Study on Tesco business practices

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Part (a)

Temperature of air-conditioner and refrigerator Tesco will always control their temperature of air-conditioners and refrigerators in a suitable level. This action can avoid customers to feel uncomfortable about overheating or overcooling. This will also allow Tesco to save the extra electricity costs. Besides, Tesco supermarket is located in the most inner part of the entire building and it is far away from the entrance, which can also reduce the cooling air generated by air-conditioner because it will be cooler there as compared to the places near the entrance. There are also two entrances for entering into Tesco, which can reduce the cool air from blowing towards outside and avoid air-conditioner to generate extra cool air. (Refer to appendix 1)

Number of operating checkout counter depends on the number of customer There will be a green line in front of each checkout counters. When customers queue up behind the green line, Tesco will open a new counter to service them and speed up the checkout process. This act can deduct their operating cost which include salary and electronic costs. The more counter you open, the more staff you need. Besides, the more checkout counter you open, you will have to use more electricity to operate those cash registers and bar-code security scanners. (Refer to appendix 2)

Each staff has a lot of duty Although this might be a weakness to Tesco but this action can also help them to reduce the number of staffs. Therefore, they can save the additional salaries and use it for other purposes. For example, the staffs that are in charge of the fitting room service had to arrange the clothes and to open the fitting rooms too. It is because the fitting rooms are always close unless there are customers who request them to open it. This may save the lighting fees and prevent people from stealing because you can only try the clothes when there are staffs outside the fitting room. If the staffs are doing other duties, the customers would not be able to use the fitting rooms. (Refer to appendix 3)

Saving transportation expenses By ordering huge amounts of inventory at one time, it reduces the frequency, helps to save transportation expenses, and enhances their bargaining power and get lower prices for the goods.

Using white for the design of main building The wall and the roof of Tesco are all in white. The reason of this is to save electricity costs. White can reflect light which allows the inside part of the building to become brighter without using extra electricity. White is the most effective colour to made things cooling and this is the reason why Tesco is using white for the exterior colour of the building. This can also prevent Tesco from using extra electricity to generate cool air hence to save electricity costs too. (Refer to appendix 4)

Save the electricity cost by switching off the lights of television and freezer On the other hand, it is a step towards saving the operating cost by saving the electricity cost without the attention of the potential customers. Indeed, Tesco does fulfil the basic requirement of the normal essential services for their customers such as a fully air conditioned and comfortable environment and adequate lighting for their customers to shop in their supermarket. However, we noticed that Tesco department store save the electricity cost by switching off the freezer light by using the lighting from the surrounding or ambient lighting. In this way, the consumers still can have a clear view of the products displayed inside the freezer even though the freezer light has been switched off. Another obvious example that we discovered in Tesco department store in controlling its operating cost is that the department only chooses to switch on some of the television display units as an effort of saving electricity bill.

Convert raw food that almost stale into served food and offer discount for putrescible goods Tesco will convert those meats which are incapable to be sold when it is fresh into roasted chicken or something else. When the staffs discover some vegetables, fruits or breads that are almost stale, they will pack them into packages and label it at a discounted price. This can help to reduce wastes and to help the business gain back the cost.

Produces their own daily products Tesco has plenty ways to cut costs without drastically affecting the success of the business. Cutting down cost by managing and controlling, it can help the company to boost up the profit. Therefore, Tesco produces their own daily products such as Tesco cooking oil, mineral water, Tesco value toilet tissues, food for pets, paper napkin, and snacks. By manufacturing their own products, it has proven that Tesco has a lower investment cost as compared to investing in other imported brands for specific products. Thus, they can minimize the need to import goods to their store and reduce the stock order from external manufacturing firms. Besides, Tesco can also offer great prices for the Tesco value products since they spend less on advertising.

Reduce the use of plastic carrier bags by encouraging consumers to use goodie bags In order to conserve the environment and have a greener earth, the management department of Tesco restricted the usage of plastic shopping bags by implement an extra charge of 20 cents for each plastic carrier bag on every Saturday since the year of 2009. This is to encourage the customers to reduce their use of plastic carrier bags by bringing their own goodie bags or reuse any carrier bags at the moment they are going to checkout. Besides, Tesco tends to train the customers to adopt this as a habit when they visit the supermarket. Apart from conserving the environment, this habit may also help Tesco to reduce the cost of providing plastic carrier bags.

The reduction of proper shelves in store The management department of Tesco also uses the technique of placing or stacking up their promotion products in boxes on the ground, thus saving an amount of cost as compared to utilising a proper shelf for a limited time period. The staffs arrange the promotion product in a way that the boxes reach a height that can replace a shelf and place the products on it. This idea not only helps the customer to look at the price tag on the products clearly and also serves as a promotion advertisement for that particular product at the same time when customers pass by. Sometimes, by placing the normal price items may be made as an illusion for the customer to choose these products instead of the products that are placed on the shelf.

The use of electronic technologies in labelling price tags The price tag is put up on a piece of cardboard instead of labelling the price on each individual item on sale. Sometimes, the items on the shelf do not have price labels as the size of the department store is rather too big for their workers to update the price labels on the shelves. Thus, the department introduced a modern advance way for their customers to check the price for each item via 2 dimensional (2D) barcode scanners. These 2D barcode scanners are mounted on the wall or piles in the department store, which can reduce the staffs input as the system is automated for updates in prices for different items especially for the latest promotion items on sales.

The use of electrical machines and equipment such as the industrial electric floor mops and electric assisting shopping trolley By the help of these machinery and equipment, it is a major advantage for Tesco department store as this can help to reduce the workload of their staff and help to reduce the manpower for each task. In olden days, tasks that require two or more manpower can now be settled by a single staff such as moving a large number of heavy goods and arrange the shopping trolleys back to the trolley bay. Besides, it is a common practice of big companies and airports to imply the usage of electrical operated mop. These practices save the manpower needed, significantly reduces the workloads and at the same time, increase the efficiency of their staffs.

Internet promoting effectively and provide online shopping service Tesco promotes their latest promotions and products by using the internet. People can get the latest news about Tesco easily without stepping out from their house. Nowadays, people often use mobile phone to surf the internet anytime at anywhere. Therefore, internet advertising is a smart way to promote things. Online promoting is a more effective way rather than magazine advertising. The advantages of online shopping service are customers can shop at anywhere and Tesco also provides free delivery service to customers who buy RM150 and above of goods. The reason of giving free delivery service is to attract customers to purchase more goods. Online shopping service which is provided by Tesco can decrease their inventory turnover period and reduce their holding cost.

Sequence of arranging stock When we step into Tesco supermarket, we can see that there will always be CD, stationery and car accessories department. But the demand for these goods is lower than daily goods so they put them in a conspicuous place to attract customers. When you want to buy some daily goods, you will pass by some goods which are not quite popular in demand but it may induce you to buy it. Daily goods will always be located in the middle of the supermarket to avoid people from just taking what they need and go. Therefore, we noticed that the vegetables, breads, and others daily goods are situated in the middle and at the back of the supermarket.

Collect points and redeem cash voucher Tesco Club card provides customers to accumulate points when they are buying goods from Tesco. Usually, customers will receive 1 point for every RM2 they spent but there are a few choices to let the people collect their points in a faster way, in which include reuse any bags to keep the goods that they buy or by using Tesco-RHB card. For every 150 points that customers have accumulated, they can convert it to Tesco Club card cash vouchers. This strategy can attract more customers to register for a member card and collect points in Tesco, which can also decrease the turnover period and enhance their liquidity. The faster the goods are being sold, the lower the holding costs.

Buy land and build the Tesco Stores For the purpose of saving rental, Tesco had bought the land they would like to build the Tesco Stores. Tesco will assign other companies to carry out the construction work according to their request and design. After Tesco Stores start operating, they will invite and rent those shops inside the building to other merchant for trading purpose. Therefore, Tesco will get back the money they have invested in the land by receiving rental every month.

Part (b)

According to our research related to Tesco Store in Nilai, we found out that Tesco has some costs that incurred while it is operating. One of the costs is indirect cost. According to ED (2011), indirect costs are the expenses which cannot be recognised directly from the operation of business, but it is essential for the general operation of business. Indirect cost can be divided into manufacturing overhead cost and non-manufacturing overhead cost.

Manufacturing overhead cost can be defined as factory costs but they are not directly traceable to the products as defined in Seattle Central (n.d.). Manufacturing overhead cost consists of three main costs, which are indirect materials, indirect labour, and indirect expenses. Security guards, cleaners, cashiers, fork lift truck drivers and supervisors are examples of indirect labour.

As protectors, security guards protect the safety of the whole store and prevent crimes such as theft cases to happened. (Refer to Appendix) The staffs of Tesco store have different roles such as the cleaners take care of the cleanliness of the store, cashiers are responsible for the payments in the store, and fork lift truck drivers handle the raw materials of the store. Besides, the supervisors are supervising the operation of the store and solve certain problems that may occur so that the store can be operated smoothly. They are paid by wages or salaries but they do not contribute directly to the production or selling of goods. Hence, manufacturing cost is also known as indirect cost.

Non-manufacturing overhead costs are period cost and they are related to the accounting periods rather than to the output (Tax accountants, 2013). According to our research on Tesco Store in Nilai, there are some examples of non-manufacturing cost. Firstly, selling and distribution cost is one of the non-manufacturing overhead costs. For example, delivery cost, road fund licenses for delivery vehicles, and advertising cost are the examples of selling and distribution cost.

Delivery cost is the cost that has to be paid for delivery of goods from the factory to the store and delivery of goods to the customers. Tesco offers free delivery to the customers if they can meet the requirements that are set by Tesco management such as online shoppers who spend more than RM150 do not have to pay for the delivery fee. Road fund licenses are required for every vehicle to be driven on the road. Advertising cost can also be recognised as marketing cost and this cost is essentially for Tesco store to promote its products. Tesco prints the brochures to distribute to the customers to attract them to spend more on the promotion products. Furthermore, Tesco also advertises in the newspaper to inform the public which products are on promotion period. (Refer to Appendix)

Secondly, salaries of the management team of Tesco Store such as the salary of marketing director and communication manager are the examples of administration cost. The marketing director needs to think about the ways to attract new customers to purchase goods from their store and to promote the products at the same time. (Refer to Appendix) Hence, they are paid salaries for their efforts and the salaries are counted as a part of the non-manufacturing overhead cost. This is because they are not directly linked to the production or selling of the goods. Another administration cost is the maintenance fees for the machines such as the cash registers. Some of the machines needed maintenance work to ensure the well-functioned of daily operation.

Research and development cost is the next key elements of non-manufacturing overhead costs. The management team of Tesco developed their own products with a cheaper price as compared to products of other brands to attract customers. For instance, Tesco established many types of Tesco branded products recently such as toothpaste, carbonated drink, pizza and cooking oil. (Refer to Appendix)

All the examples of non-manufacturing overhead costs are not included in the production or selling of the goods and also the cost of sales, but the costs are recorded as expenses in Statement of Comprehensive Income when they have incurred.

In addition, there is also fixed cost, which indicates costs that are related to the products that have to be paid despite from the quantity of products being produced or sold (Peavler, n.d.). Regardless how many products are being sell or not sell, fixed cost have to be paid. For instance, rent and salaries of employees are the examples of fixed cost. Salary of the chief executive officer is an example for fixed cost because the person received a fixed amount of salary and also in charge of the arranging and planning of the operating activities for the company performance. (Refer to Appendix)

Variable cost is a cost that will vary according to the production or volume of sale of a company (Caplan, 2006). Variable cost rises when the production increases and falls when the production decreases. It includes direct cost and manufacturing overhead cost. Direct labour, depreciation of equipment, and utilities are the examples of variable cost. Utilities are considered as indirect cost since the electricity and water are not directly related to the production or selling of goods but they are necessary for the operation of the business. (Refer to Appendix) Besides, labours that received wages based on the number of hours they work is also consider as variable cost as the hours of working can be varied. (Refer to Appendix)

Furthermore, another cost is irrelevant cost, which means a cost that will have no impact on the result of a management decision making (Bragg, 2013). It is also considered as sunk cost since it is a past cost that has been paid and therefore it will not be able to affect the present decision making. For instance, Tesco had bought the land which they want to build the Tesco hypermarket earlier. Since they had acquire the land, the further decision making will not be affected such as the size of Tesco that they wanted to build and the exterior and interior design of the entire Tesco building.