The Transformation of Physical Distribution in Retailing of TESCO - Case Study Example

The Transformation of Physical Distribution in Retailing of TESCO Introduction TESCO (“TESCO” or the “Company”) is the largest retail chain operating in the United Kingdom (“UK”) which currently enjoys a market share of 31%. It presently operates in twelve international markets with a retail network of more than 3,260 outlets. Products sold under TESCO’s brand can be classified into the following categories; food items, electrical appliances, home entertainment, clothing, health and beauty, stationery, soft furnishings, kitchen equipment, garden equipment etc.The group’s primary objective is to provide premium service and product quality to its customers, in order to earn everlasting loyalty. Since its inception in 1924, TESCO has come a long way in expanding its business. TESCO started to cross the UK boundaries in 1990s reaching out for places like Poland, Hungary, Turkey, China, Japan, South Korea and Czech Republic. Tesco has a long term vision of having atleast 50% of its total business operations running in foreign markets (outside UK). TESCO plans to have atleast 32 hypermarkets all across Asia by 2012. TESCO’s operations in UK are under four banners namely Extra, Superstore and Metro and Express (Smith, D.L.G. and Sparks, 1993, pp.74). It currently employs a staff network of more than 450,000 people around the globe. TESCO is the first amongst other UK retail chains to implement an e-commerce strategy. A website, tesco.com, has been launched to facilitate the grocery home shopping initiative. Another interesting initiative taken by the Company is the launch of personal finance, a joint venture with Royal Bank of Scotland. This personal finance business currently has a customer base of 3.4 million approximately, which is expected to grow further. TESCO has also proved its merit on the environment friendly front by taking special care in handling of packaging material. It is the largest packing recycler in the UK. It has taken an initiative on majorly cutting down on unnecessary packaging material on items such as food. TESCO is currently operating numerous recycling projects. TESCO’s group sales grew by 15.1%, group profit before tax by 5.5%, diluted earnings per share by 2.6% and dividend per share by 9.7%, by the end of February 2009. The various initiatives taken by TESCO, some of which are mentioned above, are major contributors towards enhancing the Company’s goodwill, thus achieve such great financial targets. Since TESCO is strongly committed towards implementing its long term strategy, it is expected to achieve greater milestones in future (Smith, D.L.G. and Sparks, 1993, pp.124). Background In this report, the basic business strategy of TESCO will be discussed, especially from a viewpoint of warehousing and distribution operations. We will have a look at how the said operations are in line with the overall business strategy. The way in which TESCO actually managed to gain competitive advantage via implementing its strategic decisions related to warehousing and distribution, will also be discussed. Finally, an analysis of TESCO’s supply and logistic system will be presented. In this section, the use of information and communication systems in order to successfully implement the supply and logistic strategy will be touched upon. The report will be concluded by giving recommendations as to how TESCO can further improve its overall operational network in order to enhance market share, thus profitability. TESCO’s Warehousing & Distribution Network, and its alignment with the overall company strategy Any retailer has to consider certain transaction costs before deciding whether warehousing and distribution activities should be carried out in house or sub contracted to other specialist firms. TESCO basically adopted a combined strategy where products available at its various stores were coming from both sources; internal distribution network and other suppliers (Bhatmagar and Viswanathan, 2000, pp.68). Not very long ago TESCO was following a strategy of running smaller sized stores in greater quantity. It operated around 800 retail outlets with the average size of each outlet being 5,000 square feet. During this time the in house distribution system only accounted for around 20% of products available at stores. The rest were being directly supplied by other entities. Recently TESCO made some amendments in its long term strategy which resulted in some major transformations. One example was curtailment in the number of outlets being operated under TESCO’s brand name, which reduced from 800 to 450. But simultaneously the area size of each retail outlet enhanced by a significant margin, with the average size figure reaching up to 16,000 square feet (Anderson and Coughlan, 1987, pp.46). Consequences were that it became quite difficult to cope up with the existing distribution strategy. Therefore, some fifteen months ago, the distribution system was revamped. A centrally controlled distribution system was set up which started to meet vast majority of TESCO’s stores needs. Furthermore, the main regional distribution centres were strategically located to make it convenient for stores in terms of proximity and profile (Smith, D.L.G. and Sparks, 1993, pp.127). By implementing such changes the distribution system became so efficient that the maximum lead time for any product became just 48 hours. At present, TESCO’s total distribution network employs around 1,500 people, and its total warehousing space approximately is 2 million square feet. The distribution infrastructure also includes around 250 commercial vehicles and 600 trailers. TESCO is expected to take more initiatives to further enhance the performance of its warehousing and distribution network, in the near future. For instance, TESCO aims to further reduce the maximum lead time for any product to 24 hours, a great achievement if successfully implemented (Bourlakis & Bourlakis, 2001, pp.88). TESCO has already implemented a multi shift working environment at its warehouses, and is expected to further increase the number of shifts to achieve a target of 130-140 work hours per week at its warehouses. TESCO is currently in the process of reviewing all its products to decide whether such products should be placed in warehouses in the first place or not. Decisions would be taken regarding whether a particular product should be placed in the national warehouse, in a regional warehouse, or simply continued to be delivered directly to retail outlets by external suppliers. The inventory management system is expected to be critically examined soon. The basic aim behind improving the inventory management process will be to minimize stock holding periods while ensuring the highest degree of stock availability at various retail outlets. Initially TESCO just used its own fleet vehicles as a mode of product transportation, but now a system of contract carriage is seriously being considered (Butterworth-Heinemann, 2001, pp.55). With all the initiatives relating to TESCO’s distribution network which it plans to implement, as discussed above, certain strategic objectives would be achieved. For starters, TESCO will be able to improve the level of control over products reaching its various retail outlets. TESCO will strike a better balance between the utilization of its various distribution resources namely in house distribution, specialist contract carriage operations, direct supplies from other sources. By improving the efficiency of the distribution network, TESCO will be able to achieve better customer satisfaction, with customers being TESCO’s various retail outlets in this case. But eventually the satisfaction of various retail outlets will automatically be passed upon to ultimate customers, since they will possibly not have to wait for any product for more than 24 hours (Butterworth-Heinemann, 2001, pp.97). The improved inventory management system will not only avoid unavailability of products at any moment in time, but will also indicate over stock situations. If such over stock situations are identified then appropriate remedial actions can be taken within time. Finally, the overall productivity of the entire warehousing and distribution system will improve after initiatives mentioned above are implemented. Majority of staff will be sent for sophisticated trainings in their respective areas, which in turn will again contribute towards productivity. A part of TESCO’s overall strategy is to achieve ultimate customer satisfaction, and to hold on to the current status while strengthening its competitive advantage in the retail industry (Smith, D.L.G. and Sparks, 1993, pp.74). Therefore, a more improved warehousing and distribution network will further align this area with TESCO’s overall business strategy, as it has been doing in the past. The role of information and communication systems in assisting TESCO’s logistics strategy Since the past 14 to 15 years computers have been used in the retailing industry in UK. Companies like TESCO and Sainsbury started by implementing distribution and basic accounting systems on mark sense cards and equipment like Emidec 1100. But slowly and gradually as these retail chains started to grow, they took further steps in the development of its information technology infrastructure (Clemons and Row, 1991, pp.28). Initially there used to be separate strategies for information technology and logistics. But as TESCO started to realize the importance of computer equipment in order to gain competitive advantage through the logistic function, it has majorly integrated strategies relating to information technology and logistics. By combining these two strategies, competitive advantage is gained through an overall lower cost for the entire distribution and logistics system, higher customer satisfaction due to reduction in waiting times, better inventory management by reduction in stock holding periods etc. TESCO, at present, is following a strategy of carrying out majority of its warehousing and distribution activities from its national and regional warehouses. As mentioned before, majority of products in TESCO’s retail outlets arrive from TESCO’s own warehouses. However, still some products exist which directly arrive from their respective suppliers’ warehouses (Smith, D.L.G. and Sparks, 1993, pp.113). Therefore, the distribution and logistic system at TESCO is quite complexed. In order to run this complexed mechanism effectively, TESCO has successfully used the power of information technology. It has implemented sophisticated systems which link/ connect data from the main national warehouse to all the regional warehouses, and further connecting it to the data bases of all individual retail outlets. Furthermore, TESCO has also linked this information system network to the warehouses of its suppliers. Due to this automated system TESCO has successfully managed to achieve a much improved inventory management system. Whenever a particular retail outlet wants to order some products, it simply connects with either TESCO’s concerned warehouse, or the warehouse of a third party supplier, and orders the necessary products (Reardon, Hasty and Coe, 1996, pp. 32). Even databases of TESCO or third party suppliers’ warehouses keep track of the stock level of its customers (TESCO’s retail outlets in this case). If these suppliers (TESCO warehouses or third party suppliers) see that stock levels of some products at any specific retail outlet has fallen below the minimum stock holding quantity, they automatically send further supplies to that outlet. For perform this function, these warehouses have already taken permission from all retail outlets. Therefore, due to the successful implementation of modernized information technology systems, the lead time for any stock order has substantially reduced at TESCO’s retail outlets. Furthermore, TESCO has also integrated computer systems at its centralized warehouses with some of its major product suppliers, in order to expedite the inbound logistic procedures (Clemons and Row, 1991, pp.86). By the help of information systems, TESCO has also started home delivery services to its customers. Such deliveries are for all sorts of items, be it food or non food. The customers can go on to TESCO’s official website, www.tesco.com, and order their respective requirements. All customer product demands are initially received at TESCO’s head office. Then the head office delegates orders to concerned retail outlets. After each retail outlet is notified of home delivery orders pertaining to its shop, it quickly arranges and dispatches the products demanded to respective customer addresses (Powell, T.C. and Dent-Micallef, 1997, pp.132). Selling through the internet, which has been made possible with TESCO’s latest information technological equipment, has enhanced TESCO’s overall sales, thus profitability. Information systems have also been used to effectively manage TESCO’s transportation network. The monthly planning for each vehicle is done beforehand by TESCO’s systems. Factors like a vehicle’s age, distance travelled, wear and tear condition, physical features such as refrigeration facility, are considered before planning is finalized (Reardon, Hasty, and Coe, 1996, pp.79). TESCO’s systems automatically identify which vehicles need servicing, or even replacement at start of the month, and the workload of those vehicles are distributed accordingly. Conclusion Investing in growth is one of the prime pillars upon which TESCO’s overall business strategy is built. Initially it created a strong presence in the UK market before launching its retail services abroad. It has expanded its sale of non food items, and has exploited other areas of great potential. Development of electronic commerce (widely known as e-commerce) has been a major activity in the last decade. It is of prime importance to TESCO to maximize return for its shareholders. TESCO’s management has also adopted a strategy of market penetration by lowering product prices at times, which enabled enhancement of sales. TESCO could afford to do this due to economies of scale enjoyed because of its operational size. The two operational areas discussed above, which are of key strategic importance, have facilitated a great deal in TESCO streamlining its operations to enhance economy and efficiency. The opening up of new warehouses, ranking them in terms of national, regional and local, and linking their respective data bases with each other, has greatly helped in the inventory management process. The average lead time between placing orders and arrival of goods have reduced, thus affecting in reduction of expenses and improving productivity. Furthermore, by linking warehouse databases with databases of suppliers, stock control efficiencies for external products have also increased. The use of information technology has also proved to be extremely beneficial. Selling via the internet has once again improved the revenue figures, thus profitability. Tracking and planning of commercial vehicles via computers has facilitated the fixed asset management process. Decisions like when a vehicle should be repaired, services or even replaced have become quite easier. Therefore, the introduction and effective utilization of computer systems have certainly helped TESCO in achieving its core strategic objective of maximizing shareholders’ returns. Recommendations Although TESCO has already streamlined its logistic process in an efficient manner, yet there always is room for improvement. Instead of relying solely on warehouses for the ultimate supply of any product to any of the retail outlet, TESCO can adopt a policy of shifting products from one retail store to another, depending upon the demand supply situation. For instance, if electrical appliances are a slow moving category in one store, then it can always be shifted to other outlets where turnover for the said product is comparatively expeditious. Since the use of information technology has been beneficial in handling the logistics division, such technology now can be used in other operational areas. TESCO can further venture into new high potential markets. Databases of all national and international TESCO stores could be linked to the central data base in the UK. By doing this TESCO will take a major stream in streamlining its global logistic operations. Although TESCO currently purchases part of its warehouse stock from external suppliers, but in the long run, TESCO should aim to sell only those products which belong to its brand. Reliance on external stakeholders (such as suppliers) should be to an extreme minimum, if not eliminated at all, since quality can be compromised due to loss of control. TESCO should also take help of information technology in activities related to Research & Development (“R&D”). Since R&D is essential in sustaining competitive advantage via product and service development, TESCO is already investing in this aspect. Furthermore, staff should be sent for more sophisticated trainings where they can learn how to operate complexed computer systems. If all such recommendations are followed by TESCO, it certainly will help in further improving profitability. References Smith, D.L.G. and Sparks, L. (1993), “The transformation of physical distribution in retailing: the example of Tesco plc” Anderson, E. and Coughlan, A. (1987) “International market entry and expansion via independent or integrated channels of distribution”, Journal of Marketing, Vol. 51 Bhatmagar, R. and Viswanathan, S. (2000), “Re-engineering global supply chains: alliances between manufacturing global logistics service providers”, International Journal of Physical Distribution & Logistics Management, Vol. 30 Bourlakis, M. and Bourlakis, C. (2001), “Deliberate and emergent logistics strategies in food retailing: a case study of the Greek multiple food retail sector”, Supply Chain Management: An International Journal, Vol. 6 Butterworth-Heinemann, (2001) Food and Drink Supply Chain Management for the Hospitality and Retail Sectors Clemons, E. and Row, M. (1991), “Sustaining IT advantage: the role of structural differences”, MIS Quarterly, September Powell, T.C. and Dent-Micallef, A. (1997), “Information technology as competitive advantage: the role of human, business and technology resources”, Strategic Management Journal, Vol. 18 Reardon, J., Hasty, R. and Coe, B. (1996), “The effect of information technology on productivity in retailing”, Journal of Retailing, Vol. 72 Read More