Tesco Company: Project Risk and Procurement Management

Introduction

The establishment of any functional department in an organisation is determined by the value it brings to the firm. The procurement function, for a long time, has been viewed in the traditional sense as the firm’s transactional unit. However, in some firms, the function integrates cost reduction and supply chain management (SCM) into procurement activities in a bid to enhance their competitiveness (Fernie & Sparks 2009).

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It has evolved into a value-add function, a cost reduction process, and an SCM tool. In the UK, Tesco Plc, a leading brick-and-mortar and online-based retailer based in London, has designed its procurement function to contain costs and improve strategic sourcing/purchasing process in order to compete effectively. The purpose of this report is to examine critically the contribution of the procurement function to Tesco’s competitive advantage in the European market.

Procurement Strategy

Procurement, as a function, encompasses purchasing activities that need cost/expense containment to promote business efficiency. It allows organisations to acquire goods or services useful as operational or production capital. An effective procurement strategy is required to enhance purchasing efficiency and cost-effectiveness. It considers supplier input in “internal processing, evaluation, and ordering” to optimise process stages and for effective process management (Fernie & Sparks 2009, p. 71). Organisations use different methodologies to optimise their procurement processes. Examples of such models are the Lean Six Sigma, ERP, and Just in Time (Sutherland & Canwell 2005). The high-level procurement decisions reflect the preferred strategic model of a firm.

In this context, strategy is the direction a firm follows in relation to procurement practices in line with its strategic mission. For example, a retailer may only procure organic food from suppliers that meet the prescribed quality standards. Therefore, the management of procurement is a cross-functional process that combines internal operations and external input in activities such as scheduling, invoice processing, and quality.

Tesco sells its products through many brick-and-mortar stores and online stores. Tesco is a bulk buyer with a wide network of suppliers. Its procurement strategy is to leverage on economies of scale and technology to manage suppliers in its markets effectively. Tesco’s business model, as shown in figure 1, is grounded in four pillars: “insight, buy, sell, and move” (Tesco Plc 2015, p. 14). These core activities relate to its procurement strategy. From the Porter’s five forces model, effective management of supplier power is a source of strategic advantage. External and internal factors such as the “number of suppliers and product uniqueness” determine a firm’s procurement strategy (Sutherland & Canwell 2005, p. 54). Tesco’s procurement management addresses external and internal forces in the market.

 

Tescos Business Model.
Figure 1: Tesco’s Business Model. Source: Wulfraat (2014)

The external factors could be economic landscape, business regulations, competitive rivalry, and suppliers. Tesco relies on suppliers to replenish its stock of supplies in its stores. It extends training to support its suppliers to manufacture quality products. This strategy allows Tesco to leverage on supplier capabilities to grow. Internal factors such as labour and equipment also support Tesco’s procurement strategy. A staff population of 200,000 and new equipment enables Tesco to operate at optimum levels, manage inventory effectively, and streamline in-/out-bound logistics.

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Supply Chain Management

A supply chain (SC) is made up of the organisation and its trading partners. Harrison and van Hoek (2010) define SC as a system of more than three firms connected by “upstream or downstream flows of products/services, finances, and information” (p. 98). Each of the SC firms adds value to the final product or service.

Procurement management essentially entails the streamlining of the supply chains to remove weak links and avoid SC risks or breakdowns. Examples of probable weak links in SCs include delays, poor quality, subpar production quantity etc. Supply chain management (SCM) improves an organisation’s bottom-line by eliminating SC inefficiencies and waste.

Tesco’s SC management could be explained in the context of the Six Sigma theory. The model primarily focuses on the quality of the end products/services or process. It aims to control costs and maximise profits by imposing control limits for each step in a process using various tools (Sutherland & Canwell 2005). An example of the Six Sigma tool is a trending chart.

For Tesco, the inbound logistics could be regarded as upstream activities in the value chain. The ordering, receipt, warehousing, handling, and shipment of goods obtained from suppliers require efficiency in distribution. Tesco ensures consumers receive wide-ranging quality products on time through vertical integration.

A good example of SC partnerships relates to Tesco’s banana supply chain. Tesco works with 12 farms located in Latin America that supply the retailer with bananas (Marketline 2015). This strategy helps Tesco instil high ethical and quality standards into the suppliers. The organisation provides expertise in the form of banana technicians to boost local skills. Additionally, frequent farm visits help strengthen its relationships with the suppliers. Thus, Tesco improves its SC relationships through quality control regulations and enhancing the efficiency of product distribution. This approach helps lower incurred costs that would lead to higher consumer prices.

Another component of upstream activities besides inbound logistics is service. Tesco’s operations are focused on providing a quality service for competitive advantage success. Its streamlined services, including opening hours, stocking the stores, and expanding its Metro stores resonate with its customer-centric focus. Typically, groceries received into a warehouse are put into standard totes before being loaded into the automated storage and retrieval system (ASRS) that avails to order pickers (Veliyath & Fitzgerald 2000). Thus, customer orders can be released on timely manner to prevent SC risks.

The theory of business process redesign holds that a restructuring of a firm’s business process through hardware/software implementation can bring efficiency and competitive advantages. Tesco’s multi-shuttle system, i.e., the ASRS, enhances the efficiency of outbound logistics. Additionally, Tesco’s automated systems for order tracking and inventory management remove wastage, delays, and costs from the supply chains. Tesco monitors the efficiency of its SCs using the ‘steering wheel’ approach, a performance-based system that evaluates the individual stores, personnel, costs, and customer satisfaction (Tesco Plc 2015). These performance metrics enhance quality standards and productivity.

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Procurement Processes

A case study by Garry (2007) revealed that Tesco has a network of stores capable of holding more than 20,000 items, including food and non-food goods. The products are obtained from several suppliers that meet the retailer’s quality and capacity requirements within a short time to meet customer demand. The Chartered Institute of Purchasing and Supply proposes a 10-step procurement model for firms.

Its key stages include need recognition, supplier sourcing, price and terms, purchase order, delivery, inspection, receipt, and invoice approval and payment, among others (Sparks 2010). Tesco’s procurement processes reflect the elements of this model. It ensures efficient flows of products and information with its suppliers who deliver at a central depot for disbursal to the stores. It is estimated that about 2.1 billion products are delivered to Tesco’s stores annually (Tesco Plc 2015). The strategic alliances with suppliers are essential for the on-shelf availability of products in the stores.

In the 1980s, Tesco operated 26 depots for storing products obtained from suppliers. The depots were small, uneconomical, and could not provide controlled temperature for fresh products. Fresh food depots were developed to house supplies with differing temperature and capacity requirements. For example, a typical fresh food depot has a capacity of more than 80 million pallets and can serve over 50 stores (Zhao 2014). After a purchase order, the suppliers use insulated trailers with temperature-controlled chambers to transport groceries to the depots. The seamless flows of information between the retailer and its suppliers ensure on-schedule delivery to replenish the shelves.

Due to the massive product range, re-ordering and keeping track of inventory in each store may be a challenge. Thus, a manual re-ordering system may not work. Tesco uses an electronic point-of-sale (EPOS) system to monitor goods on the shelves. A barcode reader scans bought items and notifies the stock-keeping unit of a store (Wulfraat 2014). The Tesco Information Exchange (TIE) harmonises the inventory volume at each store twice a day. The TIE relays the trading information to the suppliers who arrange to replenish the inventory. The system also facilitates the launching of new products and promotional campaigns.

The retailer uses an electronic data interchange (EDI) system for ordering new products from its suppliers based on a short-term sales forecast (Garry 2007). The ordering restocks the depots with the forecasted sales for the next day. For example, the stock ordered today will be sold tomorrow while yesterday’s inventory will be sold today. However, for fast-moving goods, no extra inventory is retained after all the stores have received their orders (Garry 2007). Thus, through collaboration with suppliers, the depot can operate optimally without wastage or delays. The shelves are replenished twice daily; this ensures optimal on-shelve availability of products to satisfy the changing demand.

Strategic Sourcing

Strategic sourcing is a procurement management approach that assesses “procedures, methods, and sources” to create value for the firm (Sparks 2010, p. 85). It entails an evaluation of the purchasing budget, suppliers, and transactions to achieve the organisation’s SC goals. Tesco collaborates with its suppliers to obtain value and consolidate its purchasing power.

There are several examples of this collaboration. Tesco gives two-year contracts to certified farms to supply beef and mutton to its stores through the Sustainable Farming Groups (Tesco Plc 2015). These initiatives will enable the retailer to build strong relationships with key suppliers. They also provide a platform for evaluating demand and production standards.

The retailer also works collaboratively with banana farmers to strengthen its banana supply chains. Tesco works with 12 banana farms located in Latin America to ensure the farmers meet expected ethical and quality standards (Tesco Plc 2015). This direct approach entails banana technicians who provide expertise and do regular farm visits to strengthen supplier relationships. A third example of Tesco’s strategic sourcing involves the retailer’s strategic relationship with the Marbour Group. This firm is a certified producer of Basmati rice in the EU. Thus, through the collaborative relationship, Tesco can control risks related to “commodity price fluctuations, currency volatility, and rising freight costs” (Trautrims, Grant, Fernie & Harrison 2009).

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Tesco also engages in partnerships with fruit suppliers to ensure fresh and quality products and on-time delivery of goods. The retailer collaborates with MMUK, a fruit production company that specialises in citrus and grapes to ensure fast and timely delivery of fruit to customers. Tesco shares volume forecasts with its suppliers, allowing them to deliver fresh fruit directly to the retailer’s depots across Europe.

In this way, customers purchase fresh fruit with a longer shelf life. Another example of the collaborative partnerships relates to the meat segment. Tesco works collaboratively with Hilton, which supplies the retailer with pork and beef. According to Mukerjee (2013), the long-term relationship with Hilton drives Tesco to open new stores in foreign locations. Conversely, Hilton’s plan to develop a new site in Poland is driven by the need to expand its reach in the EU, Tesco’s primary market.

E-Procurement

The aim of an e-procurement activity is to obtain goods of optimal value at the best prices in the market. It entails a B2B sales and purchases that occurs electronically. Registered firms can access e-procurement software platforms to search and identify qualified suppliers. The software solutions provide e-procurement officers with a system for searching and comparing suppliers and ordering.

The elements of a procurement model entail several steps, including identification of procurement need, choosing products to buy, seeking a purchase approval, ordering, receipt of products, invoice validation, and paying the supplier (Desharnis 2016). E-procurement streamlines these processes using dedicated software as shown in figure 2 below.

Tesco’s e-procurement process occurs in a sequential manner. The process begins when the store manager sends a purchase request form to the purchasing department. Upon approval, a request is sent to suppliers electronically to quote their prices for the products. The selected supplier is the one that provides quality products within the budgeted amount. The supplier is notified to begin manufacturing the product or send the goods to Tesco’s depots.

 

E-procurement Model
Figure 2: E-procurement Model. Source: Wulfraat (2014)

Tesco has implemented various platforms to support its e-procurement function. An example is the OB10 platform implemented to improve the retailer’s “end-to-end processes for goods and services globally” (Child 2002, p. 137). The technology is a flexible and scalable; thus, it can accommodate many suppliers from different countries. The platform supports supplier management and electronic submission of invoices by suppliers without affecting data integrity. Therefore, OB10 serves as a useful role in ensuring timely delivery of invoices and aids the supplier selection process.

Sustainable Procurement

Firms that practise sustainable procurement incorporate public considerations into their cost-benefit analyses. A sustainable approach considers third party consequences on the public besides quality and price. The framework contains three elements (triple bottom line), namely, “environment, economic, and social” (Srivastava 2007, p. 56).

Environmental considerations dominate the debate on ‘green’ procurement to avoid overexploitation. Social issues such as inclusivity, labour laws, and workplace diversity also justify the need for sustainable procurement. On the other hand, economic considerations pertinent to sustainable procurement include fair trading practices and CSR activities.

Tesco was recognised as among the top FTSE 350 companies for its “carbon reporting and reduction measures” in 2011 (Srivastava 2007, p. 61). The retailer has taken a platinum position in the Community Corporate Responsibility Index for five consecutive years. These measures project Tesco as a company that embraces sustainable procurement.

Tesco has undertaken to achieve a zero-carbon emission by the year 2050 through its ‘4F Plan’. One of the components of this plan is the use of fuller cages to ferry totes to cut down carbon emissions. Additionally, fuller trucks and optimised logistic/route planning have been adopted to maximise distribution network and reduce emissions. In this way, Tesco practises sustainable procurement in relation to the environment.

The retailer utilises alternative modes of transportation, such as rail and sea transport, to ferry products to its stores. For example, Tesco’s containers traditionally shipped by sea between Bremerhaven port and its UK depot are transported by rail, saving it millions of dollars (Mills 2002). The retailer sources its garments from South Asian countries, including Sri Lanka and Bangladesh. According to Mills (2002), Tesco’s Clothing Manufacturing Standard supports quality improvement and decent working conditions for employees. This strategy is consistent with the social dimension of the triple bottom line.

Besides improving working conditions, the firm strives to maintain socially sustainable practices. Muller, Vermeulen, and Glasbergen’s (2012) 3-year study of the UK fruit supply chain established that Tesco uses a “push/unilateral approach” in its social sustainability efforts (p. 131). This strategy prescribes socially responsible values that suppliers or partners must follow as opposed to collaborative/bilateral engagement. The downside of this approach is that it creates room for misunderstanding that affects Tesco’s image and control of its supply chains. A better approach would be the ‘management by objectives’ model employed by rival retailers like Waitrose (Ritz 2005). The approach supports inter-firm communication and cooperation to realise shared objectives.

Supply Risk

Controlling supply risks helps a firm avoid SC breakdown. Supply risks fall into several categories, including systems risk, financial risk, forecast risk, and delays, among others (Murray-Webster 2010). Information distortion may cause supply risk due to “batching of purchases”, a practice that increases the volatility in ordering (Murray-Webster 2010, p. 65). Additionally, a distortion in SC may arise when ordering does not reflect the end-customer demand, creating a bullwhip effect.

The type of supplier used depends on the nature of the product. Witt (2008) recommends the use of redundant suppliers for goods with “high holding costs or obsolescence rate” (p. 36). Tesco, for example, purchases its groceries from multiple suppliers in the host country. This strategy allows the retailer to avoid disruptions and maintain inventory at optimal levels. Tesco uses multi-sourcing approach for high-volume goods and single sourcing for slow-moving goods. In this way, the firm can avoid the risk of disruption and maintain optimal inventory movement.

Tesco has experienced supply risks in its history, ranging from supply chain problems to delays. For example, in 2013, unscrupulous activities by SC intermediaries affected the quality of products in the retailer’s meat segment. The beef products were found to be contaminated with horsemeat, despite going through quality tests. The firm initiated regular tests on the sources of meat the suppliers used to ensure adherence to company practices. It conducts up to 22,000 tests yearly, which is equivalent to 40% of the meat products (Tesco Plc 2015). Regular visits to suppliers and franchises aim to stem out unscrupulous practices and ensure the quality of the goods.

Conclusions

Procurement is a fundamental function and a critical success factor. Tesco’s procedures for procurement and supply chain management occur within a customer-centric context. The retailer lowers supply chain risk through multiple sourcing for bulk goods and effective inventory management. Through the deployment of technology solutions, strong partnerships with suppliers, and direct interventions, Tesco receives quality goods for its stores to satisfy consumer demand and meet sustainable procurement constraints.

References

Child, P 2002, ‘Taking Tesco global’, Mckinsey Quarterly, vol. 1, no. 1, pp. 137-138.

Desharnis, D 2016, E-Procurement: Its Future in the Digital World.

Fernie, J & Sparks, L 2009, Logistics and Retail Management: Emerging Issues and New Challenges in the Retail Supply Chain, Kogan Page, London.

Garry, M 2007, ‘Supply Chain Systems Seen Boosting Tesco’s U.S. Stores’, Supermarket News, vol. 55, no. 43, pp. 56-61.

Harrison, A & van Hoek, R 2010, Logistics Management and Strategy: Competing Through the Supply Chain, Pearson, New York.

Marketline 2015, Tesco plc Company Profile.

Mills, L 2002, Why Tesco gets it right’, In-store Marketing, vol. 1, 19-23.

Mukerjee, K 2013, ‘Strategizing for CRM to Leverage its Benefits, Business Strategy Series, vol. 14, no. 4, pp.118-122.

Muller, C, Vermeulen, W & Glasbergen, P 2012, ‘Pushing or Sharing as Value-driven Strategies for Societal Change in Global Supply Chains’, Business Strategy and the Environment, vol. 21, no. 1, pp. 127–140.

Murray-Webster, R 2010, Management of Risk: guidance for Practitioners, Office of Government Commerce, London.

Ritz, C 2005, ‘Store wars’, Business Review, vol. 11, no. 1, pp.22-23.

Sparks, L 2010, Supply Chain Management and Retailing’, Supply Chain Forum, vol. 11, no. 4, pp. 84-91.

Srivastava, S 2007, ‘Green supply chain management: A state-of-the-art literature review’, International Journal of Management Reviews, vol. 9, no. 1, pp. 53-80.

Sutherland, J & Canwell, D 2005, Key Concepts In Business Practice, Palgrave MacMilan, London.

Tesco Plc 2015, Trading Responsibly: Improving the Way We Serve Our Customers and Work With Our Suppliers.

Trautrims, A, Grant, D, Fernie, J & Harrison, T 2009, Optimizing on-shelf availability for customer service and Profit’, Journal of Business Logistics, vol. 30, no. 2, pp. 231-247.

Veliyath, R & Fitzgerald, E 2000, ‘Firm Capabilities, Business Strategies, Customer Preferences, and Hypercompetitive Arenas: The Sustainability of Competitive Advantages with Implications for Firm Competitiveness’, Competitiveness Review, vol. 10, no. 1, pp.56-82.

Witt, C 2008, ‘Tesco every little supply chain change helps’, Logistics & Transport Focus, vol. 1, no. 1, pp. 34-38.

Wulfraat, M 2014, Case study: Tesco’s dot-com U.K. business model and lessons learned.

Zhao, S 2014, Analyzing and Evaluating Critically Tesco’s Current Operations Management’, Journal of Management and Sustainability, vol. 4, no. 4, pp. 71-79.

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