Tesco Supermarket Supply Chain - Essay Example

Executive Summary In the face of today’s rapid globalization, the long supply chains that characterize many of the contemporary global supply chains have resulted in a number of obstacles some of which include increased risks of procurement frauds, lack of effective monitoring systems and difficulty in tracking the supplies to authenticate their transparency. As a result, many supply chains supply chains such as the retail industry have increasingly become less resilient and more vulnerable to disruptions. Overcoming these obstacles is significantly critical in ensuring the success of supply chain management. Using the case study of Tesco supermarket supply chain and the horse meat scandal of 2013, this paper critically discusses the three most important obstacles that need to be overcome in order to achieve a resilient and successful supply chain management. Introduction The resilience of the global supply chains and their ability to overcome obstacles continually deliver their core values in the face of disruptions is currently one of the most important concerns in supply chain management. Although the increasingly globalized and interconnected world market has resulted in highly sophisticated supply chains vital for the competitiveness of multinational companies, it has also contributed to development of a highly complex, volatile, uncertain, interlinked and global nature of the supply chains has in increased their vulnerability in many fronts. A recent study conducted by Aon Risk solutions revealed that the percentage of global companies that reported loss of income due to disruptions in their supply chains increased by 42% between 2011 and 2013 (Allianz, 2013, p.44). According to many experts, the continually rising levels of logistical complexity have compromised the resiliency of many supply chains thereby making them mo.mre vulnerable to disruptions by various obstacles including natural disasters, economic uncertainties, rapid changes in technology, regulatory compliances as well as political upheavals Christopher and Peck, 2010, Deloittes, 2012). Many global businesses are currently competing internationally by working with their global suppliers, outsourcing as well as marketing their products world wide. Consequently, with the increasing competiveness of today’s global markets, there is an urgent need for the optimization of the supply chains through effective management of transportation, product plans, inventory and information flow to enhance customer experience and ultimately improve their competitive advantages. However, achieving resiliency in the supply chains particularly in the retail industry is a highly complex process that involves integrating key business processes and networks amongst different companies such as producers, suppliers, manufacturers and retailers in an international context. In addition, this may also require that the companies operating on the international markets to enhance their capability of supervising the movement of products across the supply chains. Supply Chain Obstacles: Case of Tesco and the 2013 Horse Meat Scandal Tesco is one of the world’s largest retail chains in terms of revenues and profits. Headquartered in Cheshunt, Hertfordshire, the British multinational retailer is not only a market leader in the UK but is also currently operating stores in more than 12 countries across Europe and Asia. The Tesco supermarket supply chain is one of the most collaboration-dependent supply chains. This is owing to the fact that the sales made by a supermarket are largely defined by the efficiency with which the suppliers deliver commodities to the supermarket. However, In January 2013, the British media reported one of the biggest cases of food fraud in the recent times, involving a massive adulteration of meat products particularly burgers sold by Tesco and other retail outlets across Europe. Following the revelation, Tesco was rocked by a sales slide in nearly 9 of its 11 global markets with significant sales decline being experienced even in non food items being sold by the giant retailer (Felicity L. 2013, p.2). As Tesco and other European retail outlets such as Nestle, Taco Bell and Ikea are still struggling to assure their consumers of the safety of their food products, the impact of the meat adulteration scandal on the Britain’s biggest supermarket revealed a number of contemporary challenges and obstacles that need to be overcome in order to achieve successful supply chain management. 1. Difficulty to Track or Guarantee Transparency of the Supply One of the major global supply chain management obstacles and problems that can be derived from the case of Tesco following the 2013 horsemeat scandal in which a significant percentage of horse DNA was found beef burgers sold in the outlets of the giant supermarket is the difficulty of tracking the products from their original source due to the complexity of the long interlinked cross supply chains thereby making it difficult to oversight the suppliers and guarantee their transparency. For example, in Tesco’s situation, the supply chain for supermarket is highly complex, since the supermarkets rely on the goodwill of its suppliers and the delivery of a variety of food products by a supermarket to its customers is highly dependent on the transparency of the suppliers in delivering the products to the supermarket(BBC News, 2013:n.p.). This particularly makes it more challenging for organizations to guarantee the safety of the products. In this regard, the mistake done by one player in the supply chain can be costly to the other parties, yet such other parties have little control over the actions of that player. There is a necessity for collaboration of the players in the supply chain towards the achievement of certain goals. However, such players are very independent in their operations, resulting in the argument that there might be no right theory for the management of the supply chain. This argument is backed up by the principal-agent theory (PAT). This theory provides that due to the separation of the ownership and control of the economic activities between the agent and the principle in the supply chain, various agency problems may arise. These problems may subsequently transform into major supply chain obstacles (Halldorsson, et al., 2007, p.287). 2. Longer Supply Chains and Lack of Adequate Monitoring Systems Lack of effective monitoring systems due to the long supply chains has been cited as a major obstacle that causes the contemporary global supply chain management to function inefficiently. For example, the longer the supply chain, the more difficult it becomes to effectively monitor the supply chain and carry out compliance checks (Felicity, 2013, p.3). As a result, many firms, business and even individuals that participate in a particular supply chain, without having the knowledge of how the other partners operate (Katunzi, 2011, p.108). This form of cooperation and collaboration is very detrimental to the supply chain management. This is because it hinders the chances of the supply chain partners being able to support one another through information and best practices that can enhance their partners operations. Additionally, this would eventually enhance the operation of the whole supply chain. Possessing the knowledge of how each of the partner firm operates in the supply chain, even if it is only the knowledge of the basics, can be very helpful. It can enable the whole supply chain to formulate best practices and culture that benefits them all (Ketchen & Hult, 2006, p.577). However, the problem of lack of knowledge of operations of the partner firms, just like the problem of lack of information visibility, is caused by lack of trust between the partner firms in the supply chain (Katunzi, 2011, p.108). While the partner firms operating within a supply chain do not trust one another, there is a tendency of each firm trying to preserve its own mode of operation and guard it against access by the others, so that the firm can feel safer (Juanqiaong, Tingting & Jingjing, 2007, p.887). However, this does not help the overall supply chain. Any of the partner firm may have access to information on how the mode of operation of a given partner firm can be improved, to enhance efficiency and increase returns. However, is unable to share such information, due to lack of knowledge of how the other partner firm operates. Thus, improving the knowledge of how each partner firm operates within the supply chain can be very pivotal towards streamlining the whole supply chain. This can in turn increase chances of its successful management. Information visibility among the participants to the supply chain is fundamental, towards ensuring that all the participants in the supply chain are reading from the same page (Katunzi, 2011:108). However, lack of information visibility has become a major obstacle for the supply chain management between different firms. This results in each firm within the supply chain pursuing goals that are not complementary to the goals of either participant. Most notably, diverse technology adoption and application has become a major barrier to the synchronization of the information visibility for firms operating within a supply chain. The application of different supply chain management technology has resulted in the difficulty of the supply chain partners being able to access the information of interest from other partners (Wisner, 2006:56). The overall effect is that such firms are not able to collaborate effectively, most especially because such firms are not in a position to acquire external marketing and research information from one other. Such information would greatly help them to synchronize their product supply activities, for the greater interest of efficiency and high returns on investment. The major challenge presented by the application of different technologies by the supply chain management partners is that such firms require obtaining raw data from their partners as related to the market research. Then, the firms are required to enter such data into their own supply management applications for subsequent analysis. This process in turn means that the firms have to duplicate efforts, time and resources in evaluating and analyzing the same data for effective decision-making regarding the supply chain management. In addition, it also causes the delays in implementation of the appropriate supply chain management strategies, which can enhance efficiency and enable the firms to reap maximum benefits out of their collaboration. Further, the time lost in the process of the different partner firms analyzing and evaluating the same data differently can mean lost opportunities for the partner firms to meet the needs of their end- customers and thus increase their customer base (Cachon, 2005, p.847). The lost time can also mean giving the competitive firms an upper hand, through offering them an opportunity to satisfy the customer needs better than the partner firms in the supply chain do. Overall, the lack of information visibility can be very costly for the partner firms within a supply chain, and thus requires to be mitigated. 3. Increased Risk of Procurement Fraud Increased risk of procurement fraud due to the long supply chains involved in cross border businesses is another critical obstacle that may significantly impact on the success of the supply chain management (CLSCM, 2012, p.56). For example, as seen in the case of Tesco supermarket and the horse meat scandal, it is likely that the supplier may have knowingly substituted beef with horse meat as a way of delivering cheaper supply to the supermarket in order to derive some unfair benefits. This would in turn allow them to earn higher profitability. The risk of procurement frauds such as product substitution, bribery and corruption among other forms of fraud significantly increases with the length of the supply chain (Christopher and Holweg, 2011, p.88). According to many experts, this may be attributed to the misalignment of the different incentives of the many parties involved in the supply chain. Consequently, once the incentives of the agents and the principle are misaligned, there is a high likelihood that the potential benefits that can be obtained from this relationship will be missed either by one or both of the parties to the contract. For example, in the “Horsemeat scandal”, the suppliers of the beef burgers supplied the supermarkets in Ireland and the UK with burgers that contained the DNA of horses (BBC News, 2013:n.p.). On discovery of the horse DNA in some of the refrigerators of the supermarkets, the sale of beef burgers in the supermarkets declined markedly. The supermarkets were accused of selling burgers made of horse meat to the customers, as opposed to selling burgers made from cattle meat. In this example, both the agents and the principle did not reap the benefits associated with the manufacture, supply and sale of the beef burgers. The customers were unwilling to buy even the burgers that were genuinely made of beef. The misalignment of incentives between the suppliers and the supermarkets in this case arose from the fact that the manufacturers of the burgers used the wrong meat to produce the beef burgers, and they did not inform the supermarkets of their actions. Thus, the incentives of supplying the burgers made from the horse meat by the suppliers was to acquire higher profitability compared to the profit they would have earned out of using cattle meat. On the other hand, the interest of the supermarkets was to sell more beef burgers to the customers, and thus earn more profitability. The example can therefore show that the misalignment of the incentives between the agent and the principal can result in a major obstacle that hinders the successful management of the supply chain. The misalignment of incentives between the supply chain participants has also been referred to as the’ silo mentality’(Katunzi, 2011, p.107). This concept refers to the actions of some players in the supply chain to fail to consider the effect of their actions on the long-term competitiveness and profitability of the whole chain (Katunzi, 2011, p.107). Thus, such participants in the supply chain are driven by the mentality and incentives of ‘I win’ regardless of whether ‘others lose’. This in turn results in the offer of cheaper supplies, lack of concern for customer specification needs and assigning few resources to processes. All these eventually breed inconveniences for the whole supply chain (Katunzi, 2011, p.107). The overall effect is that the firms with such ‘silo mentality’ eventually create problems on the quality, timing and costs related detriments for the whole of the supply chain. This in turn affects the business interests of all the other participants in the supply chain. Further, the misalignment of incentives among the supply chain participants may arise due to the nature of the organizations themselves. For example, a supermarket is a retail entity that offers retail goods manufactured by different manufacturers to the customers. In turn, the supermarket earns profitability out of maximizing the sale of each of the manufacturer’s products category. On the other hand, the manufacturers supplying the supermarket with different branded products are competing entities. In this respect, the incentive of the supermarket is to sell as many products for each manufacturer as possible. The incentive of the manufacturers on the other hand is to limit the sale of the products of the other manufacturers by the supermarket, and in turn increase their own manufactured products sale. This misalignment of incentives and objectives may result in supply chain problems. This is because the manufacturers to the supermarket may apply strategies that would increase their sales and limit the sales of the other manufacturers, for example through reducing the prices for the products. This would in turn reduce the supermarket’s sale of the other manufacturers’ products, and thus limit its profitability. Therefore, the nature of organizations acting as supply chain participants is in itself a major supply chain obstacle contributing to misalignment of incentives. The organizational nature also promotes the ‘silo mentality’, resulting in detrimental effects to the whole supply chain (Sanchez & Mahoney, 1996, p.72). Thus, misalignment of incentives/silo mentality is a major obstacle that causes problems for the whole supply chain, effectively affecting the whole of the supply chain negatively. To be able to overcome these obstacles, the firms collaborating in the supply chain must strive towards aligning their goals. This is so that all the firms operating in the supply chain are working towards the attainment of the same goals (Fawcett, Magnan & McCarter, 2008, p.37). This requires that while making the functional decisions of a firm, the interest of the other firms participating in the supply chain should also be put in consideration. This way, the final decision taken is the one that favors all supply chain players. If the supply chain is to be managed successfully, then, there is no doubt that the inter-firm misalignment rivalry within the strategic supply chain must be overcome. Recommendations There are a number of potential recommendations that can be put in place to overcome the current obstacles to supply management and ultimately mitigate against the risk of supply chain related disasters such as the 2013 horse meat scandal. First and foremost, it is important to keep the supply chain as simple and short as possible in order to reduce their complexity. This is particularly because the longer the supply chain, the more difficult it becomes to effectively monitor the supply chain and carry out compliance checks (Allianz, 2013, p.34). For example, Tesco supermarket was unable to track and determine the original source of the horse meat contamination because of the complexity of the long interlinked cross supply chains thereby making it difficult to oversight the suppliers and guarantee their transparency. On the other hand, a possible effective way of alleviating the obstacle of lack of effective monitoring system within a supply chain is to synchronize the technology applications by the different partner firms. Firms should be able to apply supply management systems that offer the same functional applications and information analysis procedures. This way, the firms can be able to save on both time and resources consumed in parallel evaluation and analysis of external market research information (Katunzi, 2011, p.108). The practice to apply customized supply chain management technology by the partners in the supply management is informed by the need for such partner firms to protect their business turf (Katunzi, 2011, p.108). Thus, even when the partner firms within a supply management chain are applying the same technology, they tend to customize the functionalities. This makes the applications of such technologies only meaningful and useful for the individual organization. The customization of technology could be advantageous to enable each firm maximize the benefits obtainable from the technology by enhancing its efficiency. Finally, overcoming the supply chain problems associated with the ‘silo’ mentality’ and the misalignment of the incentives between firms does not only require that the firms motives are harmonized, but also require that the behaviors of the firms should also be synchronized. Inter-firm rivalry within the supply chain has been seen to contribute to the firms competing as opposed to the firms cooperating productively (Fawcett, Magnan & McCarter, 2008, p.37). If the firms are not able to cooperate willingly, then, the supply chain cannot be able to result into the attainment of lower costs and high returns on investment. Therefore, to ensure successful supply chain management, firms should overcome the inter-firm rivalry tendencies and be willing to synchronize the motives and behaviors. According to Goldsby et al. (2010), this would in turn work towards attaining a smoothly operating supply chain, where all the participants to the supply chain can benefit from the collaboration. Conclusion In conclusion, despite some of its potential benefits, the increasingly globalized and interconnected world market has resulted in increased vulnerability of the global supply chains in many fronts through the development of a highly complex, volatile, uncertain, interlinked supply chains. As witnessed in the case of Tesco during the 2013 horse meat scandal, the long supply chains that characterize the contemporary global supply chain significantly makes is more difficult to effectively monitor the supply chain and carry out compliance checks. The other important obstacles that may also potentially result from the long complex supply chain systems include increased risk of procurement frauds and transparency issues with the supply. Fortunately, there are a number of recommendations that can be put in place to address many of these obstacles and enhance successful supply chain management. References Allianz, G. 2013. Managing Disruptions. 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