Purchasing and Supply Chain Management Analysis of Tesco - Research Paper Example

As purchasing and supply management upholds the supposition that supplier integration is crucial in increasing firm performance, supplier integration is still has to be accomplished by organisations. Tesco is the leading UK retail store. As it leads in information and technological innovation in the retail industry, Tesco embroils in controversies with its supplier. This posits a discrepancy between what they claim in their reports and what some of their suppliers experienced. In this regard, this research addresses the question, “beyond the rhetoric, how can supplier integration be strongly established in TESCO?” Conducting a literature review of relevant articles, the study has found out the following. 1. Trust is pivotal in building the relationship between the firm and its suppliers. 2. The role of power in the relation between supplier and the firm must be clarified. 3. Tesco has to undertake organisational changes in oreder for it to establish the environment fostering trust between them and their suppliers. Tesco and Suppliers: Towards Integration Introduction Purchasing and supply chain management has evolved from being an administrative concern to one of the most critical and strategic organisational functions (Gundlach et al., 2006; Kerkfeld and Hartmann, 2012). Since, at the heart of contemporary “organizations are the operations that create and deliver products” (Waters, 2008, p. 5). This development is a result of the demands and challenges coming from both the external factors affecting the business environment such as globalisation, technological developments and consumer demands and internal factors, like organisational goals, that are unique in each organisation (Zhung et al., 2007). From this perspective, purchasing and supply chain management as a tactical and strategic function, aims not only in securing the competitive advantage of the organisation in all its dimensions (Carter and Rogers, 2008) but it is also geared in maximising company responsiveness (Liao, Hong and Rao, 2010) and secondly keeping and ensuring its sustainable growth (Wittstruck and Teuteburg, 2012). The Company Tesco is UK’s largest retailing store and one of the biggest four supermarkets in Europe. It is a recognised global retailer operating in 12 markets across Asia and Europe. It employs 500,000 people and work with suppliers over in over 70 countries (TESCO and Society Report, 2014). It operates 3, 378 stores in the UK; 2,417 in Asia and 1, 510 in Europe. It serves 38 million loyal customers with over 85 million shopping trips a week (Tesco PLC Annual Report, 2014; TESCO and Society Report, 2014). In its market position, it is ranked 1st in UK and 1st or 2nd in other markets outside of UK (Tesco PLC Annual Report, 2014). Sustaining this strong market position, Tesco embraces ethos and commitments fundamental in their operations, these are: 1) trading responsibly 2) reducing the company’s impact in the environment 3) being a great employer and 4) supporting local communities (TESCO and Society Report, 2005; 2014). Translating these ethos and commitments into reality, Tesco promotes trading responsibly. In TESCO and Society Report (2014), Tesco asserts that they “build strong partnerships with trusted suppliers so that they can deliver high quality, safe products that are responsibly produced for the customers at an affordable price” (p. 26). In the same report, Tesco also affirm that they are working with local supply experts who “find great products and use their expertise to innovate in partnership with their suppliers” (TESCO and Society Report, 2014, p. 26). Furthermore, Tesco claims of establishing platforms and channels that will allow them to listen to their suppliers via anonymous feedback, meetings with suppliers and the ‘protector line’ which is “primarily used by colleagues and contractors to report suspected breaches of our code of business conduct or internal company policies” (TESCO and Society Report, 2014, p. 27). Gauging TESCO and Society Report, 2014, it is apparent that Tesco embraces the attitude of responding to the competitive and dynamic fast phase changes happening in the retail industry by keeping strong partnership with suppliers as well as managing the supply chain effectively while they continuously endeavour in keeping and sustaining customer trust. Similarly, with the same TESCO and Society Report, 2014, it avers that TESCO recognizes the impact of their operations to the environment. Hence, currently in their distribution, they have reduced their carbon emission by 7.8% per case of deliveries. They are closely working with various NGOs – Consumer Goods Forum and sustainable Fisheries Partnership - to achieve zero-net deforestation and sustainable fisheries to all respectively (TESCO and Society Report, 2014, p. 28-29). In the same way, they acknowledge the pivotal role of their employees in both the operations and services they provide to their customers. As such, TESCO “creates opportunities at every stage of an individual’s career so that they can achieve their aspirations, as they are introducing a new People Plan across our markets for 2014/15 to ensure that all colleagues are empowered to do their best in a happy, healthy, high-performing team” (TESCO and Society Report, 2014, p. 31). Finally, TESCO espouses a strong corporate social responsibility. From these perspectives, it can be inferred that TESCO’s purchasing and supply management is a response, a strategy, a means to connect and collaborate with suppliers and customers and an essential factor for sustainable growth. However, for more than a decade now TESCO has been involved in various supplier issues and problems. From the year 1998 -2002, TESCO used pesticide without reduction contrary to their claim they reduced by 80% their pesticide usage (www.corproratewatch.org). In 2003, they have unnecessarily over-priced fruits and vegetables. In 2004, Friends of Earth branded TESCO as unethical and unfair for pressuring farmers to lower their selling price (Dresser, 2004). This allegation continued in 2005 with African wine makers. This issue of unfair traded persisted until 2013 when farmers were again complaining that TESCO did not allow them to increase their prices, so Tesco can maintain its low retail price in the market or they were made to bear the company’s losses. In 2009, they have to close stores in California because they failed to integrate suppliers’ view on their market position (Guan and Rehme, 2012). Likewise, in 2011, Tesco had to pull out from Japan, failing to get a niche on the market because of supplier issues. This same issue was also one of the factors why they are not doing well in China and to save the company, Tesco has to tie up with a Chinese conglomerate. It was also in 2013 when horse meat was found in their meat produce. The Focus Shapiro et al (1993) argued that SCM is not only between the firm and the customer. It involves the supply side. In the supply side, the core concept is the buyer-supplier dyad (Chen, Paul raj and Lado, 2004; Shapiro, 2001) and it is asserted that the collaboration between suppliers and buyers is advantageous for the organisation (Daugherty et al, 1999; Holmstrom 1998; Thron et al, 2008). In this regard, the study will focus on supplier integration as a pivotal element in developing strategic purchasing and supply chain management (PSCM) (Dyer, 1996; Dyer and Singh, 1998; Kerkfeld and Hartman, 2012; Zimmerman and Foerstl, 2014). It will try to explore the issue of inconsistency of supplier integration in TESCO with the question “beyond the rhetoric, how can supplier integration be strongly established in TESCO?” LITERATURE REVIEW Studies have shown that a harmonious and well-developed relationship with the supplier establishes a competitive advantage for the organisation (Cousin, Lawson, and Squire, 2006; Paulraj, Chen and Flynn, 2006; Paulraj et al., 2008). In a seminal article, Kraljic (1983) introduced one of the first portfolio approach intended to transform purchasing into strategic purchasing by 1) incorporating purchasing function as part of supply chain management 2) looking at it as a response to risk, interruptions and uncertainties and 3) using it as a coping mechanisms for the fast phase changes and technological developments influencing the business world. With the portfolio, Kraljic (1983) classified purchasing materials into four categories – strategic, bottleneck, leverage and noncritical – with profit impact and supply risk as the two dimensions guiding buyers in assessing, defining and delimiting products and services that they need. In this way, Kraljic’s portfolio approach serves as clear cut guide in facilitating the “structuring and planning of current needs as well as future need of various services” (Lindberg and Nordin, 2008, p. 297). In addition, Kraljic (1983) advocated the strengthening of the organisation via the inclusion of purchasing in the overall business system, greater integration, stronger cross-functional relations and involvement of top management as crucial in strategic purchasing. This means genuinely adopting effective relations with all those involve in the purchase and supply management of the company (vertical integration), system support and meeting staff skills and requirements (horizontal integration). In this way, profit is optimised and risk is minimised (Gelderman and van Weele, 2005). In effect, the portfolio does not only identify critical elements in purchasing materials but it essentially involves the recognition and implementation of organisational changes integrating purchasing and supply management as pivotal and strategic functions of the firm. Hence, configuring purchasing with the context and condition of the firm (Ellram and Belingtonn, 2001) and aligning it with dimensions of supplier integration and relationship, financial outcomes and product performance enable the company to attain competitive advantage out from strategic purchase and supply management (Carr and Pearson, 1999; Chen, Paulraj and Lado 2004; Cousin, 2005; Cousins et al., 2006; Cousins et al. 2008; Story, Emberson and Lead, 2005; Tan, Lyman and Wisner, 2002; Wagner and Johnson, 2004). Aside from Kraljic’s portfolio approach in purchasing, other similar portfolio approaches have been developed signifying the recognised significance of these models in PSM in particular and in the business environment in general (Cousins et al., 2006; Gelderman and van Weele, 2005). Figure 1. Source: Author This figure shows both firms and suppliers respond to the demands of the environment. The strong and solid relation between firm and suppliers modify PSM into strategic PSM which in turn enhances firm’s performance. In this regard, it can be inferred that Kraljic portfolio approach together with organisational transformation, strengthened supplier relations, alignment, and configured purchasing all are essential in yielding better firm performance. However, portfolio approaches to purchasing and supply management have been strongly criticised on several considerable points. Olsen and Ellram (1997) argued that purchasing and supply management is not as clear cut as the classified categories or its identified dimensions. Since, it is not just about independent variables, but it is about interdependent factors and variables. Ramsay (1996) noted the ambiguity of the terms profit impact and supply risk. Moreover, portfolio approaches are too simplistic. It fails to capture the complexity not only of the interactions in the business environment but it falls short in encapsulating and realistically representing the dynamism and robustness of these interactions (Coate, 1983; Olsen and Ellram, 1997). Thus, portfolio approaches downplay the critical role of networking in strategic purchasing (Dubios and Penderson, 2002). Furthermore, as portfolio approaches, like the Kraljic model, centre on purchasing materials, profit and supply risks, it removes from the discourse of PSM the essential role of supplier and supplier relations (Kamann, 2000). It limits purchasing to materials and services needed, as such; it attaches little importance to relations crucial in establishing strategic purchasing and deemphasises collaborative actions (Homburg, 1995; Gelderman and van Weele, 2005). Finally, it blurs and undervalues the role and meaning of supply integration and supplier-buyer dyad as the focal point of purchasing and supply management is the interaction among materials/services need, profit and risks. These perspectives highlight the supposition that as portfolio approaches guide buyers in identifying and understanding material - services - needs of the organisation, it also diminishes the value of other key features (e.g. effective relations, support), players and interactions decisive in the success of strategic purchasing and supply management. Consequently, this necessitates a more inclusive and wider application of portfolio approaches as it is adopted in strategic purchasing and supply management. Analysis: Tesco and Supplier Relationship Tesco’s ‘seemingly’ tumultuous relationship with its suppliers should be considered as a vital issue affecting the company. It cannot be relegated as a mere smear campaign against the company, even if others may considered it as such, because studies have consistently shown that good standing relationship between suppliers and the company contribute both to the competitive advantage (Cousin et al., 2006; Paulraj et al., 2006; Paulraj et al., 2008) and sustainable growth of the organisation (Gupta and Palsule-Desai, 2011; Wu and Pagell, 2011). Kraljic (1983) stated for strategic purchasing to transpire, it is indispensable that effective relations is established within the department involve in purchasing and supply and with other department and systems in the organisation. This signifies horizontal integration. From this way of looking at ‘effective relations’, it can be maintained that Tesco is adequately implementing programs and policies promoting workers- colleagues’ empowerment (TESCO and Society, 2014). In addition, by practising cross-functional relations, Tesco supports the integral service of purchasing experts in the actualisation of strategic purchasing (TESCO and Society, 2014). On the other hand, when effective relations refer to vertical integration of third parties such as their suppliers, Tesco is not successful. As noted earlier, there is an incongruity in their relations with their suppliers. Tesco asserts they intend to establish strong relationship with trusted suppliers (TESCO and Society (2014). In this regard, what characterises trusted Tesco suppliers? What are their standards in creating this environment of trust between them – Tesco and the suppliers? Is it good quality produce at an affordable price? Or looking for the point where in a win-win situation for both Tesco and suppliers may be achieved? Is creating the virtual platform where they can listen to the anonymous voices of suppliers sufficient in creating the environment of trust between them and suppliers? Or is listening to the demands of suppliers and negotiating with them on how they can hurdle together economic downturns? Or trusted means just following Tesco’s demands? Does trusted supplier means hiding facts about your produced unless caught by Tesco (e.g. 2013 horse meat issue)? How is the power relation between Tesco and the suppliers? Is it symmetrical or asymmetrical? Figure 2 Trust and Power Source: Author The figure shows that effective relations between Tesco and suppliers are tenuous because trust structures and environment supporting their relationship are not transparent and integrative enough. In addition, the power relations between Tesco and suppliers have to be clarified. Is it symmetrical? As such, both parties are partners; or asymmetrical with Tesco weighing in more power? Tescopoly coined against Tesco as the y practise bullish and aggressive competitive relations against their competitions and suppliers (Guan et al., 2012). This perception and environment result into unhealthy competition, even adversarial, relations. An example of this is their stint in the US. Fresh & Easy closed because they excluded local suppliers by not listening to advises and suggestions they gave (Guan et al., 2012). Paiva et al., (2014) claim that to ensure success and for pragmatic reasons, trust between the corporation and supplier should already be integrated even in the planning of supply chain. This may be easier said than done, but both Tesco and their suppliers must acknowledge that strategic interdependence is possible and necessary in fostering effective relations between them (Mahapatra, Narasimhan and Barbieri, 2010). For firm performance increases as alignment built on trust between supplier and buyer is established by the parties (Tan et al, 2010). Kraljic’s portfolio approach helps purchasing professionals. Tesco espouses some of its commitments. However, Tesco leaves out one of the key players in the equation of purchasing and supply management – suppliers. By obscuring their meaning of trust, by keeping the role of power in their relations with the supplier vague, and by blurring ‘effective relations’ with suppliers; Tesco fails to capitalise on the advantages of having a harmonious and good relationship with suppliers. The acerbic relationship with the suppliers impacts Tesco’s 1) reputation and image, 2) genuineness and sincerity in terms of social responsibility, 3) firm performance and 4) chance to gain the benefits from having long-term relationships with suppliers. Source: http://cmym.wordpress.com/2014/01/10/uk-supermarket-retail-in-a-single-chart-q4-like-for-like-sales/ The graph shows why Tesco has to act fast. Among the major retail supermarkets in London, Tesco is one of the two who is experiencing a decline in firm performance. With the continued economic downturn and with people having less money, Tesco has to secure other market relations and fundamentals that will help them get over the tide – genuine supplier integration Recommendations: In view of the analysis pertinent to Tesco and supplier relationship, the following recommendations are put forwarded. 1. Tesco has to set-up consultation and negotiation with their ‘trusted’ supplier, new suppliers, and past suppliers in order to articulate what are the characteristics and parameters necessary in clarifying the idea of trust as it is established in the context of Tesco – supplier relation. 2. Tesco has to identify the kind of power relations that they have with their suppliers. This requires a strengthening the organisation. This can be attained by establishing ‘effective relations with their supplier. This can be done through the help of their local experts or buyers. They can have focus group discussion regarding the issue of power in their relationship with the suppliers and on how they can harness it to attain a strategic and suitable power relation between Tesco and suppliers. At the same time, suppliers must also determine their position in this power relation. Since, if it is weak, they can form collaborative groups so they strengthen power and bargaining position. 3. As Tesco leads technologically in the retail industry (Swabey, 2013), they should also use it with their supplier, so that not only products, services, and grievances are shared, but more so, information and knowledge. However, Tesco must learn to listen. 2945 words including abstract References Carr, A.S.,& Pearson, J.N.(1999)“Strategically managed buyer–sellerrelationships and performance outcomes,”Journal of OperationsManagement 17: 497–519. Carter, C., & Rogers D. 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