that their employees get all the privileges mentioned therein. Tesco use SEDEX (Supplier Ethical Data Exchange) to carry out the risk assessment of all of its direct suppliers and all of their suppliers should undergo an exhaustive and independent ethical audit. (Tesco Annual Report 2009:39). For measuring customer’s satisfaction, Tesco is evaluating customer insight skills through a survey and by the loyalty scheme like Cubcard and with careful analysis of this data, Tesco understands what their customer’s needs are. This helps Tesco to study about cost-conscious or price-sensitive consumers’ so that it can invest in lowering its product prices, mainly to assist their customers, especially during economic downturns. (Tesco Annual Report 2009:9). The main reasons for the preference of TESCO by customers are as follows: Shoppers mainly prefer to shop with Tesco due to the factors like Clubcard, the familiarity of their stores and their attractive offers and prices. If there is a question, whether to be with Tesco or not, shoppers always give due weight to Tesco’s quality, order fulfillment, timeliness and freshness. (Wade-Gery 2009 ) 3. Supply Chain Management Effective supply chain management is one another milestone for a flourishing business strategy. The style in which this policy is managed in companies around the world helps to increase its shareholder values. Tesco employs both purchasing and supply strategies as an essential part of its business strategies. There were number of previous empirical studies that have been carried out on the subject of Tesco supply chain management in the past like (Smith and Sparks1993 2004), (Smith, 1998) & (Sparks 1986). Tesco is focusing its attention on the fast handling of farm fresh foods from the suppliers to retail shelf resulting in lesser stock being held in the supply chain. (Gustafsson et al 2006:123) Tesco is reaping the advantages of exchanging its sales data with its suppliers through extranets. TIE (Tesco Information Exchange) facilitates “win-win” supply chain relationships. Tesco reaps benefit because it from sharing such data and is eliminating the inventory holding cost while at the same period enhancing on-the shelf availability. Tesco suppliers also gain benefits, since they can plan and arrange production and distribution against real demand rather than foresting demand by minimising their necessity to carry safety stock. (Christopher et al 2002: 135). “Tesco Distribution” is the warehousing and logistics arm of Tesco, which operates its own network of stores. Tesco uses cross docking strategy through which it is loading all the products from different suppliers, which are heading for the same Tesco store and will be unloaded from inbounding truck trailers and then loaded straightly into an outbound trailer. This gets rid of the necessity for inventory holding, storage and order picking has been shifted to manufacturers from Tesco’s DCs which facilitates Tesco to minimise its inventory holding by nearly 33%. Further, Tesco is using its own trucks for primary distribution whereby it takes delivery of products straight from its domestic suppliers and distributes the same through its own distribution network. Through backhauling process, the primary distribution facilitates Tesco to employ its distribution fleet to the maximum level. As of 2009, about eighty percent of products from suppliers to Tesco’s DCs were dispatched by the Tesco’s contracted or own fleet. Tesco has achieved considerable cost savings and is able to enhance on time delivery by fourteen percent and is able to minimise its stock holding. Tesco and its suppliers have moved to collaborative Planning, Forecasting and Replenishment (CPFR) which involves business associates exchanging, estimating and outcome data through the internet so as to minimise inventory costs while at the same juncture, improving the availability of the product across the supply chain. This system is being employed to take a decision on offline stocking points to fine tune production quantum and to decide about the quantum of the stock to be maintained. Further, Tesco is now operating in Asia and Eastern Europe and it is in the course of developing of an international supply chain. A fresh produce DC and a magnificent grocery DC was being opened by Tesco in Hungary in 2002. In 2003, 1.5 million square feet DC was opened by Tesco in Korea. Tesco’s first DC was opened in Poland. In 2003, 29,000 pallets capacity with 260,000 square feet DC was opened in the Czech Republic. In Dublin, a 209,000 sq feet DC was opened mainly to supply products to all the Tesco stores in Ireland. Tesco is following a customary replenishment system, each store will decide what products are in demand. Tesco follows a centralised order processing system and the order is being passed on to the suppliers through the intranet who will be in-turn deliver the goods at the respective DCs. Then, these will be delivered to respective stores. In the customary style, at the end of each day, sales data will be posted and orders will be made for the next day and the same will be delivered on the next day thereby keeping the supply chain management in-tact. (Barnes 2008: 268). TESCOs TRADITIONAL SUPPLY CHAIN DIAGRAM: Source :( Barnes 2008:268) For instance, as part of their supply chain initiatives, Tesco is actively engaged in research activities on how to carry on and transport livestock and exchanges the research findings with abattoirs, transporters, packing stations and farmers. Further, Tesco is funding the research projects at Oxford University, Harper Adams University College and at Bristol University. The main aim for these research projects includes offering specific courses /seminars to its suppliers and to kindle the awareness among their consumers and farmers of best practices to be perused in meat production. (Lindgreen 2008: 108) 4. Customer Loyalty Card Nationwide Clubcard was launched by Tesco in February 1995. The main purpose of this CRM (Customer Relationship Management) strategy was to “generate value for clients to make their lifetime royalty.” It is to be noted that Clubcard is more than a “standard “loyalty card and acts as a core theme of the Tesco’s philosophy. Thus, the main intention behind the Tesco’s loyalty card is to remunerate the loyal, individual customers for their true bond with Tesco. The main intention is to foster a modern “corner stone.” This customer –focused strategy is also mirrored in the prime role of Tesco employees who deliver to the customer’s experience and the brand promise and thus act as ‘brand ambassadors’ for the company. (Zentes et al: 245). Tesco has really benefited from its customer’s data drawn from its customer’s loyalty programme which helped it to diversify into the financial service and banking sector. With this ulterior motive, Tesco in association with the Dunnhumby introduced a ‘two-tier’ club card programme. Under this plan, the first tier is earmarked for collecting the invoice data that could be utilised to redeem up to 150 points for vouchers. The second tier is intended for those customers with frequent spending habits, which is more pioneering. Under this scheme, a loyal customer acquires a key per every $ 38 spent in Tesco stores. Earning of fifty such keys offers him the rank of a premium key-holder. Further, a customer attains a premium key-holder status if he attains 100 such keys. Thus, the premium status offers an invitation to prime events, mega discounts, etc. This is mainly intended to create some favorable change in the demeanor style of the customers towards Tesco’s products and services. Tesco had also initiated a marketing programme on an international level for supporting their loyalty card campaign. (Shajahan 2006 205). Tesco has introduced Clubcard, which assists it to comprehend what its customer needs are while permitting Tesco to thank its customers for shopping with them. During the year 2009, Tesco gave away nearly £400 million in Clubcard vouchers to its customers. Further, Tesco is also having national loyalty card schemes, which are based on Clubcard in South Korea, Malaysia, Ireland and China and Tesco has also introduced pilot schemes in Poland, Slovakia, Turkey and Thailand. (Tesco Annual Report 2009:30). The major source of customer information for Tesco emanates from its Clubcard with about thirteen million active card holders were in 2007. Tesco is using the customers’ data to enlarge its value proposals to its shoppers. 5. Relationship Marketing Gronroos delineates relationship marketing as: “Marketing is to create, administer and improve the relationship with customers and other associates, at a profit, so that the goals of the parties or associates are accomplished. “This is accomplished by a mutual fulfillment and exchange of promises. Such relationships are always long-term in nature. For instance, establishing relationship with a customer can be classified into two parts namely 1) to magnetise the customer and 2) to fabricate the relationship with that customer so that economic pursuits of such relationship are realised. (Shajahan 2006:30). According to Porter (1993:14), relationship marketing is described as the process whereby both the seller and buyer create an efficient, effective, enthusiastic, enjoyable and ethical relationship. The relationships should be one that would professionally, personally and profitably rewarding to both the categories. TESCO has a commitment to deliver on its assurances and to make amendments when things go wrong and to construct a reputation for executing both. Thus, Tesco is attempting to blend both the relationship marketing and branding together. According to one commentator, relationship marketing in Tesco is more akin to a marriage bonding and real intention of Tesco is more selfish in nature. It is to be noted that Tesco has not fallen in love with their customers but it thinks that is good for its business. (Hastings 2007:136). Further, there are many commercial advantages to relationship marketing, and it offers like better long-run planning and stability as it will facilitate Tesco to know better about its customers. It also offers lower price sensitive as both trust and service quality will provide valued incentives. In relationship marketing, Tesco is having an opportunity to ‘cross sell ‘or sell alternative products and also “up sell “or sell more. (Hastings 2007:136). According to Palmer (2000), relationship marketing can also be built horizontally, vertically and internally by Tesco. It can build relationship marketing with stakeholders, suppliers and even in case of strategic alliances and with its competitors. In Tesco’s relationship marketing, all employees are certainly drawn into the programme and total quality management (TQM) insists on customer specific and focuses all through their supply chain and hence, relationship building is significant both externally and internally. According to Morgan and Hunt (1994), there exists an aggregate of twenty-seven varied sorts of relationship that are thrown open to corporate, which can be classified into four categories namely a) suppliers ( example: advertising and research agencies ) b) internal ( e.g. employees) c) buyers ( e.g. customers ) and d) lateral (e.g. competitors). (Hastings 2007:136). According to Jim Barnes, Tesco knows more than any company which he has seen with how their buyer thinks, what will amaze them and what deject them and how they feel about grocery shopping? (Jobber: 290). TESCO CRM (Customer Relationship Management) was not just restricted to their loyalty card scheme, but it was more of a whole group-wise philosophy. Industry critics are of the view that Tesco’s CRM efforts facilitated to develop more exhaustive marketing strategies. But for its CRM efforts, the group would not have become as the UK’s number one retailer in 1995 as it had fought back at number two lagging behind its arch –rival Sainsbury for nearly two decades. Thus, with the help of its relationship marketing efforts, it was able to maintain a market share of 27% as compared to its competitor Sainsbury which market share was only just 17% in 2003.( Jobber :290). Tesco actually derived advantage from having a customer –centric approach to its commercial operations. This can be corroborated in varied ways of approach by Tesco. The “One in Front “effort was intended mainly to assure that shoppers’ queue did not surpass two levels at any checkout points at Tesco. Though this process did cost the company with millions of pounds for the implementation but the strategy worked since shoppers welcomed the efficient and quick service offered by Tesco. (Download it org 2009). 5.1 TESCO’s Green Clubcard Points for reemploying bags Other than Clubcard, Tesco is also offering Green Clubcard Point every time its customer reuses a bag. The main goal is that as long as if a customer is willing to help the environment more secure by not using a new carrier bag, Tesco will be offering a Green Clubcard point in its return. Tesco is presently offering one Green Clubcard Point for every item ordered without a new carrier bag. TESCO efforts in this direction will help to reduce the usage of carrier bags by twenty-five percent over the next two years. (Gummesson 2008:147). 6. Financial aspect of buying The main philosophy of Tesco is to market an exhaustive variety of quality services and products at an affordable price. TESCO is able to achieve considerable profitability from its operations as it has achieved the economies of scale connected with selling at high volume and buying in bulk quantity. This also indicates that the cost is kept at low ebb. Thus TESCO proved to be major UK retailer by marketing basic groceries at very low prices. (Download it org 2009). 7. Theories of Buying (Retail). Marshallion replica of Economic theories of buying Classical economists were developed this model and had explained how a shopper as a rational purchaser who has ideal knowledge about the market. He will assess all the available substitutes and selects the one which offers him with the greatest utility value at the minimum cost. TESCO is an excellent example of Marshallion economic theory of buying. (Bose 2004: 509). Psychological Theories of Buying This is also known as learning curve theories. This theory emphasises that shoppers learn from their previous shopping and the outcomes of their experience transform their buying attitudes in future periods. The importance of brand loyalty and recurring purchase attitude will make the learning curve more appropriate in the field of marketing. Customer loyalty card like Cubcard, Green Clubcard has been introduced by Tesco, which helps to retain their brand loyalty and to reward them for making recurring purchases from Tesco stores. (Bose 2004:509). Stimulus Response Theory Under this theory, learning is footed on four key elements namely drive, response, cue and reinforcement. Drives are motives or needs that are more secure, whereas ‘cue’ is a weaker stimulus. The shopper’s response will be answering to the cue or the drive. If shopper’s response is cue, the response may be shifted to competitor’s brand as per their last experience. The past rewarding experience will be strengthened in the reinforcement process. (Bose 2004:509). Cognitive Theories Under Cognitive theory, prompt of a want is disciplined by a shopper’s perception, his knowledge, attitudes and beliefs. The above theory further emphasises that even after a methodological buying, the shoppers may experience some fear or discomfort. This stress is due to cognitive dissonance emanating from fears about the previous purchasing decision taken. (Bose 2004:509). Gestalt Theory Under this method, buying is not influenced by a single factor, but is the aggregate of many factors. However, Field's theory emphasises that a shopper makes the buying decision to purchase only after evaluating the quality, product, advertising, price, retailers, etc. Thus, Field's theory can be called as a constructive refinement of the Gestalt psychology. (Bose 2004:509). 8. Distribution Management in TESCO Tesco is having about 306 stores in UK, which offers it about 99% coverage in UK market alone. Its stores are situated in such a way that it will take maximum of twenty-five minutes drive only to reach any stores from any given point of place. Further, it will take just fifty-five minutes only to reach its dotcom only stores from any given point of place. Moreover, TESCO is having more than 250 direct desks, which offer Tesco about sixty percent coverage. Transportation and distribution costs are occupying a high portion in home delivery economics and Tesco tries to keep them at low ebb “through short travel distances. “. As a distribution management strategy, Tesco is now concentrating more on Dotcom only stores. It has established three numbers of exclusive stores which will extend service only to dotcom shoppers. Now, Tesco is having exclusive dotcom stores in Greenford, Aylesford and Croydon. Tesco is planning to open about one dotcom exclusive store per annum for at least for the next few years. By 2014, Tesco is planning to have at least 15% of its sales generated through the dotcom stores. Tesco’s multi channel approach is a key to their business success. (Wade-Gery 2009). As an innovative process in distribution strategy, Tesco’s catalogue shops are a new initiative of their Tesco Direct, and it reflects on their aggregate of non-food business. Catalogue range is held in stock in warehouses within the Telco’s store. It takes initiatives to bring widespread non-food range to small stores of Tesco. Further, its distribution strategy authorises reconfiguration of existing space to foster improved non-food shopping trip. Trials of above are used in on Superstore and in six Homeplus and will be extended to more Extras and Superstores in the coming years. (Wade-Gery 2009). Location of Tesco Stores in UK. Source: (Wade-Gery 2009) Tesco in recent years has launched their new online clothing business and it has now become the third biggest online category with about 2600 lines available in an aggregate and about 1000 lines are dedicated to online which includes some famous brands. (Wade-Gery 2009). 8. Conclusion TESCO SALES GROWTH The above graph indicates that Tesco’s sales growth is very robust and strong. TESCO success story is an ongoing process, and it has a clear and concise agenda of going forward to improve its business on a bigger range. It aims to increase its website merchandising capacity by employing greater personalisation through web data and Clubcards. TESCO is very much aware that its success is reliant on greater customer interactivity and wishes to expand on more closely assimilated business operations and mainly through efficient transport and timely fulfillment orders. It also plans to develop a full operating replica for global, which will be implemented in the coming years. Its future international operations will be decided on the quantum of internet penetration in that market and on the propensity to shop online. (Wade-Gery 2009). List of References Barnes, David. (2008). Operations Management: An International Perspective. London: Cengage Learning. Bose, Chandra D. (2004) Principles of Management and Administration. New Delhi: PHI Learning P Ltd. Christopher Martin, Payne Adrian & Ballantyne David. (2002). Relationship Marketing: Creating Shareholder Value. New York: Butterworth –Heinemann. Daft, Murphy & Willmott. (2009) Organisational Theory and Design. London: Cengage Learning. Gummesson, Evert. (2008). Total Relationship Marketing. New York: Butterworth Heinemann. Gustafsson Krestin, Jonson Gunilla & Smith David. (2006). Retailing Logistics and Fresh Food Packaging. London: Kogan Press. Hastings Gerard. (2007). Social Marketing: Why Should the Devil Have All the Best Tunes? New York: Butterworth Heinemann. Jobber. (2009). Foundations of Marketing 2E. New Delhi: Tata McGraw-Hill. Lindgreen, Adam. (2008) Managing Market Relationships. London: Gower Publishing Ltd Shajahan S. (2006) Relationship Marketing: Text and Cases. New Delhi: Tata McGraw-Hill. Shin, Namchul. (2005) Strategies for Generating E-Business Returns on Investment. New York: Idea Group Inc. Wade-Gery, Laura. (2009). TESCO: Growth and returns. [online] available from http://www.tescoplc.com/plc/ir/pres_results/presentations/p2009/seminar2009/wade-gery.pdf > accessed on 18th March 2010. Zentes Joachim, Morschett Dirk & Klein-Schramm Harna. () Strategic Retail Management. Text and International Cases. London: Gabler Verlag. Read More