Operations Management for Creating Competitive Advantage - Case Study Example

and Section # of Name> EXECUTIVE SUMMARY This report deals with the operations management issues faced by and the ways they can be tackled in one of the very successful companies in Britain and worldwide, Tesco. There are many aspects of an operations management of a company, but Tesco faces issues regarding location, layout, supply chain and inventory, since it basically is a retail outlet. The strategic fit between the company's strategies as well as mission has been quite great, after a change of strategy when the Founder resigned from the company. Tesco analyses its each factor of operations management in a very strategic way. For instance, locations are first selected keeping in mind the country, then the region and lastly the site. Stakeholders, especially the shareholders are taken care of by maximizing the profits of the company and putting back profits in the betterment of the company only. Some of the recommendations that have been given are that of using mathematical techniques in choosing locations and the starting of slotting fees. The budget that will be used is to hire trained human resources and the huge costs for buying backward links that is suppliers. The innovative recommendation is that of using scent marketing. All in all, the company Tesco is practicing efficient operations management but there is always room for improvement, if they want to sustain their position of market leader. AN INTRODUCTION TO CASE STUDY This case study is aimed at applying the theoretical side of the study of operations management to a real world company. Operations management is a very broad term and thus it incorporates within itself many various issues and activities through which an organization's goods and services are changed and transformed from the inputs that were put to the outputs that are produced. It is about the various operations that are performed on the goods and services from the moment their production starts to the moment the customer receives it. In this report, Britain-based company Tesco has been aimed and its operations management activities have been analyzed. Recommendations on how OM activities can be improved have also been given. The report also evaluates the various financials behind the activities as well as the budget that may be required. PROBLEM FACED BY TESCO The problem faced by Tesco is that of sustaining its market leader position. Competition from Sainsbury and other leading retail stores is a big threat for Tesco and it does not want to lose out on market share to these competitors. Thus, improving on operations management is one of the basic things that it can do. The various issues that it primarily faces with respect to operations management are that of layout, location selection, supply chain management and inventory. METHODOLOGY The methodology that was used was that of secondary sources. Books were referred and internet resources were checked to get information on the general theories of operations management as well as the way operations management is used in Tesco. RESEARCH ON TESCO AND IDENTIFICATION OF KEY ISSUES OF OPERATIONS MANAGEMENT THAT TESCO FACES Founded in 1919, Tesco is one of United Kingdom's leading companies. It is an international chain, retail based, which initially used to sell grocery but with time, has diversified into general merchandising. In Britain, it has the prestigious title of being the top most and the largest retailer, if measured through global sales as well as the market shares that they have captured on a domestic level, within Britain. So be it be the domestic competition or the international competitors, Tesco has left them all behind. Tesco also has improved over the years and thus has secured the fourth best and largest retailer in the whole world in the top ten countdown of the year 2008. Thus, the whole alignment and setting of the top five retailers got altered because of the increase in the ranking of Tesco. The major products of Tesco are food and drink, the items one finds in a typical grocery. But with time, additions have been made. For instance, the products list now also includes clothing, software, consumer electronic items, Internet browsing services, financial services and products, telecom products, home items like decorations and kitchenware, car insurance plans, health insurance products, dental services and plans. The company also sells as well as rents the DVD's and CD's, which are gaining quite a lot of popularity among consumers. Key Issues of OM Facing Tesco Operations management is a very broad term and thus it incorporates within itself many various issues and activities through which an organization's goods and services are changed and transformed from the inputs that were put to the outputs that are produced. Thus from the raw inputs to the finished outputs, the goods and services have to go through various activities, which add value to the goods and services as well as the company. these activities not only add value, but they also are a significant way in which companies can achieve hard core and lasting competitive advantage for itself over its competitors. (Ritzman et all, 2006) Operations management consists of ten areas in which an operations manager has to make the right decisions so as to fit the company's strategic vision with what the budget allows, and to achieve that competitive advantage too, all at the same time. The key operations management issues that face Tesco, the UK based company that is being studied, are that of location selection for the numerous stores that it keeps on opening. Other issues are that of layout of the goods in the stores, supply chain management of the goods, and inventory. STRATEGIC FIT BETWEEN THE ORGANIZATION'S CURRENT PORTFOLIO PROCESSES AND SYSTEMS A strategy is the course of action that a company aims to take with respect to achieving a particular goal. Strategic fit would be when the company has very well integrated the firm's mission as well as the strategies along with the internal capabilities that it has and the external environment that it has to survive in. thus, missions (what needs to be achieved) as well as the strategies (how it needs to be achieved) must be in alignment with what the company is capable of doing itself and how much the outside environment and externalities will allow it to perform. (Slack, 2005) The Tesco strategy has not always been the same as it is now. Right before 1973, Tesco started reporting low sales and the rumors that it was now considered a "bad company" in the eyes of the consumers. This was an alarming situation. And the reason was the strategy that was being used. The Founder of Tesco had been using Green Shield Stamps, stamps which are given to the shoppers of Tesco as sales promotion scheme. The shoppers can later exchange these coupons for gifts. Thus, after the founder resigned and Leslie Porter took over the company, the first thing he did was to abandon these stamps. He also reduced the prices and made sure that all the stores had centralized buying, so as to increase the accountability factor. This major change of strategy increased the market share of Tesco in a few weeks only, and this increase was sustained over the years. Tesco's strategy also includes constant growth for the company as well as in the quantity of their stores. The company not only tries to bring new stores within US, it aims to diversify into geographical markets that are internationally based. The strategy to diversify the products within which Tesco deals is also a very important factor in giving that perfect strategic fit that Tesco has. It was after 1997 only that Tesco started retailing products, other than grocery. Tesco realized the potential of the external environment (the consumers and their demand for products other than grocery) and the fact that Tesco had the internal capability to cater to all this demand, through its systems and processes. Thus, growth - through new products, new markets - is the core strategy of Tesco to achieve their mission of "creating value for customers to earn their lifetime loyalty." The various processes and systems that are in place should be well integrated to manage this strategy as well as mission. Tesco's processes and systems are concerned with getting the best products and selling them to their precious customers at retail price. Thus, all the activities which constitute the processes and the whole system through which this happens must be good enough to suit the internal capabilities and external pressures. (Chapman, 2003) One of the major systems is that of the whole supply chain management, through which Tesco goes through to ensure that the stock of inventory reaches them on time and is in the perfect shape. The other processes are to decide on what a customer will go through once he enters a specific Tesco store till the time he exits its door. Tesco has planned on this whole process, so as to see in what ways they could facilitate the customers and help ensure their loyalty for next time. HOW OPERATIONS MANAGEMENT THEORIES MANIFEST IN THE ORGANIZATION'S OPERATIONS As far as operations management is concerned, the operations manager has to take decisions in ten critical areas. They are product design, quality management, process design, location selection, layout design, human resources, supply chain management, inventory, scheduling and maintenance. Since Tesco is not producing the goods, it somewhere lies in the middle in the goods-service continuum. Tesco is distributing goods, but it does so through the service and facility of a store, so it does lie in the middle of the continuum. The operations management theories that manifest in Tesco's operations are that of location, layout, supply chain management and inventory. Theories of Location Tesco believes in thoroughly examining a number of factors before it actually chooses a location for itself. Since Tesco is an international company, it has to choose locations worldwide, and thus a number of factors have to be considered on the country level, region level and the site level. Factors like labor productivity, cost, exchange rates and currency risk, attitudes, proximity to markets, proximity to suppliers, proximity to competitors is evaluated and then a decision taken as to whether the location is suitable or not. (Hoyle, 2006) Theories of Layout The retail layout is one the many types of layout that exists and which are default by nature and can be adopted by the companies as it is. Some general theories about retail layout that Tesco adapts is that, firstly, it places the items that draw a large amount of customers in such a way that they encompass the whole periphery of the store. In that way, to take the various high-draw items, the customer will have to move around the whole store, and thus impulse shopping will be maximum. Theories of Supply Chain Management Since Tesco is a global company, it faces a lot of issues with the supply chain. Since suppliers all over the world are the business partners of Tesco, it would have to be extremely alert about the various situations that might occur due to the negligence or mismanagement of even one supplier. Such issues should not reflect on Tesco, else it will give a negative image of Tesco to the customers. For this, Tesco has hired local specialists, who can handle every matter related to supply chain, whether it is customs, freight or political issues. (Jeston et all, 2006) Theories of Inventory Tesco is a retail outlet, which just does the distribution of goods, and thus, it only has the finished goods inventory, which reduces the complications that do arise in the inventories of a manufacturing concern. Tesco uses the ABC principle to take care of its inventory. It focuses on the expensive parts of the inventory and does not give the same treatment to the inexpensive parts. Thus, energy is saved and better utilized in taking care of inventories that are worth it all. SUITABLE FINANCIAL EVALUATION OF COST IMPLICATIONS FOR ORGANIZATION AND ITS STAKEHOLDER, SHAREHOLDERS IN PARTICULAR The stakeholders are the groups of people who have a vested interest in the activities and the status of a particular company. There are two types of stakeholders, either market or non-market. Market stakeholders have a direct interest with the company; their money might be at stake or their progress. On the other hand, non-market stakeholders are those who have an indirect interest in the company. Whatever happens with the company will not directly affect them. For instance, the media is the biggest example of a non-market stakeholder. The media is never directly related with the company but what happens with the company allows the media to give coverage and get profits out of making viewership. (Ritzman et al, 2006) The financial evaluation of cost implication for the shareholders, can only be made through the amount of dividend that the shareholders are getting (if any) and the worth that is increasing of the share (if at all). If the share suddenly raises its market price in the stock market, there is enough room to say that the company is doing well since the demand of the shares of the company have outgrown the supply and thus this would lead to a happy shareholder. His unrealized gains are increasing and even if the company is not paying dividends, the shareholder is willing to maintain keeping the shares of that company since the unrealized gains are increasing day by day. If the company is not giving dividends, this also means that the company has ploughed back the profits in the operations of the company, thus making it better. Therefore, if as an investor, the rate of return of a share is high, the company is doing pretty well.(Slack et al, 2005) As far as Tesco is concerned, all the strategies that have been recommended to the company for improving on its operations management are bound to increase the effectiveness and efficiency of the whole system and their processes. This factor is bound to increase the worth of the shares, and thus even if dividends are not given, it will not bother the shareholders. As far as the short-term costs are concerned for Tesco, they will be quite a lot, since buying suppliers, investing in physical surroundings, hiring people to analyze models and work on them will require a lot of costs. But in the long run, it will be very beneficial to the company in general, since it will raise the profitability of the company, and thus the worth of a Tesco share in the stock market. For other stakeholders, like the employees and customers, it will also be a welcome change, since employees will now be trained to better manage customers and customers will get that special treatment that will increase their loyalty towards the store, thus ensuring life time loyalty, the mission of Tesco. RECOMMENDATIONS FOR EFFECTIVE OPERATIONS MANAGEMENT STRATEGY DEPLOYMENT When it comes to operations management, the operations manager has a wide variety of choices as to how to go about it. Operations management is all about increasing the productivity of the company, thus efficiency has to be present, along with effectiveness in the first place. Thus, the following are the recommendations for a better deployment of OM strategies: Location Till start of 2008, almost a year ago, Tesco had around 2000 stores all over the world. Thus, this shows that proper location selection, such that it is near to the customer is a key issue. To decide upon which location should be chosen, Tesco can use a variety of formal methods. For instance, the first one is that of locational break-even analysis, in which a cost to volume analysis is done so as to compare location alternatives on the basis of finances and the economic aspect. This includes determining the fixed and the variable costs associated with each decision. (Chapman et al, 2003) The other method is that of center-of-gravity method. This is a mathematical technique, in which the best location is found, which would be strategic in terms of its location with respect to the many various points where it has to distribute goods. Thus, for a company like Tesco which has around 2000 stores and counting, this method is important to find that perfect location for a distribution point. Layout An aspect that Tesco can implement within its layout system is to introduce slotting fees. These are fees that the manufacturers pay to the retailers so as to get maximum shelf space and shelf visibility. Display (aka place) is one of the four Ps of the marketing mix and thus it is important to promote the product. And thus, manufacturers are willing to pay slotting fees so as to get maximum visibility of their products. The concept of slotting fees does have an ethical aspect to it, since customers will most probably have to bear the costs that the manufacturer is incurring for better display. But the idea is worth a shot. Moreover, Tesco should take care of various factors while designing the physical surroundings in which the customers will move around and shop. For instance, care should be taken of the ambient conditions, the spatial layout and the signs, symbols and artifacts. (Hoyle, 2006) Supply Chain Management One of the biggest recommendations for Tesco with regards to supply chain management will be to go for vertical integration. This is all about either producing the goods that were first bought, or buying the supplier's company and making it a part of Tesco. There are two types of vertical integration, forward and backward. In the case of Tesco, it will do backward integration, since it has to buy suppliers. The adoption of vertical integration will give a strategic fit to the company, since it aims to serve the customers well. If it will take the supply chain totally in its control, making the customers happy would become even easier. Other strategies for supply chain can be that Tesco creates a "Keiretsu" network, a term from Japanese language, which signifies a supplier who has now become part of the company network. Thus, loyalty also increases of such suppliers who have now become part of the company's coalition. (Jeston et al, 2006) Inventory As far as inventory is concerned, the recommendation to Tesco is to use cycle counting. This method constitutes of a "continuing reconciliation of inventory with inventory records." This means that an audit team verifies all the counting of inventory every now and then. This will ensure the accuracy of the maintenance of inventory. Tesco is already using the ABC analysis and thus using the cycle counting would not be a difficult addition, since inventory classifications used in cycle counting are the ones that were used when doing the ABC analysis. The other recommendation is to use models of inventory that have been custom made for the purpose of determining inventory holding costs. The various models that can be used are basic economic order quantity (EOQ) model, production order quantity model and the quantity discount model. SUGGESTION OF BUDGET AND EVALUATION METHODS FOR THE RECOMMENDED OPERATIONS MANAGEMENT STRATEGY IMPLEMENTATION There can be an evaluation method for all the various recommendations that have been given for the strategy implementation with respect to operations management. Firstly, in terms of location, the use of the locational break even analysis as well as centre of gravity method requires the use of mathematics and an analyst who would best interpret the results. Evaluation would be done by the location specialists and the budget would be simply to hire a proper mathematician who can handle the technicalities of the method. (Slack et al, 2005) Secondly, Tesco will not have to pay anything for charging slotting fees. In fact, it will add to the revenue of Tesco. Then if the physical surroundings will be made attractive, cost will be incurred on the lighting, sound, smell and temperature maintenance into one type, so as to give the customer the same feeling every time he comes. Evaluation can be made through hiring a mystery shopper, who can judge the layout of the store by telling whether he was helped by sales people or he faced difficulty in finding products on the aisle or not. Thirdly, vertical integration and the Keiretsu network both require that Tesco buys or integrates within their network, the suppliers who are the backward linkage in the supply chain. This would require huge costs and a big budget since buying a whole distributor would only be possible if Tesco puts a big bid. Evaluation of which supplier to buy can be done by top management through cost-benefit analysis. And lastly, the usage of the process of cycle counting would just require the cost to hire an audit team who would do so. Apart from that, making use of models requires that the company hires professional mathematicians who knows the basics of these models and can apply them well to the company. (Chapman et al, 2003) INNOVATIVE RECOMMENDATION NOT IN USE BY TESCO A very innovative recommendation that is still not at use by Tesco is that of scent marketing. This is the perfect way to attract more and more customers to the store of Tesco and the uniqueness of this method is sure to store Tesco and the memory of shopping there in the minds of the customers for quite a long time. Scent marketing deals with the process of dispatching patches of scented air out from nozzles which are hoisted and fixed in aisles. For instance, if the certain aisle contains Johnson's baby powder, then the nozzle will throw out the smell of the Johnson's baby powder, the smell which mothers love, since it reminds them of the days when they used to breast feed their child. Thus, using smell, which is a very powerful sense among human beings, for playing with the emotions and the memory of the people is a great idea, since the customer will always remember Tesco for such way of marketing its products. This will fall under the category of layout in the ten decision areas of operations management. CONCLUSION In conclusion, it can be said that Tesco is one of the largest retail stores of UK, thus it needs to constantly improve and out do its own self to maintain the leader position. For this, productivity and efficiency has to be increased with time. This can only be made possible if Tesco invests in better operations management, since it will give a sure shot competitive advantage to the company over its competitors. BIBLIOGRAPHY 1. Krajewski, L& Ritzman, L 2006, Operations Management Strategy and Analysis, Prentice Hall 2. Slack, N., Chambers, S. & Johnston, R. A. B. 2005, Operations & Process Management: 3. Chapman, C. & Ward, S. 2003, Project Risk Management: Processes, Techniques and Insights, John Wiley and Sons Limited 4. Hoyle, D. 2006, Quality Management Essentials, Butterworth-Heinemann 5. Jeston, J. & Nelis, J. 2006, Business Process Management: Practical Guidelines to Successful Implementations, Butterworth-Heinemann Read More