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Strategic Supply Chain Management At Tesco Commerce Essay

Tesco plc is a UK multinational with diversified retail operations in 14 countries in Europe, America and Asia. Tesco is the 3rd largest retailer in the world with £ 62.5 billion sales in 2009, having 4811 stores worldwide and 472000 employees. The core business is grocery items and main market is UK with c70 % of total annual sales. Tesco offers more than 70000 food and non food products and services by using different store formats as shown below in the diagram.

The diagram shows different type of store formats and product and services offered by each format. The above complex structure makes supply chain operations even more complex to manage. This paper attempts to explore how the complex supply chain is managed at Tesco and looks at different supply chain practices implemented by Tesco. The paper discusses the supply integration practices adopted in the industry and looks at Tesco’s approach towards integrating the supply chain. Finally, the paper suggests some recommendation for improving Tesco supply chain.

2 Tesco Supply Chain Analysis

Supply chain has been defined by many authors in different ways; in the context of Tesco’s supply chain the definition given by Stevens is most appropriate: “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 point of sales, club card information to replace material with information and hence is able to offer cheap products at a very fast speed. A typical supply chain involves customers, operations and suppliers. Tesco supply chain is analyzed by using a model developed by Evans and Danks (1998) which adds supply chain integration as the fourth dimension.

2.1 Customer Service Strategy

Revenue management

Tesco is a very customer focused retailer. They are the first to introduce loyalty club cards to their customers. The principle behind introducing the club card system is to gather as much information as possible. Tesco collects information about customers buying habit, family, finance, religion, race, employment, mental health. Some critics of Tesco alleged that Tesco is interested in knowing customers voting preferences (Tesco - The Supermarket that's eating Britain - Dispatches Channel 4, 2007). All this information is used to understand what customer wants and then accordingly new products are introduced into the market. In Malaysia Tesco introduced 27 new grocery products and in UK under ‘Discount Brands at Tesco’ initiative 500 new products were launched in 2009. Around 30% customers buy something from ‘Tesco Discount Brands’ each time they visit Tesco. Tesco reduced prices of 1500 products in the Tesco Direct Spring/ Summer catalogues as compared to Autumn/Winter catalogues. Tesco branded TV Technica is the 5th largest brand in UK with 10% market share. Total sales of Tesco Direct increased by more than 50% in 2009. All this shows that Tesco is increasing its non food sales with rapid speed and low cost. To increase revenues and maintain growth even in recession Tesco opened 2.0 million square feet of new sales area in 2008/9 which include 11 Tesco Extra, 21 Superstores and 125 Express stores making the total to 2482 stores in UK ( Tesco Annual Report, 2010).

Customer service segmentation

Tesco stores generally attracts many customers and each customer has different expectation from Tesco. The order qualifiers for Tesco are availability of the products and in store service and the order winner is price. For different customer group different product ranges are offered. Tesco offers many cheap products but it also offers range of Tesco Finest products for premium customers. Some other famous Tesco brands are Cherokee, F&F and Healthy Living. Tesco also offers healthy living tracker - an interactive application which gathers information from the customer and suggest the diet to lose the weight or maintain healthy eating habits.To improve customer service Tesco has introduced new check out technology at their stores which enables faster check out by staff, it also enables 25% of the customers to use self service check out. (Tesco Annual report, 2009).

Cost to serve

Tesco is able to use customer insights to tailor its products and due to its shear size and economies of scale it is able to offer products at much cheaper prices as compared to its competitors. The following two chart shows that the cost to serve customers is much less and hence Tesco offers cheap products and deliveries to customers.

2.2 Demand Flow Strategy

Demand planning

Tesco uses advanced technology to maintain the optimum inventory level in stock. All the information about shelf size like height, width and length for each item in the store is feed in the IT system. Every morning and evening employees in the store scan the shelf space for each item and this information is send to distribution centre electronically which generates list of items to be sent to particular store and depending on the requirement either few large deliveries are made or many small deliveries are made. Also point of sale information between the two scans is used to change the delivery schedules. The following graph shows the inventory days at Tesco, Sainsbury’s, Morrison and Walmart. Tesco inventory days have increased from 14.7 days in 2006 to 19 days in 2010. Sainsbury’s and Morrison are efficient at managing inventories with average around 14 days, where as Walmart is worst in managing the inventories. With only 19 days inventory Tesco offers more than 100,000 food and non food items and still able to serve its customers which shows Tesco has truly integrated supply chain.

Channel design

For customer convenience Tesco has introduced different store formats like Tesco Express, Tesco Metro, and Tesco Extra which gives customer flexibility to find a store for doing purchasing. For those customer who are not able to go to store or do not have time to visit the store Tesco has online grocery store which offers all the food products like a normal store and home deliveries are made as per customer convenience. Tesco Direct offers non food items through as well as telephone ordering and around 11.5 million catalogues were issued in 2009.

Supply chain

Tesco’s supply chain is very complex in nature. They source milk locally from major suppliers like Dairy Crest, Arla and Robert Wiseman. There are 1361 farmers in welsh who supply beef and lamb. Tesco source products with short life locally and all other products are sourced through international sourcing office in Hong Kong. The office source almost 60% of the clothes and 40% of the non food items sold in UK through 800 suppliers in Asia . The office takes care of 50000 products and all their related activities such as designing, sourcing, production and ensuring quality. (Tesco's International Sourcing - the machine behind the machine, 2009). It has 24 depots in UK to supply products to different stores on time. The following diagram shows location of UK depots. This well spread distribution centres enables quick deliveries to all the stores.

2.3 Sourcing Strategy

Manufacturing management

The store managers manage promotions in store and mark down prices of the perishable goods as and when required. The point of sale information helps distribution centre to continuously replenish the goods and at the same time same information is sent through electronic data interchange to suppliers. There are 24 depots which include 6 non food depots with a fleet of 2000 vehicles and 4000 trailer serving 2482 stores. The food products come to depots and kept in three assembly areas. The temperature of each assembly area is maintained differently, products such as fruits, eggs, breads and cakes are stored at 120C, in second area cheese, meat , butter and other freeze items are stored at 10C and in third area frozen food is stored at – 260C. These depots act as transfer points and not as storage facilities as the products are perishable. Every day 200 20 ft containers containing TV sets, clothes and other non food items are shipped from Hong Kong to UK and Tesco uses Advanced Shipment Notification (ASN) to inform distribution centres about arrival of these deliveries. To manage the demand Tesco uses 19% third party warehouses and 41% of goods are carried by third party logistics providers (Tsinopoulos and Mena, 2010).

Make or Buy

Tesco uses its market power to launch its own branded products in all segments and offers “good, better and best products”. It offers 2200 Tesco value, 2300 Tesco and Tesco Finest products along with Tesco Healthy Eating, Tesco organic and Tesco kids (Tsinopoulos and Mena, 2010). 70% of the Discount Brands at Tesco are delivered ready packing. Tesco do not make these products itself, they have outsourced these activities to 44 countries in the world mainly Asia. In 2009 Tesco sourced 53 million pairs of socks though its international sourcing office (Annual report, 2009).

2.4 Supply Chain Integration Strategy

Information integration

Tesco has used IT extensively to integrate its supply chain. It uses Sysrepublic Real Time Integrator™ (RTI) along with Microsoft® BizTalk® Server and Microsoft SQL Server™ to manage its store operations, supply chain and “the solution handles 1500 XML POS transactions a second at peak times, which each have an average of between 50 and 100 sales items”(Customer Case Study : Tesco, Sysrepublic). To effectively managing “” operations and delivery of the products Tesco uses Microsoft SQL 2005 service along with XP Embedded devices and Microsoft .net compact framework with mobile picking devices. Tesco also uses Oracle retail planning software to

Physical Flow Integration

Tesco has used Just In Time concept very well to manage its material flow and maintain low inventory levels, it also use vendor managed inventory practice for suppliers like Nestle. Tesco uses continuous replenishment model to maintain right amount of inventory in all its stores.

Financial Integration

Having complex operations in store, fraud prevention was another important area where Tesco worked with Sysrepublic to develop and implement “Secure” a fraud detection and loss prevention software only for Tesco which reduced overall fraud activities by 15% and saved millions of pounds. Tesco financial accounting and controlling is done from Indian operation called Tesco Hindustan service centre (Tesco HSC) which provides inputs to top management for taking better informed decisions.

3. Lean or Agile?

Tesco offers different products and operates different store formats which require different supply chain configuration. The demand for food products is comparatively stable so the competitive advantage of Tesco lies in making the supply chain as lean as possible and offer products at low price. For fashion clothing it is very important to respond to customer preferences as quickly as possible hence agile supply chain is more suitable. requires combination of Lean supply chain till the customer order point and from here onwards the system needs to responsive to fulfill the order. The following matrix shows the different positions of Tesco product lines.

4 Supply Chain Process mapping

Process mapping is very important tool to understand the process flow and identify value adding and non value adding time in a process. For making supply chain efficient Time Based Process mapping (TBPM) is done and non value adding time is reduced by reducing 7 deadly wastes. Tesco has used this tool effectively to identify waste in the supply chain. Before making improvements Tesco supply chain was as below in the diagram.

As shown above the process was lengthy and waiting time was high at each stage resulting into one delivery per day. The total process time was very high.

All the non value adding activities related to Man, Machine, Method and Material can be captured using an Ishikawa diagram. For Tesco non value adding time looks to be related to Method and Machine as there was no central system available and no standard operating practice followed. Tesco introduced continuous replenishment model which resulted into significant reduction in waiting time and resulting into many deliveries per day and a continuous flow. They implemented a single system for all the products which is centrally controlled.

Tesco used value stream mapping extensively to reduce all the non value adding time and waste in its supply chain. Following table shows improvements achieved by Tesco’s supply chain for soft drink. The non value adding time related to touches, stocking points, decision time and throughout time reduced drastically to make the supply chain lean.

5 Literature review – Supply Chain Integration

Arun Rai, Ravi Patnayakuni and Nainika Seth (2006) defines “supply chain process integration is defined as the degree to which a focal firm has integrated the flow of information, materials, and finances with its supply chain partners” (Rai, 2006). The framework is discussed in detail in the following sections.

5.1 Information Flow Integration

In supply chain information is always transferred in the reverse direction i.e. from customers to manufacturer and from manufacture to supplier. The information integration is very important to reduce the Bullwhip effect. Bullwhip effect amplifies actual customer demand many fold creating a distorted picture. To reduce this effect information related to invenoty levels, demand, production schedules is shared by supply chain members. Lee et. al. (1997) suggests that if inventory holding information is shared by the members of the supply chain then it helps to reduce overall inventory in the pipeline.

The following graph shows how information distortion amplify the orders creating huge inventories in the pipeline.

Lee and Whang (1998) and Simchi-Levi et al. (2000) state that information sharing supply chain members to improve forcasting, production planning and help to identify performance bottlenecks . Use of Electronic Data Interchange (EDI) and point of sale (PoS) information help to integrate the supply chain information system and improve the visibility of the total network. Information integration substitute physical inventory with digital information and hence improve the operational performance by reducing inventory carrying cost, reducing working capital requirement and reducing cycle times (Milgrom and Roberts 1988).

5.2 Physical Flow Integration

“Physical flow integration is defined as the degree to which a focal firm uses global optimization with its supply chain partners to manage the stocking and flow of materials and finished goods” (Rai, 2006). There are many ways to achieve the physical flow integration like use of Just in Time approach to reduce the inventory and smooth flow of goods , (Chapman and Carter, 1990; Chen and Chen, 1997; Landry et al., 1997; Grout, 1998; Narasimhan and Carter, 1998; Tan et al., 1998; Sakakibara et al., 1997; White et al., 1999) Automatic replenishment , Product postponement and mass customization are other techniques ((Lee, 1998; Lee and Tang, 1998; Van Hoek et al., 1998; Pagh and Cooper, 1998), also third party logistics is another way to integrate the physical flow. Goldhar and Lei 1991 state that physical flow integration recues cost of production, logistics, warehousing and transportation. Other benifts are reducing the lot size, buffer inventory and reduce purchasing costs.

5.3 Financial Flow Integration

“Financial flow integration is defined as the degree to which exchange of financial resources between a focal firm and its supply chain partners is driven by workflow events ( Rai, 2006).” Financial flow integration help to reduce the transaction costs. The main benefit is achieved thourgh reduction in cash conversion cycle as discussed below.

Cash to Cash (C2C) metric from supply chain perspective

Supply chain integration for reducing the cash conversion cycle requires all the cross functional working in the company and collaborative working throughout the supply chain. Cross functional working helps to reduce C2C by reducing accounts receivable days, inventory days and increases accounts payable days. Farris II and Hutchison (2002) suggest various ideas to improve C2C metric performance as below.

1. Extending accounts payable

“To increase the accounts payable days a firm can use electronic payment method to pay to its suppliers and make the payment on the last day or pay partially to the vendors. Firm can use interest free credit cards. The bank float can be increased by using banks in remote places. Also vendors can be asked to send invoices to post box at the limited service post office locations. Some firms take advantage of purchase discounts by making prompt payment (Farris and Hutchison, 2002)”.

The above graph clearly shows Tesco is performing far better than its competitors in extending the accounts payable.

2 Reducing Inventory days

Farris and Hutchison classify inventory in two categories first is optimum inventory and the second is overage inventory. Optimum inventory is the right amount of inventory required to carry out the immediate production and overage inventory is the extra inventory above the required level. The overage inventory can be good or bad, good overage inventory is held strategically and bad inventory is always needs to be reduced or eliminated. To reduce inventory days first company should focus to reduced bad overage inventory by implementing Just In Time (JIT) and real time inventory tracking systems. Then by introducing collaborative planning and continuous replenishment techniques optimum inventory can be reduced (Farris and Hutchison, 2002).

Tesco has implemented Just In Time and continuous replenishment model and with the help of advanced IT system it has managed to maintain inventory level very low at average of 19 days but it its competitors Sainsbury’s and Morrison have inventory levels around 14 days.

3 Reducing Receivable Days

Boardman and Ricci (1985) suggest for collecting receivables faster discount terms looks to be good idea. Another idea is to use electronic transaction option to expedite the process. In advance payment or huge deposits are some ideas to secure receivables. Cash of delivery is another way to get the receivables on time. The following graph shows that Tesco is worst among its competitors for collecting receivables.

The cash conversion cycle shows the overall performance of the company. The following graph shows Tesco is performing better than its competitors. Negative cash conversion cycle of 35 days shows that Tesco’s suppliers are financing its operations.

5.4 Supply chain Integration model

The Global Supply chain Forum ( GSCF) uses supply chain definition as “Supply Chain Management is the integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders” (Drucker, P. F, 1998). This definition can be further explained by the diagram showing direction of information flow and product flow.

As shown in the diagram supply chain management is about integrating all the eight business processes for achieving competitive advantage. For effective supply chain integration Lambert D.M and Copper M.C. (2000) suggested three dimensional model consisting of supply chain processes, supply chain network structure and supply chain management component (Lambert D.M &Copper M.C., 2000). This is shown in the diagram as below.

The Supply chain network structure identifies primary members of the network who perform direct value adding activities and supporting members who provide help in terms resources or knowledge to the primary members. Then look at the number of tiers in the supply change referred as horizontal structure whereas vertical structure identifies number of customers/ suppliers within each tier. It is also important to see the horizontal position of our own firm in the whole chain (Lambert D.M &Copper M.C., 2000).

Tesco supply chain is shown in the following diagram which indicates that Tesco is position close to its customers and most of Tesco’s customers are end user means there are 1st tier but it has many direct and indirect suppliers and hence multi tier supplier structure and in many cases vertical structure in each tier is big.

“The key supply chain processes identified by members of The GSCF are:

• Customer relationship management

• Customer service management

• Demand management

• Order fulfillment

• Manufacturing flow management

• Procurement

• Product development and commercialization

• Returns” (Lambert D.M &Copper M.C., 2000).

Tesco uses Dunnhumby to integrate all the above processes by getting useful data from customers and helping the suppliers to understand customer needs and tailor the products to meet customer expectations

The intercompany business process links can be categorised in four types as managed directly processes which are integrated and critical to the company, monitored processes are not critical but needs to be integrated, non managed processes are not managed because they are not critical and non member process links are the links which are not part of the company’s network but they need to be monitored. This can be demonstrated by the diagram as below.

The third dimension of the framework is ‘The Management Components’ which can be classified in two groups as Physical and Technical component and Managerial & Behavioral component as shown in the diagram below. The physical and technical component is well understood by the firms and they effectively implement it whereas the managerial and behavioural companent is not understood and it is difficult to implement (Lambert D.M &Copper M.C., 2000).

5.5 Arcs of Integration

Frohlich and Westbrook (2001) suggested various levels of integrations in the supply chain. Stevens (1989) observed potentially greater benefits for highly integrated supply chains.

The following diagram shows different combinations of arc integration.

The outer facing arc can gain highest performance benefits but maximum firms only go up to periphery facing arc integration. Tesco has customer facing arc integration.

6 Recommendations

Supply chain management is all about reducing time and cost. To reduce the cost and time Tesco can take various initiatives as below

Tesco’s main mode of transport is road in UK. It is using other transport mode such as train and water but the portion is small. If the material is transported by these modes the cost and the environmental impact will be less.

Tesco uses 5000 MT meat every year to generate 2500 megawatt-hours of renewable electricity, however it is very important to see why they have to recycle the meat in the first place. This waste can be reduced by effective planning.

70% of the Tesco Discount Brands come with ready to display packing which shows there are still 30% products which require manual intervention by Tesco staff which waste of time and money. Tesco should work closely with suppliers to increase ready to display

Tesco used B50 biodiesel for almost all its vehicles because of the key incentive given by UK government which they have withdrew. As a result Tesco has decided to use only 5% mandatory biofuel for its fleet. In 2009 between April and August Tesco saved 34000 tonnes of carbon dioxide, now by using standard diesel they will increase their carbon foot print and to compensate it they will incur additional cost. The better solution is to find alternative ways such as using only double deck vehicles, using river transportation and increasing railway transportation.

The cash conversion cycle analysis shows that the inventory days and receivable days of Tesco are little higher as compared to its competitors which shows their still some scope for improvement for Tesco.

Tesco is using backhauling c75% of the time. There is still c25% gap and this can be taken care of by using advanced routing technologies with the help of experts such as Isotrak.

7 Conclusions

Supply chain management is about managing flow of material in forward direction and passing the information in the reverse direction to improve the overall performance of the chain. Tesco has successfully managed to integrate all the links of the supply chain to gain c31% market share. It has used almost all the innovations in the field of supply chain such as IT, lean management, point of sale, EDI, continuous replenishment model, RFID to achieve the excellent supply chain. Tesco has used customer buying preferences to introduce many discount brands during economic downturn resulting into strong growth. Tesco uses economies of scale to achieve low cost to serve the customer. The literature review of supply chain integration shows that there are three main types of integration required namely physical flow integration, information integration and financial integration to gain the competitive advantage.

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