Retail Buying and Merchandising Management: Tesco Plc - Term Paper Example

Retail Buying and Merchandising Management - Tesco Plc - Number and Number Number of Words: 3,020 Introduction As the third largest and fastest growing grocery retailer in the United Kingdom, Tesco Plc offers a wide range of grocery products and wine items, entertainment products such as books, CDs, DVDs, personal computers, photo and gaming items, landline and mobile phones, home electrical appliances, ready-made or made-to-order furniture items, car and garden supplies, sports and leisure products, and a wide-range of toys and clothing for babies and toddlers (Tesco, 2011a; Liptrot, 2005). A significant factor that contributes to Tesco’s business success lies behind its management’s ability to manage its supply chain system. To avoid reaching the decline stage in business cycle, Tesco decided to expand its business outside the United Kingdom. By entering into joint-venture agreement with other large-scale grocery retailers around the world, Tesco Plc managed to establish 12 international businesses in Central Europe, Czech Republic, Hungary, Japan, Malaysia, Poland, South Korea, Thailand, Turkey, United Kingdom, and the United States among others (Leahy, 2007, pp. 42 – 43; Couch, 2006; Wilson, 2005). One of the secret behind the business success of Tesco is its ability to determine and deliver what its valued customer wants. In line with this, establishing an effective supply chain management is necessary not only within the operational level but also within the strategic level. Through the use of effective supply chain management system, the use of efficient logistic infrastructure enables the company to easily meet its target consumers’ expectations at a relatively cheaper service costs. In relation to the importance of establishing an effective supply chain management, this report will provide a strategic analysis with regards to the key supply chain issue that Tesco Plc would face over the next five years. As part of going through the main discussion, a brief historical outline with regards to the features of Tesco’s existing supply chain and special offers will be briefly tackled to give the readers with a clear overview concerning the research topic. Based on the historical developments in Tesco’s supply chain management system that took place between 1970s up to the present time, strategic recommendations on how Tesco Plc could further improve its supply chain management system will be highlighted in details. Brief Historical Outline with Regards to the Features of Tesco’s Existing Supply Chain and Special Offers Among the major suppliers of Tesco includes not only the local farmers but also other food and non-food manufacturers (Tesco PLC Corporate Responsibility Review 2007, 2007, p. 12). To achieve and maintain a smooth flow of product supplies coming straight from Tesco’s accredited suppliers, the retail company maintains not only a good working relationship with its employees who are directly responsible in managing the schedule of delivery of its needed food and non-food supplies but also its valued consumers and a total of 1,500 accredited suppliers (Tesco PLC Corporate Responsibility Review 2007, 2007, p. 14). Mid-1970s – Direct to Store Delivery (DSD) Process During Mid-1970s, Tesco’s supply chain management system was highly dependent over the use of direct to store delivery (DSD) (Gustafsson, 2006, p. 45; Fernie & Sparks, 2004, p. 103). In line with the implementation of DSD process, Tesco was dependent over its regional distribution centres (RDCs) each time there was a need to transport ordered goods coming from its accredited suppliers straight to its retail store outlet (Gustafsson, 2006, p. 45). Although the use of this particular supply chain strategy enabled the company to deliver the ordered products directly to each of Tesco’s store outlets, the retail company encountered customer complaints due to the inconsistency in the quality and market prices of food and non-food products offered in each of Tesco’s store outlets. In line with this, the use of DSD process made it difficult on the part of the company to standardize the control over the product quality and prices since the ordering decisions of needed supplies was decentralized to each of the store manager (Powell & DiMaggio, 1991, p. 185). 1980s – Centralized Supply Chain System Because of the disadvantages associated with the use of DSD process, Tesco’s supply chain management shifted to the implementation of its centralized supply chain system (Fernie & Sparks, 2004, pp. 104 – 105). Aside from solving issues related to inconsistent quality and market prices of food and non-food items, this strategy enabled the company gain benefits from economies of scale (Mooney, 2011). In line with this, the ability of Tesco to order its required supplies by bulk order made the company able to bargain the prices of goods directly from its accredited food and non-food manufacturers. By improving the efficiency of its logistics through supplier compliance, the company aimed at standardizing the quality of its customer service. Furthermore, the company’s decision to centralize its automated ordering system enabled the company to make its administration process simplier (Mooney, 2011; Jones & Clarke, 2002). With the use of sale scanning devices, automated control over the inflow and outflow of goods in each of Tesco’s warehouses, and the use of electronic data interchange (EDI) (Jones & Clarke, 2002), the entire process of centralizing the supply chain system of Tesco made the company able to expect the delivery of order goods within a maximum time-span of 48 hours (Mooney, 2011; Sparks, 1986, p. 104). As part of the economic consequences of centralizing the supply chain of Tesco, the company had to invest on additional warehouse and expand its existing distribution facilities (Fernie & Sparks, 2004, p. 105). Aside from increasing the operational cost associated with the cost of additional warehouses and other related distribution facilities, the company also had to spend on additional manpower to conduct product control inspection. Aside from requiring its accredited suppliers to strictly follow just-in-time (JIT) delivery, Tesco started outsourcing its distribution services to freight specialists in order to cut down on unnecessary cost associated with hiring additional manpower and shouldering expenses each time delivery trucks need to be fixed (Gustafsson, 2006, p. 45). 1990s – Combination of Centralized Supply Chain System and the Application of Composite Distribution Between 1990s to 2000s, grocery retailers are being challenged not only to improve its customer service but also reduce the operational and distribution costs by reducing the volume of available stocks through the use of store-based internet ordering and delivery systems (Gustafsson, 2006, p. 45). However, one of the major challenges associated with the supply chain system of a grocery retailer is the handling and distribution of frozen and perishable food items together with other non-perishable items. To ensure that frozen and perishable food items remain safe for human consumption, Tesco had to re-design its supply chain system when it comes to managing temperature controlled products like eggs, vegetables, fruits, chicken, cattle, and beef (Bourlakis & Weightman, pp. 182 – 183). As explained by Gustafsson (2006, p. 47), composite distribution is referring to Tesco’s ability to “distribute mixed-temperature food items coming from the same distribution centre and on the same vehicle”. Each year, the volume of incoming supplies of food and non-food items increases as the number of Tesco’s retail store outlets increases. In order to maintain Tesco’s operational and distribution efficiency particularly with regards to the deliveries of food and non-food item from its centralized warehouse to each of its retail store outlets nationwide, the use of composite warehouse and composite distribution together with the practice of just-in-time delivery and centralized supply chain system was necessary to enable Tesco deliver food and non-food items at the finest quality possible (Gustafsson, 2006, p. 45; Bourlakis & Weightman, p. 184). (See Appendix I – Design of Multi-Temperature Trailer Used by Tesco on page 14) Strategic Analysis with Regards to Tesco’s Supply Chain Issue Over the Next Five Years Having high levels of unsold inventory of food and non-food items increases Tesco’s risk of encountering future problems related to the company’s inability to dispose or sell these products within the shortest time possible (Agrawal & Smith, 2009, p 59). Considering the historical developments in Tesco’s supply chain strategies, the future trend of Tesco’s supply chain management will focus on improving the flow efficiency of its supply chain system by maintaining close to zero inventory level on slow-moving non-food items and perishable food items combined with just-in-time delivery. In line with this, imposing a strict just-in-time delivery system with its accredited suppliers enabled Tesco reduce the ordering to delivery of ordered goods from 12 to 18 days down to three days (Jones & Clarke, 2002). Since the practice of just-in-time delivery requires Tesco’s accredited suppliers to deliver ordered food and non-food items limited to the quantity of goods each of the grocery retailer store outlet requires, it would be easier on the part of the receiver of goods to double check and control the quality of each item. As a result, strictly requiring each of Tesco’s accredited suppliers to follow just-in-time delivery system will empower Tesco in terms of keeping its valued customers satisfied with the quality of goods and services they receive from the company. According to Boyer and Verma (2010, p. 214), radio frequency identification (RFID) is a type of “identification method that heavily relies on storing and remotely retrieving data using devices known as the RFID tags or transponders”. To effectively manage and control the inventory level of Tesco’s food and non-food items, the retail company started relying on the use of RFID revolution in each of its store outlet (Lyengar, 2004). Since 2005, Tesco considered the use of RFID technology as a significant tool that increases the company’s effeciency in its supply chain management. This strategy made Tesco effectively manage its daily inventory easily (Dunne, 2008, p. 298). Likewise, the use of RFID technology also drived down its total operational costs since the company need not hire extra manpower to closely monitor the remaining stocks stored in Tesco’s warehouses (Sanghera & Thornton, 2007, p. 142). In relation to the use of RFID technology, the RFID scanner used in point-of-sale (POS) system makes Tesco able to track down the movement of goods each day (Sanghera & Thornton, 2007, p. 142). This technology is also known as the barcode reader. Using either a hand-help or stationary barcode reading device, each item that is sold to each customer will be recorded on a real-time basis. Based on the gathered information, the marketing and sales department of Tesco could easily identify specific items that needs to be replenished even before reaching a zero inventory level for the said food or non-food item. Through the use of high technology gadgets, Tesco could easily synchronize its sales department with its centralized purchasing department. As a result of reducing the level of food and non-food stocks in each of Tesco’s warehouses, the grocery retailer could continuously offer fresh food and in-demand electronic items. Within the next five years, Tesco will continue using the RFID scanning devices to enable the company identify real-time inventory levels and segregating fast-moving food and non-food items from the slow-moving ones. Upon utilizing these electronic devices, Tesco could learn more about what exactly its loyal customer wants. By gathering information concerning the purchasing behaviour of its valued customer, the grocery retailer could immediately response to the changing demand of its slow-moving and fast-moving food and non-food items. This will make the Tesco effectively implement a lean approach to supply chain which could make the company achieve close to zero inventory level. Over the past few years, there has been a shift from the need to entertain a long-list of accredited suppliers of food and non-food products that could offer Tesco with the lowest market price possible (Gadde & Hakansson, 1993, pp. 165 – 166) to the need to establish and maintain a long-term collaborative relationship with its accredited suppliers (Chobra & Meindl, 2001; Araujo, Dubois & Gadde, 1999; Bensaou, 1999). In line with this, establishing a strong supplier relationship management could make Tesco able to effectively manage its supplier network aside from maximizing the value of its business relationship with its accredited suppliers. According to Wisner, Tan and Leong (2009, p. 95), supplier relationship management is the “extended procurement process which includes sourcing analytics, sourcing execution, procurement execution, payment and settlement, and closing the feedback loop through the use of supplier scorecard and performance monitoring”. As part of reaching close to zero inventory level, Tesco aims to strengthen its relationship with its accredited suppliers in order to increase the chances wherein the retail company will receive continuous replenishment of re-ordered food and non-food items from its accredited suppliers. By strengthening Tesco’s supplier relationship management system, the grocery retailer could develop and maintain a good relationship with its accredited suppliers to ensure that the company will be able to receive ordered high quality food and non-food products a few days before the inventory levels of food and non-food items would reach close to zero level. Conclusion and Recommendations Conclusion In response to the tight market competition in UK grocery retail industry, Tesco has a competitive advantage over its competitors by listening closely to what its target customers want (Tesco, 2011b). Aside from offering food and non-food items at the lowest possible market price, the company continuously aims at improving its customer service by extending the store hours and making a wide-range of food and non-food items available to the consumers. Upon reflecting on the historical trend of Tesco’s supply chain management developments, it is clear that its developmental strategies aim to improve its supply chain management process in order to create more customer value and a long-term customer loyalty. One of the challenges associated with Tesco’s existing supply chain management system lies behind the grocery retailer’s ability to respond accurately within the shortest period of time especially when it comes to dealing with the on-going changes in customer demand. Based on customers’ demand, the ability of Tesco to offer consumers with fresh foods and non-obsolete electronic products increases the success rate of the business within the retail grocery industry. As a common knowledge, the ability of Tesco to keep the customers satisfied is one factor that made its valued customers loyal to Tesco. In line with this, the company should make consumer goods item readily available in each of its retail store outlets. The practice of centralizing Tesco’s ordering system together with composite delivery and the practice of just-in-time delivery system could significantly reduce Tesco’s daily operational costs. Therefore, Tesco’s top management should exert extra effort in keeping its purchasing department aligned with its marketing and sales department. By keeping its purchasing department synchronized with its sales and market department, the top management of Tesco could easily reach and maintain close to zero inventory level particularly on slow moving food and non-food items including perishable food items that has a very little shelf-life. Upon analyzing the entire supply chain situation, the rationale behind Tesco’s desire to keep its inventory level of slow-moving and perishable food items low is to protect the company from facing the risk of either their inability to sell the goods before the item becomes obsolete or spoiled. In the past, most purchasers are entertaining a long-list of accredited suppliers of food and non-food products that can offer Tesco with the lowest market price possible (Gadde & Hakansson, 1993, pp. 165 – 166). These days, modern purchasers acknowledge the importance of establishing and maintaining a long-term collaborative relationship with its accredited suppliers as a means of availing cheaper and better quality foods and non-food items (Chobra & Meindl, 2001; Araujo, Dubois & Gadde, 1999; Bensaou, 1999). In line with this, the ability of Tesco’s accredited suppliers to deliver ordered food and non-food items just-in-time before reaching a zero level store inventory could significantly affect Tesco’s retailing performance (Chen & Paulraj, 2004, p. 133; Hakansson & Snehota, 1995; Johanson & Mattson, 1987). Considering that the buyer-supplier relationship are most likely to dissolve in case both parties failed to benefit from one another (Croxton, García-Dastugue, & Lambert, 2001), it is crucial on the part of Tesco’s purchasing department to establish and maintain a strong business relationship with its accredited suppliers (Gadde and Snehota 2000; Kalwani and Narayandas 1995). Recommendations Having a centralized ordering system, the use of RFID scanning devices, electronic data interchange (EDI), and the practice of composite delivery significantly improved the supply chain management system of Tesco as compared to the use of direct to store delivery (DSD). Considering the business advantages associated with these strategies, Tesco should continuously make use of these methods. One of the best ways to minimize the cost of unnecessary freight, additional manpower and warehouse expenses is to make sure that each of Tesco’s accredited suppliers will deliver the ordered items straight to each of Tesco’s retail store outlet on time. To improve the strict compliance of Tesco’s accredited suppliers with regards to just-in-time delivery system; Tesco’s purchasing personnel should give more time and exert more effort in establishing a better business relationship with the accredited suppliers who can deliver the ordered food and non-food items on time. According to Wisner, Tan and Leong (2009, p. 78), “trust is critical for any partnership or alliance to work”. Likewise, the study conclusion of Moolering (2003) revealed that there is a strong positive correlation between the ability of the purchasers to establish trust with its accredited suppliers and the ability of the accredited suppliers to deliver the ordered goods on time. Taking these concept into consideration, this report highly recommends the importance of establishing trust between Tesco and its accredited suppliers. In line with this, establishing trust between the buyer and seller is possible though plant visits. Aside from maintaining a small group of accredited suppliers, it is equally important for buyers and sellers to share the same vision and business objectives. Several authors revealed that buyers and sellers who share a common business goal are more likely to go through win-win business negotiation with regards to the product quality and market prices of goods (Wisner, Tan, & Leong 2009, pp. 78 – 79; Chandra & Kumar, 2000). To enhance Tesco’s supply chain system, this study highly recommend that Tesco should establish and make its accredited suppliers aware of its vision and business objectives especially when it comes to the interdependency and rules behind its business collaboration (Croxton, García-Dastugue, & Lambert, 2001). *** End *** Appendix I – Design of Multi-Temperature Trailer Used by Tesco Source: Bourlakis & Weightman, 2004, p. 184 References Agrawal, N., & Smith, S. (2009). Retail supply chain management: quantitative models and empirical studies. Springer Science. Araujo, L., Dubois, A., & Gadde, L.-E. (1999). Managing Interfaces with Suppliers. Industrial Marketing Management , 28, pp. 497-506. Bensaou, M. (1999). Portfolios of Buyer-Supplier Relationships. Sloan Management Review , pp. 35-44. Bourlakis, M., & Weightman, P. (2004). Food supply chain management. Blackwell Publishing Ltd. Boyer, K., & Verma, R. (2010). 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