The Transformation of the Supply Chain and Distribution Network - Assignment Example

? Supply Chain AFFILIATION: Table of Contents Introduction 3 Discussion 4 Internationalisation 4 The Internationalisation of business 5 The transformation of the Supply Chain and Distribution network 8 Decentralised system 8 The centralised system 8 Revision of the centralised supply chain and distribution system 9 Supply chains as an important driver of Internationalisation strategies 11 Conclusion 13 References 14 Supply Chain Introduction The British company Tesco could be considered as a great phenomenon in itself and in the world of food distribution. At the end of 2004, the company emerged as the seventh largest distributors of retail with sales of U.S. $ 50.3 billion (30.8 billion pounds). Between 2000 and 2004, its turnover grew by 85.4 %, the third best performance of the main European distributors, despite of the fact that the growth index of consumer prices in the United Kingdom is one of the lowest out of all the major European countries. The success of the company relies on a strategy of volume rather than margin through the reinvestment of productivity gains in the form of lower prices. A special feature of the company is that it does not seem to take the paths agreed by its competitors. In the late 1970s, company undertook a radical revision of the distribution system and 20 years later, it became one of the first profitable company in the field of nutrition (Collinson, 2007). Sir Jack Cohen founded the company in 1929 and named it as Tesco. This acronym combines the letters of the tea supplier and partner (TE Stock well) with those of Sir Cohen. The group opened its first grocery store in the suburbs of London, and it was during the 1930s that it began its growth by adding a hundred outlets, mainly in the British capital. After a visit to the United States, Mr. Cohen returned to England with the aim of importing the model of self-service supermarkets. He developed the formula Tesco “put products into a high pile and sell low" (Pile it high and sell it cheap). This formula has been the philosophy of the company for several decades. It has gained its success and accomplishments based on this formula in the right way. After World War II, the company continued its growth in the targeted segment of the working class. Through a series of acquisitions, the company had more than 800 outlets by the late 1960s. Moreover, the regulation of time prevented some items to be sold at a loss (in the price agreed with the suppliers) to attract customers in the retail sale. Only large chains were subjected to this regulation that excluded independent stores. To overcome this limitation, the Tesco management decided to launch a system of tradable stamps (trading stamps). The customer who purchases at Tesco can accumulate stamps. When it has a certain number, it can be exchanged against a sum of money or gift product. This system has proved to be very popular and has increased sales. In 1964, regulations on price controls were abolished and Tesco has launched a strategic price reduction while maintaining its stamp system. Now, Tesco is an international distribution group which represents 14 countries in all. In 2008, its market capitalization was $ 34.84 billion Euros and its turnover reached 80 billion Euros, which placed the group at the forefront in UK and fourth in the world behind Wal-Mart & Carrefour. The headquarters of this global group is located near Chesnutt, London where Sir Terry Leahy is CEO since 1997 (Christmann, 2006). Discussion Internationalisation Internationalisation is the process by which relations over greater distances are contracted, and thus extend over national borders. The parent organisation opens its branches all around the world to increase its level of sales and profitability. This is a result of both globalisation and regionalisation. Organisations tend to gain strong advantages by operating on an international mode. As a result, national governments are bound by their policy to international agreements and developments and have fewer grips on the national economy. Internationalisation has taken off especially after the Second World War. Capital flows increased sharply in this period. It consisted largely of foreign direct investment by the expansion of multinational companies for whom national borders were of nominal value. By the size of their investment, these companies exerted great influence on politics, especially in the developing countries. They were able to conduct operations on a cost effective basis and hence were able to maintain the financial stability of the business. They also contributed towards the phenomenon of evasion and violation to the national legislations of developing countries. To curb the scenario, international and supranational organisation were founded. As the operations and task of multinationals were taken by national governments, that strengthened the process of Internationalisation (Palmer, 2004). The Internationalisation of business In 1999, Terry Leahy, the company's president, said “The consolidation process has only just begun. Tesco will certainly continue its successful transformation from a simple national distributor to a leading global player. "David Reid, vice president of business, precise: 'To claim to be a truly international group, we must achieve 25 % of profits abroad". In 1998, this percentage was 10 %. The Internationalisation of the company had already begun approximately 20 years ago, while in 1979, Tesco acquired a 51 % of food distributor in the Republic of Ireland. This does not prove sufficiently profitable and the management of the company was conducting its investment to gain in the year 1986. The latter was localised mainly in the Dublin area. The company management has remained in the study of markets in North America and Europe and in 1992 it was finally decided to acquire the French supermarket chain Regional Gatteau. Once again, the operation proved insignificant in 1997 and yielded Tesco participation. David Reid says this manoeuvre: We learned from our takeover of Gatteau, resold Promodes. In Western Europe, it is almost impossible to grow without organic growth by opening new stores. We decided to go to the country where we could operate without having to pay premiums for buying a fantastic business. This strategy may be implied by many other businesses as this helps a business to become cost effective in a certain way. From this observation, the countries of Eastern Europe and Asia have therefore become targets of choice. For Central Europe, management meant, in 1998, he was a strategic breath that generated short-term losses. The company devotes to the international activities of its two and a half billion pounds of budget development. During 2000, Tesco became the second largest investor in the world for stores like hypermarkets (Baggs & Brander, 2006). Tesco constantly started achieving success and gaining popularity. It built a good brand image in the minds of the consumers. Table 1 reveals acquisitions or equity investments made in recent years. Targets are often the smaller companies. The purpose of these exercises is to take have a presence in the different regions to pursue a strategy of growth through the construction of hypermarkets. Andrew Higginson explains: A big acquisition would represent a heavy investment. However, our industry emerges from the low rate of return, which is barely sufficient to fund our organic growth. We are ready, of course, to make tactical acquisitions if opportunities arise, particularly in Asia but it is still limited to small or medium-sized enterprises (Hambrick, 2008). The acquisition in 2003 of the Japanese company C Two-Networks is an example of prudent management of Tesco. Its competitors, the French Carrefour was established in Japan in 2000, where the U.S., Wal-Mart acquired a few months ago a stake in Seiyu, the fifth local distributor. C Two-Networks manages only 78 stores, but the chain is profitable unlike Seiyu that shows heavy losses. In addition, Tesco has not outbid in its takeover, because the investment is 60 % of turnover and eight times its operating profit. Table 1 Internationalisation of Operations Year Country Target 1994 Hungary Catering 51% of market share 1994 Czech Republic/ Slovakia Acquisition of K-Mart 1998 Thailand Acquisition of 75 % of market share 1999 South Korea Partnership with Samsung 2000 Taiwan Acquisition of Local store Chain 2001 Malaysia Venture with Sime Dam Stores. 2002 Poland Acquisition of HIT hyper mart 2003 Japan Acquisition of local food chain 2003 Turkey Acquisition of Chain Kipa 2004 China Participation of 50 % of market share The transformation of the Supply Chain and Distribution network One of the most radical transformations performed by Tesco management concerns the supply chain and distribution network. Changing the form of supply chain and distribution network can be a major challenge and also for an organisation that is huge in size and has a diversified portfolio of products. While it was highly decentralised in the 1970s, but the management tried its level best to convert it to a centralised form (Butle, 2006). Decentralised system In the late 1970s, a small proportion of products were sold in retail outlets cum warehouses and depots at Tesco. At its highest level, it is 83 % of its merchandise is delivered directly from the manufacturer’s point of sale. This practice tends to give a lot of leeway to managers of grocery stores encouraging specific agreements between them and the manufacturers to acquire other products at better prices. Consequently, standardisation of products in different point’s sales was slight. Addition, the inventory control store was very difficult to do and it became difficult to establish a dividend policy for the maximisation of resources for both the suppliers and the store (He, 2007). The centralised system To the obvious shortcomings of the decentralised system, the direction of Tesco decides to overhaul. A centralised system will now re-supply points of sale for the vast majority of products. Initially, this system should be able to replenish stores within 48 hours. Six geographical areas are created in order to obtain a suitable period of replenishment. There has been a change of use for warehouses already owned by Tesco, but we also proceeded with the construction of new warehouses to meet the demand of stores. Technology investments were also necessary. First, we introduced capture technologies electronic point of sale (Electronic Point of Sales - EPoS) assay that allowed economies of scale with suppliers with market economies microscopic to adapt supply to demand (Ibs BookMaster, 2006). An ERP warehouse (warehouse management) was established in the early 1980s. This package specifies the allocation of goods, warehousing capacity calculates and measures the productivity. Stores were linked to the grid through the head office and a computer system. There was a review on the workload of employee’s warehouses in order to get a better match demand from retail outlets. These investments and management measures have helped to reduce the replenishment period to 24 hours. Note that the management of the company had to defend its strategic choices for many months. Investments in new outlets, new warehouses and information systems have resulted in the early 1980s, a reduction in earnings. Some analysts have even doubted the survival of the company. However, the management partners have not deviated from their recovery plan (Rugman, 2008). Revision of the centralised supply chain and distribution system In the mid 1980s, Tesco had 16 warehouses while in 1989 it had 42 deposits, 36 temperature-controlled warehouses. Management of some warehouses had been subcontracted as the distribution routes and it should be noted that the number of warehouses was still lower than the range of warehouses and deposits it had in the 1960s and 1970s. During the 1980s, the company was monitoring by its distribution network of deliveries to retail outlets from 30 more than 90%. However, in late 1990, its network had certain limitations and service to retail outlets could be improved. First, each of the major product groups had its replenishment system, which in some cases was better suited to the constraints of logistics provider that Tesco. Then, the number of sites made it difficult to present in each service of quality control that could lead to a decline in standards. Thereafter, each warehouse geographical area was dedicated to a product group; therefore the quantities delivered to outlets were low. In addition, because some product families require an environment of temperature controlled delivery, five different vehicles were sometimes necessary to distribute all products of the same store for a replenishment cycle (Barney, 2006, p. 99). Finally, the distribution network in its current state could not meet the company's growth. The management of the company decided to initiate a transition to distribution centres (composite distribution) to replace its warehouses and depots. These centres of a size of 76 000 square metre could manage all the families of products (fresh, frozen or dried). To support the storage, it was necessary to have a fleet of delivery trucks that can accommodate the variety of products. The trailer of these trucks could be divided into two or three compartments with removable walls. Each compartment may have a separate temperature, literature reports for example - 20 degrees for ice cream, without affecting the quality of products loaded. The objective was to minimise inventories in retail outlets by providing a daily supply. In the early 1990s, Tesco had nine distribution centres replacing 26 warehouses and deposits in the previous distribution network. Each distribution centres were assigned to a region. In the first eight centres, only two were managed by Tesco while others were under the responsibility of logistics providers. The location of distribution centres has been studied in order to be close to major highways for easy delivery. Each distribution centre normally covers 50- 80 outlets. The implementation of these distribution centres has led to a revision of the organisational structure. In the mid of 1990s, company created the position of director of development of the supply chain (Supply Chain Development Director) who reports to senior management of the company. One of the objectives of the director is to ensure long- term capacity of the distribution network in line with the needs of retail outlets. It also supports the work of the sales manager's efforts to build partnerships with suppliers. The deployment of distribution centres has resulted in a change of supplier relationships. They were doing most of their deliveries par transhipment (cross docking). This meant that a portion of the proceeds, approximately 40 % of sales of the company was redirected to the outlets just an hour after their arrival at the distribution centre. Overall, at the end of 1990, nearly 97 % of the goods that were sold in stores passed through the distribution network of Tesco (Beaulieu et al., 2005). Supply chains as an important driver of Internationalisation strategies Supply Chain is considered as an important part of the internationalisation strategy so as to be successful in the global market, the organisation needs to ensure that it has adequate supply of raw materials and its suppliers are friendly and cooperate well so that all business operations run smoothly. Some of the strategies that are associated with supply chain in the internationalisation process are discussed as follows. Export: Export represents the first alternative Internationalisation for fledgling companies in relation to foreign markets. This alternative is widely used because it requires a low degree of risk and commitment by the company. Primarily it occurs when a product or service is transportable, the Internationalisation process generally begins by exporting. This is a form of Internationalisation used by the vast majority of SMEs. The alternative export can be divided into two types of operation: direct and indirect exports. Direct exports are those made through an intermediary located outside the country of origin, e.g., distributors, manufacturer's agent, commissioned representative, affiliate sales, in addition to exports made directly to the final consumer. The advantage is to enable the exporter greater control over the distribution channels used and, consequently, on the market for which it is exporting (Chetty et.al, 2006, p. 700). Franchising: In this form of Internationalisation, there is no transfer of goods but of know-how. The license provides for the establishment of a contract between two companies, whereby one of them, being the holder of a particular know-how, undertakes to transfer it to another for a remuneration agreed. In these processes, it is typically associated with a protected brand and already implemented in the market or a duly patented technology. The use of license agreements is an important way to monetise the technological capability of a firm. This type of Internationalisation, currently expanding rapidly, allowing a rapid expansion franchise for the business and give the licensor a more effective control of products across distribution channels (Teece, 2007, p. 1319). Ventures Joint: Joint venture concerns the association between two (usually) or more companies for the purpose of conducting a business in common, each of which alone would not have the same success. Can be established for a fixed or indefinite time period, with a common purpose between the parties and mutual benefits (Chang, 2006, p. 410). Foreign Direct Investment: The form of Internationalisation by which a company decides to "go" in a particular market at your own risk. The prospect of higher profits outweighs the risks. A company that chooses to open a branch may do so by acquiring a local company, or even building their own facilities. It is a high degree of Internationalisation, since it exposes the company to high costs and political risks (Chen et.al, 2008, p. 567). Conclusion The success of the company relies on a strategy of volume rather than margin through the reinvestment of productivity gains in the form of lower prices. Success come in part and parcel and involves many factors that businesses need to consider to grow and prosper. A special feature of the company is that it does not seem to take the paths agreed by its competitors. In the late 1970s, company undertook a radical revision of the distribution system and 20 years later, it became one of the first profitable company in the field of nutrition. Managing effective supply chain in the global market is extremely important for the organisations to become successful. As we can see from the discussion above, Tesco managed it supply chain activities in a successful manner and hence was able to grow its business in the international market successfully. Meeting demands of the consumers is important in times of peak seasons, hence supply chain activities need to be built upon good will and friendly relations so that the work operates smoothly. References Baggs, J., & Brander, J., 2006. Trade liberalization, profitability, and financial leverage. Journal of International Business Studies, 37: pp. 196-211. Barney, J. B., 2006. Firm resources and sustained competitive advantage. Journal of Management, 17: pp. 99-120. Beaulieu, M. C., Cosset, J. 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Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28: pp. 1319-1350. Read More