Supply Chain Management Strategy at Tesco - Case Study Example

Supply Chain Management Strategy at Tesco BBS in Retail Management Practice Operations Management Dorota Cygan No L00105816 Wordcount: 3452 27/10/14 Table of contents: Introduction…………………………………………………………………… 3 1. Company Background and As-Is Analysis……………………………… 4 2. Critical evaluation and assessment………………………………………. 4 2.1. Strategy of the Customer Service......................................................... 5 2.1.1. Management of Revenue................................................ 5 2.1.2. Customer service and issues relating to segmentation 6 2.1.3. Cost to serve..................................................................... 6 2.1.4. Demand Flow Strategy………………………………… 7 2.1.5. Channel design................................................................. 7 2.1.6. Supply chain..................................................................... 8 2.2. Sourcing strategy..................................................................................... 8 2.2.1. Manufacturing management........................................... 8 2.3. Supply Chain Information Strategy 2.3.1. Information integration................................................... 9 3. Recommendations and conclusions......................................................................... 10 4. References.................................................................................................................. 12 Introduction In this paper, attempt is made in order to engage an understanding of the actual function of the supply chain of Tesco. This concept also appears at various supply chain practices which are regularly engaged by Tesco. This work also analyzes practices related to supply integration practices; adopting by many parallel industries alongside Tesco. In the end, the analysis includes several suggestions and recommendations in order to improve the supply chain of Tesco. 1. Company Background and As-Is Analysis The Tesco chain was created in the year 1919 by Jack Cohen. At first it was nothing more than a simple stall within London’s bustling East End. In time, the business has developed and, at this moment, it operates a dozen nations worldwide. This company employs in excess of ½ million people and provides goods and services to millions each week. Tesco is now a UK multinational. It has some diversified retail operations; which are located in over a dozen countries around Europe, Asia and America. Tesco is, at the moment, ranked in the top 3 of global retailers. Its sales have been around £ 62.5 billion in the year 2009. They have 4811 stores worldwide and they employ 472000 people. The core Tesco business is based on the sale of grocery items; accounting for fully 70% of the firms overall net profitability. Tesco offers in excess of 70,000 different types products. There are various additional services available, depending on the format of the shop (Tesco Annual Report, 2013). 2. Critical Evaluation and assessment The term of Supply chain has a lot of definitions. A lot of authors have tried to explain what this term differently. However, within the scope of the supply chain of Tesco, the meaning which has been provided by Stevens, seems to be the most appropriate. According to him: “a system whose constituent parts include material suppliers, production facilities, distribution services and customer linked together via a feed forward of materials and the feedback of information” (Stevens, 1989). Tesco uses points earned from sales and card membership information in order to provide marketing material directly to the consumer within advertisements. This allows the firm to react to unique consumer demands and personal tastes in a very rapid manner. The supply chain of Tesco is going to be analyzed with the use of a model that has been created by Evans and Danks (1998). 2.1. Strategy of the Customer Service 2.1.1. Revenue management The chain of Tesco supermarkets is very customer-oriented. This was actually the first company that offered loyalty club cards. It should be stressed that the underpinning rational behind engaging the system of club cards is to collect a high degree of salient personal information on each consumer; based upon their tastes, shopping habits, and interests. In practice, Tesco gathers all the necessary information about buying habits of particular groups of customers. What is more, they also collect data about customers’ family, race, finances, religion, employment or even mental health. Because of that, there have been a lot of critical opinions of Tesco “loyalty cards”, which alleged that Tesco is also interested in learning what are the customers’ voting preferences. It can definitely bring a lot of negative emotions, as there is a large group of people who want to protect their private life (Customer Case Study: Tesco, 2012). All of the data gained through loyalty club cards are used by the company in order to understand what the customers want. According to their preferences, there are certain products represented within the market whereas others are not. For example, Tesco in Malaysia a variety of different discounted products; whereas a different subset were initiated for discount within the United Kingdom (Tesco Annual Report, 2009). It should also be mentioned that about 30% of the customers purchase products which are included in the ‘Tesco Discount Brands’. They do it every time they visit Tesco supermarket. Tesco decided to reduce the cost of about one thousand five hundred products that Tesco had for one season in contrast to others. What is also very interesting is the fact that TV Technica, which is a brand created by Tesco, ranked as the fifth largest within the UK; representing fully 10 percent of the market. All of the sales achieved by Tesco Direct rose by over 50 percent in 2009, which has definitely been a great success. These facts show that the brand is experiencing a level of rapid growth. Yet, in order to promote further revenue generation and continue to guarantee growth, even in the time of recession, Tesco has successfully managed to open upwards of two million square feet of sales space between 2008-2009. This encompasses the expansion of 21 superstores, 11 Tesco Extra stores, and 124 Tesco Express stores; creating a grand total of 2482 total stores operated within the United Kingdom (Tesco Annual Report, 2009). 2.1.2. Customer service segmentation The stores opened by Tesco company are attractive not only for one particular group of customers. People from various social groups and with different expectations go there for shopping. The order qualifiers for shops by Tesco are, first of all, availability of the items and in store service. There is also another important order winner, namely prices. For various groups of customers there are different ranges of products available. Because of the aspect mentioned above, at Tesco customers are offered a lot of cheap products, but there are also products from Tesco Finest line, which are meant to be attractive for some of the premium customers. This idea is definitely effective. It is possible to do shopping when the budget of the person/family is limited. At the same time, when planning a fancy dinner, all of the products which are necessary can be purchased in this supermarket too. All in all, Tesco seems to make a complex store that contains all of the necessary products not only for the particular social group but for the society in general. There are a few famous brands created by Tesco. These include the following: F&F, Healthy Living, and Cherokee. Tesco further provides a web enabled tracker of healthy lifestyles; which is an interactive application suggests the diet which might be helpful for losing weight or maintain some healthy habits of eating – based on the customers eating and/or purchasing habits. Additionally, to be able to improve customer relations and service, Tesco offers a more developed means of checking out once one’s purchases have been completed. (Tesco Annual Report, 2013). 2.1.3. Cost to serve The brand of Tesco has the ability to use the insight of the customer to create goods based on its size and issues pertaining to economies of scale. Thus, it is possible for the company to offer their customers lower priced alternatives as this relates to much of the remainder of the retail industry (Tesco Annual Report, 2013). 2.1.4. Demand Flow Strategy Tesco is generally using an advanced technology in order to be able to maintain the inventory level in stock that would be optimal. All of the data about size of the shelves, such as length, height, or width within dedicated IT infrastructure. By scanning the spaces that remain on the shelves and justifying these with the information retained within such IT systems, TESCO is able to accurately understand which products need to be reordered and restocked, which ones are selling quickly, and which ones are not. Because of the fact that the schedules of delivery are different for each group of products, it is possible to manage the shelves more effectively. To be more specific, employees can make sure that there is always a perfect number of the required product available, while those products which are not being sold so fast can be delivered to the store more rarely. It is also important that Tesco days of inventory have increased from 14.7 days in 2006 to as many as 19 days in the year 2010 (according to Tesco Annual Report). With just a few weeks of inventory, the firm is able to provide and resupply hundreds of thousands of products at a near on-demand basis. Therefore, it can be stated that the supply chain of Tesco is very well integrated and effective. 2.1.5. Channel design To make their service more effective and also to meet customers’ needs, Tesco created various formats of its shops, such as Tesco Express, Tesco Metro, and Tesco Extra. The possibility to choose the shop is what gives customer flexibility. They can go for bigger shopping at Tesco extra or choose Tesco Express if they have less time to spend in the supermarket. For the customers who cannot go to the shop themselves, the company has created Tesco online store, which is located at Tesco.com. It offers all the products that can be found at “normal” shops. The only difference is that the items are delivered to the customer’s home. Tesco Direct is a place provides a litany of goods and services through Tesco.com – as well as traditional catalogue ordering options (Tesco Annual Report, 2009). 2.1.6. Supply chain The supply chain of Tesco is very complex and complicated at the first look. The milk is brought from local suppliers, such as Robert Wiseman, Arla, and Diary Crest within the UK. It is also proven that there are as many as 1361 farmers who bring beef and lamb cuts to these shops on a day to day basis. When it comes to products with short life, Tesco gets them locally too. However, all the other types of products are brought to the shops through international sourcing office, which is currently located in Hong Kong. This office is responsible for supplying nearly 60 percent of the clothing and approximately 40 percent of all non food itsms that are ultimately for sale within the United Kingdom via nearly 800 suppliers throughout Asia. This well spread distribution centres make it possible to create quick deliveries to every Tesco shop. It makes it possible for customers to feel ensured that they can always find a product that they need at Tesco. It helps to avoid situations in which some particular shops lack important products. Such situation would surely make customers trust Tesco less than they do. 2.2. Sourcing Strategy 2.2.1. Manufacturing management At every shop there are managers who are responsible for managing aspects of the business such as promotions in the particular shop. They also decide how various prices should be marked down, anytime such action is required by the situation in the market. The point of sale information is helpful when it comes to distribution centre, as it makes it possible to ensure that goods are in stock by relying on inputs from electronic devices and other means by which stock is monitored, updated, and rotated. All in all, Tesco has a network that includes twenty four different depots with fully two thousand vehicles and four thousand 4000 trailers to serve the Tesco stores. Those products which are consumable are brought to depots and there they are kept in three different assembly areas. The reason for this is that there is different temperature in each assembly area, as various products need to be stored in different conditions. Therefore, products like bread, fruit, eggs and cakes are kept in the area when the temperature is the highest of all three sectors. Another group of products are meat, cheese, dairy products, and a variety of other frozen products are stored in areas cooler temperatures. Finally, the third area represents frozen food; which is stored in the coldest sectors. It also needs to be added that these depots are a kind of transfer points and they are not storage facilities, because of the fact that certain products may indeed be perishable. Each day, massive containers, which contain a variety of different goods arrive in the United Kingdom from around the globe; with the sole intention of being reflected for sale within Tescos many locations. To manage this incessant and ongoing supply chain, Tesco utilizes only a small percentage of third party warehouses; choosing instead to maintain proprietary control. Likewise, nearly 50 percent of all the goods that are carried are born by third party logistic providers (Tsinopoulos and Mena, 2010). Tesco uses the market power that it retains as a means of re-investing within the consumer market; at least in terms of research and development of more efficient processes and new products that might engage the end consumer. Likewise, the firm offers a wide array of Tesco value products which comprise a high percentage of all of the products offered within individual Tesco locations. In much the same way that larger retailers have come to compete with major producers, Tesco has kicked off a variety of Tesco branded items that compete with the low-cost leaders within different fields of consumer purchasing behavior (Tsinopoulos and Mena, 2010). The majority of these items arrive at the Tesco location already packaged and ready to be bought directly with little to no setup required. 2.3. Supply Chain Integration Strategy 2.3.1. Information integration Effective IT utilization is heavily relied upon within Tesco as a means of meeting the consumer’s demands and providing products at a rapid “just in time” needs fulfilment. A variety of software packages by Microsoft and other proprietary services ensure that the firm is saliently aware of any unfulfilled stock needs and the potential likelihood of a given Tesco location needing their stock updated or transitioned prior to running out. (Customer Case Study: Tesco, 2012). 3. Recommendations and conclusions When managing supply chain, one should be focused on reducing both time and cost and Tesco takes a number of initiatives in order to do it. The main way of transportation at Tesco are roads. Of course, the company also uses other means of transport, like water or trains, but it should be stressed that the portion is very small comparing to road transport. If the company decided to deliver their items with the use of trains or water more often, it would be possible to reduce the cost. What is more, it would also be more friendly for the environment, which can successfully be used to build the positive image of the company. As indicated previously, fully 70 percent of such items are packaged and ready to sell prior to being shipped to the individual stores. However, at a minimum, a certain percentage of products require installation or construction by store employees. This definitely is a waste of money and time. It would be a good idea if Tesco worked closely with their suppliers. Then it would be possible to order 100% of products with ready to display packages. Such solution does not have to be expensive and it might bring a lot of advantages. Comparing to the cost of packing the products by Tesco employees, ordering packed products might, in the end, be less expensive. What is more, staff would have much more time to work on other things. According to the annual reports, Tesco utilizes a class of biodiesel that is known as B50. This type of biodiesel is employed within their delivery trucks and all transportation used to bring products from their distributors to the stores via Tescos proprietary vehicles. The underlying reason behind this is not only to represent a certain level of environmental concern but also to abide by standards for CO2 reduction ratios set by the government. However, by using the regular diesel the company will surely increase the carbon foot print which they produce. In order to compensate this, they are going to have to pay additional bills. This generates more and more costs, which could easily be reduced if Tesco would decide to use alternative ways of transportation. One way would surely be, as already mentioned before, using trains or water. However, another good idea would be to invest at least in double deck vehicles. Summing up, it can be stated that supply chain management are all the processes which are connected with managing the flowing of material, at first in forward direction and then passing the information in the opposite direction which is at this point done in order to improve the way in which the supply chain functions in the market. The company might then decide what changes are needed. It is very important not to ignore any signs that functioning of the supply chain might be improved. Therefore, companies like Tesco should definitely make sure that they hire good specialists that know how to analyze the current situation in the market. It should be mentioned that Tesco managed to integrate all of the aspects of coordinating the supply chain. They also knew how to gain a lot of market share, which proves that, at least until now, they not only extend their services, but also correct mistakes which would limit their effectiveness. What is more, Tesco also uses all of the innovations which are helpful when it comes to managing the supply chain. Probably one of the most important innovation was incorporating IT solutions. It surely was one of the biggest step towards changing the supply chain into more advanced and, most importantly, one that is easier to manage. Another important change which was done by Tesco was offering their customers loyalty cards. First of all, this made it possible for the company to provide their most loyal customers with special rewards, such as discount and special gifts which could be earned for points received after every shopping. Another good aspect of loyalty cards is that Tesco can get important data about their customers. It makes it possible to provide people with products which they need and special offers of various items. Finally, it should be mentioned that Tesco leveraged key planning initiatives when it comes to ensuring that the firm, as well as the customer is able to purchase a given product at a drastically reduced price. It was surely a step which help the company win the trust of more customers. People know that they can always find cheap and at the same time good quality items in the nearest Tesco shop. It is important especially during economic downturn. Tesco also uses economies of scale in order to achieve low cost, which is very helpful when it comes to serving the customer. Of course, it cannot be forgotten that also high quality, premium products are what provides Tesco with more and more loyal customers. The variety of products seems to be the key to having shoppers from every social group. 4. References C. Tsinopoulos, C. Mena (2010) Competing supply chain strategies: Tesco, Aldi and Lidl, Cranfield University. Graham C. Stevens, (1989) "Integrating the Supply Chain", International Journal of Physical Distribution & Materials Management, Vol. 19. R. Evans, A. Danks, (1989) “Strategic supply chain management – Creating shareholder value by aligning supply chain strategy with business strategy” in: Gattorna, John L. (ed.): Strategic supply chain alignment – Best practice in supply chain management. Hampshire: Gower. Sysrepublic Secure (2012) Customer Case Study: Tesco, Sysrepublic.com. Tesco plc. (2009) Annual report and financial statements 2009. Cheshunt: Tesco Tesco plc. (2013) Annual report and financial statements 2013. Cheshunt: Tesco. Tescos International Sourcing - the machine behind the machine (2009), Daily Telegraph 23 February 2009. Read More