Tesco Supply Chain Management

1.0 INTRODUCTION: From humble beginnings, Tesco has grown to become the UK's largest supermarket chain. Over ten years ago, Tesco set its sights on becoming the Toyota of the grocery business. Since then the company has become renowned for its best practices in supply chain management (SCM), which included lean management and the use of RFID technology. The company has got an advantage over its competitors by incorporating innovation in its supply chain like point of the sale data, continued replenishment triggered by customer demand, primary distribution, cross dock distribution centre and use of single vehicle to serve several stores.

2.0. Background Tesco was founded in 1910 by Jack Cohen, who invested his serviceman's gratuity of £30 in a grocery stall. The first private label product introduced by Cohen was Tesco Tea. The name Tesco was a combination of the initials of the tea supplier - TE Stock well and the first two letters of Cohen's name. Tesco opened its first store in 1929. Cohen was influenced by the supermarket culture in America and tried to introduce the concept in the UK. The company's driving force was the idea: 'Pile it high and sell it cheap.' In 1947, Tesco went public and a year later, Tesco self-service stores were started. In 1956, the first Tesco self-service supermarket was opened. In the 1960s, Tesco went on an expansion spree and acquired several store chains. The Retail Price Maintenance (RPM) Act8 in Britain prohibited large retailers from pricing goods below a price agreed upon by the suppliers. To overcome this obstacle to price reduction, Tesco introduced trading stamps which were given to customers when they purchased products; they could be traded for cash or other gifts. RPM was abolished in 1964, and from then on, Tesco was able to offer competitively priced products to its customers. The first Tesco superstore, with an area of 90,000 square feet, was opened in 1967. By the 1970s, Tesco's 'Pile it high, sell it cheap' philosophy no longer appealed to shoppers. As people got richer, they started demanding expensive and luxury items. The poor performance of Tesco even led to the saying 'doing a Tesco,' which meant snatching defeat from victory. Tesco's image took a further beating when Imperial Tobacco Company which had considered acquiring Tesco as a part of its diversification strategy, did not go ahead with the deal as it felt that Tesco might damage its corporate image. To arrest the downslide in its fortunes, Tesco's management went in for an overhaul of its stores during the decade. Several stores were closed down to concentrate on the superstores. The smaller stores that still remained were refurbished to make them more customer-friendly. Tesco diversified into operating petrol pumps in 1974. In 1975, Tesco offered price discounts through a scheme called 'Checkout at Tesco.' By 1979, the company's turnover had reached £1 billion. Page 1 of 11

In 1985, lan MacLaurin become Tesco's first CEO from outside the Cohen family. MacLaurin streamlined Tesco's operations, closing most of the smaller stores and opening large 30,000 square foot stores in the suburbs. Tesco also introduces a centralized distribution system, added fresh food and its own label for food products. These were successful moves. In the 1990s, the UK supermarket industry faced of 16.7 per cent, behind Sainsbury's at 19 per cent. The other major competitors were Asda and Safeway. Several warehouse stores like Costco and discount stores like Aldi, Lidl and Netto also entered the UK. In 1997, Tesco's marketing director, Terry Leahy, become the new CEO. He had introduced new pricing policy of lowering prices to match those of Asda, which resulted in Tesco's prices begin 4-5 per cent lower than those at Sainsbury's and Safeway.

3.0 DEFINING ISSUES 3.1 SUPPLY CHAIN MANAGMENT Supply chain management is a business administration strategy that aims at the improvement in efficiency of cash flow through information sharing and Business Process Reengineering (BPR) in the supply chain as a whole. The emphasis is put on maximizing a consumer‟s worth by conflating products, services, information, and the cash flow into one seamless stream. What was formerly a “push system”, in which the product was sent downstream and sold, has become a “pull system” that produces only the quantity sold. However, since the order cycle is different, the quantity of orders from retailers to wholesalers becomes the smaller wave compared with the wave of actual sales because of subjectivity. Subjectivity goes also into the wholesaler‟s decision; thus, manufacturing quantities fluctuate significantly. Such a phenomenon is called the “bull whip” effect or Forester effect. The phenomenon may be avoided if retailers, wholesalers, and manufactures share information. A large number of bottlenecks exist on a supply chain. The entire supply chain must be improved in balance. It is important to construct a system that creates unity throughout the supply chain. In order to optimize the system as whole, information sharing is required. It begins by sharing such information as the transition of sales trends showing consumer interests as well as real-time inventory data on a supply chain.

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Figure 1. Supply chain management In such a situation, RFID attracts attention as a new data career that uses the Internet. Wal-Mart stores will have RFID on pallets or corrugated boxes of products from their top 100 suppliers beginning January 1, 2005. Tesco of Britain, Metro of Germany, and the U.S. Department of Defense also decided to use RFID similarly. Promotion of RFID has been incorporated in EJapan strategy as well.

3.2 LEAN SYSTEM The core idea is to maximize customer value while minimizing waste. Simply, lean means creating more value for customers with fewer resources. A lean organization understands customer value and focuses its key processes to continuously increase it. The ultimate goal is to provide perfect value to the customer through a perfect value creation process that has zero waste. To accomplish this, lean thinking changes the focus of management from optimizing separate technologies, assets, and vertical departments to optimizing the flow of products and services through entire value streams that flow horizontally across technologies, assets, and departments to customers. Eliminating waste along entire value streams, instead of at isolated points, creates processes that need less human effort, less space, less capital, and less time to make products and services at far less costs and with much fewer defects, compared with traditional business systems. Companies are able to respond to changing customer desires with high variety, high quality, low cost, and with very fast throughput times. Also, information management becomes much simpler and more accurate.

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4.0 PROBLEM STATEMENT Tesco‟s supply chain improvements described indicate that supply chain management has the potential to improve a firm's competitiveness. Tesco‟s supply chain capability is as important to a company's overall strategy as overall product strategy. Firm‟s supply chain management encourage management of processes across departments.

5.0. QUESTIONS AND THEIR SOLUTION: 5.1.QUESTIONS 1: To what extent can Tesco's supply chain practices be said to follow lean principles? Tesco is an extremely successful company and a major part of its success has been due to its distribution network, Tesco has successfully applied lean distribution and just in time strategy into their distribution network. Using just in time within their distribution network gives Tesco a competitive advantage over its competitors by reducing inventory costs and improves scheduling. It also insures proper protective maintenance and stress quality in all phases of production from quality by suppliers to quality within Tesco. However, it is not enough. The original seven muda are:       

Transport (moving products that are not actually required to perform the processing) Inventory (all components, work in process and finished product not being processed) Motion (people or equipment moving or walking more than is required to perform the processing) Waiting (waiting for the next production step) Overproduction (production ahead of demand) Over Processing (resulting from poor tool or product design creating activity) Defects (the effort involved in inspecting for and fixing defects)

According to the original seven muda, Tesco can improve its suppliers more by teach them the lean technique. They did it before but they must do it for their new suppliers around the world.

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5.2. QUESTIONS 2: How can lean practices give benefits to Tesco operation? Lean operation is an alternative to traditional operation that an increasing number of organizations are adopting. The ultimate goal of a lean system is to achieve a balanced, smooth flow of operations. Sup- porting goals include eliminating disruptions to the system, making the system flexible, and eliminating waste. The building blocks of a lean production system are product design, process design, personnel and organization, and manufacturing planning and control. Key benefits of lean systems are reduced inventory levels, high quality, and flexibility, reduced lead times, increased productivity and equipment utilization, reduced amounts of scrap and rework, and reduced space requirements. The risks stem from the absence of buffers, such as extra personnel and inventory stockpiles to fall back on if something goes wrong. The possible results of risks include lost sales and lost customers. Lean can make more profit in Tesco‟s supply chain management by: • Point-of-sale data in the store directly to a shipping decision in Tesco‟s RDC. • “customers as pacemaker” regulating the provision stream • increased the frequency of deliveries to the retail stores • shipping dollies directly up to POS. • Contingency plan: buffer stock of full dollies is still held aside • supplier‟s distribution center for the items has disappeared. • Converting RDC as cross-docks, reducing costs their also. • Increase in loyalty of customer leading to increase in sales and more certainty in demand too. • Reduced costs, operating costs were offset by overall profits in a long run • increasing its share in every format • Better forecasting ability, i.e. better knowledge of consumption of each type of consumables at store. • Reduced inventory case as RDC was converted into Cross-docks. • Reduced Transportation costs due to milk runs. • Reduction in stock points too. • The no. Of logistical activities for a pallet to reach the final storing point reduce to 200%.

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5.3. QUESTIONS 3: What are the main differences between operating lean practices in retiling and in manufacturing operations? Lean Manufacturing is a systematic methodology that identifies and eliminates all types of waste or non-value-added activities; not only in production or manufacturing operations, but in the service industry as well. Whether you are manufacturing a product or providing a service, there are components that are considered "waste". Lean concepts are purely about creating more value for customers by eliminating activities that are considered waste. Any activity or process that consumes resources, adds cost or time without creating value becomes the target for elimination. Lean focuses on the "big picture" or improvements in the entire business process as opposed to incremental improvements. It is the business process system that can significantly improve a company's profitability. Lean concepts improve operating performance by focusing on the continuous flow of products, materials or services through the value stream. To achieve this, the various forms of waste must be identified and eliminated. Waste can include any activity, step or process that does not add value for the customer. Lean Manufacturing, sometimes also referred to as the Toyota Production System (TPS), is about the systematic elimination of waste. There are a number of waste types which are: 1.Waste from Overproduction — producing more than is required by the customer or marketplace which generates unnecessary inventory. 2.Waste from Transportation — multiple handling or movement of products does not add any value to the product. 3.Waste of Motion — of the workers, machines, and handling. Searching for tools or parts due to the inappropriate location of these items is considered waste of motion. 4.Waiting — a worker waiting for a machine to finish a cycle, waiting for a supervisor to answer a question, or waiting for information or materials reflects an interruption to flow and need to be eliminated. 5.Processing — unnecessary processing steps should be eliminated. Combine steps where possible. 6.Inventory — or Work In Process (WIP) is material between operations as a result of large lot production or processes with long cycle times. This reflects system problems. 7.Defects — producing defective products is pure waste. Prevent the occurrence of defects instead of scrapping or repairing.

Like lean manufacturing, lean retailing is an approach to re-inventing a long established business practice by using new information technologies to cut out waste and make operations more profitable. Page 6 of 11

Pioneered by Wal-Mart - but subsequently taken up by most large retailers - lean retailing relies on the use of Barcodes to manage every step of the product value chain, from raw material sourcing through manufacturing through final delivery to the shop floor. Major attention is given to "just in time" delivery to cut inventory costs, and to investments in IT infrastructures to allow stores to share sales data in Real Time with their suppliers. In many cases, Lean Retailing software systems will automatically place new orders for a given product from the manufacturer as soon as an item is scanned at the checkout counter, and in some cases, even the invoicing for that automatic order is automatized as well. Lean retailing aims to "cut out the fat" (waste) from the retail sourcing process to maximize profits for the retailer. Lean Manufacturing combines the advantages of craft and mass production systems, whilst avoiding the disadvantages of each. Lean manufacturing is 'lean' because it produces products using fewer resources than traditional 'job shop‟ and 'mass production' methods. Lean Manufacturing involves removal of all unnecessary costs (i.e. 'waste'). Waste elimination is translated into customer satisfaction (i.e. improved performance, quality, cost, delivery etc). In this regard, it is the same as Just-in-Time (JIT) Manufacturing; the difference being that Lean Manufacturing encompasses the whole business rather than just manufacturing. It includes product development, production, supply chains, distribution and customer service.

5.4. QUESTIONS 4: What challenges does the increased internationalization of both its suppliers and its markets present for supply chain management in Tesco? Tesco's real strategic store internationalization began in 1994 with entry into Hungary but soon expanded into other central European countries. First steps were then made into the Asian market, both as a reaction to the Asian economic crisis of the 1990s, which meant assets were cheap, but also due to a more positive sense of the scale of the market opportunities in China and Japan, for example. Over time the countries in which Teseo operates have changed slightly. Withdrawals from some markets have been made (Palmer, 2004, 5), recognizing the lack of scope to become the market leader and/or the desire to invest elsewhere. In some cases, these withdrawals have been made as part of asset-swaps with other leading global retailers, each recognizing their own strengths in particular markets. During this time Teseo also re-entered Ireland through a major acquisition, though it is still not represented in continental western Europe . The strategic approach to store internationalization has seen Teseo develop different solutions for diverse markets, using distinct formats and tailoring the product and service offer to the local market. In many countries it operates as a multi-format and even multi-channel retailer (home shopping is available in Ireland and Korea) and focuses on the core values and brands of the business. Behind the scenes people, processes and systems have been enhanced and rolled out initially as 'Teseo in a Box' and more recently as the Teseo Operating Model.

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As can be readily understood, the internationalization of Teseo at store level brings supply chain issues as well. At the same time, Teseo buys products on a global basis and this also has to be 'fitted in' to the ever changing pattern of supply and demand. With formats and products varying by country and with time, the need is for a supply system that can be adaptable. In some cases, eg Ireland and Hungary, the composite model has been effectively exported to thesecountries, often with the same logistics service partners. Ln other situations there is an attempt to rethink the supply system and the technology needed and use this as the platform moving forward. For example, in 2003/4, based on the UK composite model, Teseo opened the largest distribution centre in Asia at Mokchon, Korea. It also opened major centers in Poland and the Czech Republic, extended a centre in Hungary (and added another fresh food distribution centre) and developed a new composite site in Ireland. As internationalization continues, so the infrastructure and the processes in the supply chain need to keep pace with or even lead the developments. The processes are now embedded in the Teseo Operating Model, but new faculties to meet expansion needs are required. In November 2007, Teseo finally opened its much heralded Fresh and Easy stores in California and Nevada. Years in the planning, this US entry is intended to achieve 200 stores by February 2009 and to eventually develop into a major chain. Based on extensive consumer research with US families and a trial store built secretly, Fresh and Easy stores average about 10,000 sq ft and hold around 3,500 product lines. They focus on providing faster, easier neighborhood retailing with an emphasis on fresh food and fresh prepared meals at affordable prices. Environmental, neighborhood, employment and organic credentials are stressed. Fifty stores had opened by the end of February 2008, with expansion into Arizona, although a 'pause' in development was announced in April 2008 to reflect on the learning from these early developments.

It is too early to judge the success or otherwise of this US venture, but it has attracted considerable attention. The store format is different to Teseo stores elsewhere. Whilst the Teseo name is not used, its operations are based on the Teseo Operating Model, but with reduced complexity. The in-store processes are simplified, including extensive display-ready packaging, self-checkout and automated replenishment. The systems are advanced, linking processes to the service centre in India. This simplification has reduced payroll and other costs. In supply terms, the Fresh and Easy operation is a little different to other Teseo operations, partly because the model of practices and processes has been built up from scratch, though it does rely on core processes from the Teseo Operating Model. For example, there has been a degree of colocation of production with distribution. UK suppliers with particular expertise have co-located production facilities at the head office and distribution hub (Riverside, CA), so as to react quickly to demand. Whilst this is not unknown in, for example, Japan, the attempt here is to move towards a low-touch, lean operation and to Page 8 of 11

rethink traditional approaches. There is extensive recycling of packaging, use of returnable crates and retail-ready merchandizing and packaging. The emphasis is on fully automated, one-touch replenishment supported by deep shelves. At Riverside, pick-by-line has been introduced and various environmental initiatives, eg solar power, developed (Stites, 2007, 4). Store stock levels and availability were initially poor, however (Uwins, 2007, 55) and the distribution systems performance has had to improve as the store development programme has moved on. The sizes of the stores are 10,000sq ft selling around 3,500 items (Telegraph). The stores are much smaller than supermarkets such as Wal-mart, which shows Tesco are not prepared to go in direct competition with them. Furthermore, Tesco have invented a new format in America; convenience retailing as we know it in the UK - a small shop selling a wide range of fresh, topup groceries - does not exist in the US, where a convenience store means a petrol station selling cigarettes, doughnuts and little else (Telegraph). Tesco predicts Americans will prefer the convenience of a smaller store providing it caters for their needs. By Tesco being the first major competitor in the „convenience‟ market, they can have „first picks‟ on store locations, suppliers, employees and partners. This concept is known as first mover advantage. However, perhaps the reason no other company has broken into the market before is because it is not profitable or not in demand. A strategic alliance can be defined as cooperative agreements between potential or actual competitors. Tesco announced that they would form an alliance with Safeway, an American supermarket, and share profits. The strategic alliance will facilitate Tesco‟s entry into the foreign market by renting stores from Safeway in prime locations. If Tesco purchased the buildings and the project was unsuccessful, losses would be much higher than if they rented them. Therefore, a strategic alliance allows companies to share the fixed costs and reduces the risks involved in entering new markets. Furthermore, the USA has different property laws to the UK and so can be confusing to follow the law-with an American company in alliance their knowledge can be transferred to Tesco and vice-versa. However, strategic alliances can be risky too. If Safeway go bankrupt and have to sell its stores, terminating the contract, it puts Tesco in a vulnerable position of either purchasing the stores it rents or move elsewhere. Either way, it will cost the company money.

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6.0 CONCLUSION Overall, Tesco's Supply Chain Management Strategy is its long-term goal. It is important for Tesco to have an operational strategy because it establishes the types of goods and services the company will offer its target market, and how Tesco are going to get advantages over its competitors. Tesco made good planning and control in its capacity, supply chain and quality. Besides, in order to make improvements in operation, Tesco measures quality, speed, dependability, flexibility and cost. Although they have made some improvements, there are still some disadvantages in its operation. The future retains numerous distinct scenarios for Tesco. The business has currently developed into a worldwide business. One of their likely future strategies could be dedicated to gathering a spectacular clientele service, as they have currently developed enough. As cited previous, Tesco is the market foremost in the UK. To sustain this location it is significant to advance its services all the time. Tesco will require advancing its product variety by proposing more non-food items.

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7.0 REFERENCE Book 1. (2013). In D. A. Rahman, Operation Management. McGraw-Hill Create p.

Journals 1. James P. Womack and Daniel T. Jones, “Teaching the Big Box New Tricks,” Fortune, November 14, 2005. 2. Tsutomu Araki Sophia University "A SUPPLY CHAIN MANAGEMENT SYSTEM BASED ON RADIO FREQUENCY IDENTIFICATION" (2006) 3. Womack, J.P. and Jones, D.T, Lean Thinking, Simon & Schuster, New York, USA, 1996 (ISBN 0-684-81035-2) The Evolution of Supply Chain Management in Retail Sector of Tesco and Analytical Study for the Period of 2005-2011” 4. Shah, J. (2009). Supply chain management: text and cases. 1st Ed. India: Pearson Education Inc 5. Bicheno, J., Cause and Effect JIT: The Essentials of Lean Manufacturing, 2nd Edition, PICSIE Books, Buckingham, England, 1994 (ISBN 0 9513829 5 0) 9-The European Handbook of Management Consultancy, Oak Tree Press, Dublin, Ireland, 1995 (ISBN 1-86076-010-4) 6. http://siibblog.blogspot.com/2009/07/case-studylean-supply-chain.html 7. Wang, L. (2010). Enterprise networks and logistics for agile manufacturing. 1st 8. Humby, C. Hunt, T. and Phillips, T. (2007). Scoring points: how Tesco continues to win customer loyalty. 2nd 9. Pryke, S. (2009). Construction supply chain management: concepts and case studies. 1st 10. Humby, C. Hunt, T. and Phillips, T. (2007). Scoring points: how Tesco continues to win customer loyalty. 2nd

Online: 1. (n.d.). Retrieved 04 2, 2013, from Industrial time study: http://www.industrialtimestudy.com/lean.html 2. (n.d.). Retrieved 4 2, 2013, from blogspot: http://siibblog.blogspot.com/2009/07/casestudylean-supply-chain.html

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