Tesco Supply Chain Management: Executive Summary
Supply chain consolidation is crucial competitive value for firms with international operations. Close supplier relationships help improve quality, streamline delivery systems, and reduce operational costs. This paper examined Tesco’s coordination strategies for its global supply chain, returns on its R&D investment, supply chain risk management, and advanced technologies deployed to create competitive advantages. Tesco manages its global supply chains through lean thinking, vertical integration, and complexity management.
Its close relationships with livestock, banana, and citrus fruit producers ensure quality and minimize supply chain risks. Internally, Tesco has deployed a variety of technologies to support shelf management, improve its delivery system, manage inventory, and enhance the shopping experience. The retailer has also invested in an online store (Tesco.com), Homeplus solution, and RFID technology for improved customer convenience and logistics management. These strategies have enabled Tesco to create distinctive competitive advantages in the grocery sector.
Tesco Supply Chain Management: Introduction
An innovative supply chain management (SCM) strategy is required to consolidate global supply chains. Global consolidation enables a firm to capitalize on its B2B relationships (intangible assets) to acquire low-cost inputs and maximize its economies of scale. A common firm strategy is to establish a network of supplier relationships to reduce costs through enhanced purchasing leverage.
Supply chain (SC) relationships are expanded to cope with diverse political, economic, and physical environments to achieve global consolidation (Child 2002). Tesco, a leading UK retailer with a presence in over 14 countries, adopts a more collaborative approach to SCM that is characterized by relationship initiatives that support its grocery logistics (Child 2002). This paper aims to critically analyze Tesco’s global SCs coordination, the return on its R&D investment, the SC risks encountered and associated mitigation strategies, and the competitive gains of advanced technologies adopted.
Supply Chain Management of Tesco: Establishment of Global Coordination
Tesco’s supply chains have evolved since the 1980s to efficient grocery logistics. Mills (2002) observes that the retailer undertook a business transformation that realigned its organizational structure to its SC strategy. Examples of such changes included aligning the head office with store operations, matching SCM with the specific store requirements, and re-organizing middle-level management to serve regional customers better (Mills 2002).
Tesco introduced lean thinking principles and score carding to reduce costs and mitigate SC risks. The rationale for introducing these changes was to improve internal and external coordination and attain operational efficiency. Owing to the globalization of supply chains in the 2000s, Tesco coordinates its SCs through vertical integration, lean thinking, and managing complexity (Mills 2002). The specific issues addressed by each SCM approach are summarized in Table 1 below.
Table 1: Tesco’s Supply Chain Management Approaches
The SCM approaches adopted have led to greater retailer control of the supply chains. As Tesco expands its sourcing and business overseas, it has been forced to re-organize its domestic and international SCs, taking into account the changing market demands and the complexity of logistics. The retailer uses the ‘steering wheel’ approach to monitor its SC performance, coordinate its suppliers, and maintain high-quality standards (Sparks 2010).
This model evaluates four aspects of Tesco’s suppliers: (1) personnel (recruitment, training and development, and organizational values), (2) operational efficiency, (3) finance (sales and operational costs), and (4) consumer satisfaction (timely delivery and quality) (Sparks 2010). Using this approach, Tesco can control its global supply chains and create value for the customer through high-quality standards.
Tesco uses wide-ranging strategies to optimize delivery and control its inventory in an environment characterized by complex logistics. According to Thompson et al. (2012), Tesco stores hold up to 20,000 in merchandise, including non-food products such as apparel and electronics. The diversified product lines are sourced from several suppliers, who must conform to the agreed terms, including quality standards and timely delivery.
Thomas (2010) further estimates that Tesco stores receive about 2.1bn crates of goods from suppliers. The retailer offers variety and ensures on-shelf availability of items to achieve its core mission of “creating value for its customers” (Thompson et al., 2012, p. 145). Tesco has operational structures that support effective flows of information and inventory.
An example of such operational changes is requiring suppliers to ship their goods to a distribution center as opposed to each retail store. In the 1980s, Tesco operated 26 distribution centers to serve stores mainly concentrated in the UK (Mills 2002). The depots were tiny and maintained at a fixed temperature for all products. Also, the product flows to each store was considerably lower, hence inefficient.
The retailer used a different ordering system for every product category (Mills 2002). With the internalization of its sourcing operations, Tesco had to adopt a novel distribution strategy. Currently, the retailer operates large ‘Fresh Food’ depots with variable temperature conditions with an annual capacity of about 80 million crates at a single site (Mitchell 2015). Each regional warehouse serves up to 335 stores in a given market.
Tesco’s suppliers make deliveries at scheduled times to maintain optimal inventory levels both at the depots and the grocery stores. Besides managing the deliveries, Tesco determines the number of goods that should be shipped to each store to maintain on-shelf availability. The ordering involves systems that track inventory levels across the product range. An example of these systems is the electronic point of sale (EPOS), which monitors sales volumes to determine inventory levels.
Any purchased product is scanned at the till before being updated at the “Tesco Information Exchange (TIE) as a sale after every four hours” (Harrison & van Hoek 2010, p. 121). Tesco utilizes a web-based system that supports the exchange of information between the retailer and its suppliers. In this way, the response time by the suppliers is minimized, ensuring continuous on-shelf availability of groceries. Besides TIE, Tesco deploys an electronic data interchange (EDI) system to facilitate ordering. Through EDI, Tesco can order the items it requires based on the projected demand the following day (Harrison & van Hoek 2010).
Besides technology, Tesco achieves global consolidation through close supply chain relations. It has built strong relationships with livestock farmers through the Tesco Sustainable Dairy Group (TSDG) initiated in 2007 to ensure customer focus and quality standards in the UK (Harrison & van Hoek 2010). Similar relationships have been replicated elsewhere to create trust between the retailer and its suppliers. Another example relates to the banana supply chain. Tesco works with 12 banana farms located in Latin America to ensure certified farmers observe ethical and health standards in their farming. The retailer offers technical support and regular training to the farmers through banana technicians to instill ethical practices.
Another strategy Tesco utilizes to manage its global supply chains is long-term strategic partnerships with established suppliers. The retailer has a long-term agreement with a Basmati rice producer, the Marbour Group (Mitchell 2015). The collaborative relationship allows this supplier to supply branded rice to Tesco’s European stores. This approach enables Tesco to strengthen its SC relationships and share risks/costs associated with packaging, unstable exchange rates, and shipment costs.
The Tesco-MMUK relationship is another example of these strategic partnerships. The specialist citrus supplier based in Spain delivers fresh fruits to Tesco’s UK distribution centers, directly reducing costs related to waste (Mitchell 2015). The retailer has a long-term relationship with Hilton to supply beef to its stores in countries where the supplier operates, e.g., Poland. Through these partnerships, Tesco can focus on its core business of selling and leave the production, packaging, and freight to its suppliers.
Tesco Supply Chain: R&D Investment and Revenue Growth
Tesco invested in a range of R&D initiatives to develop distinct solutions that drive its revenue growth. In the 1980s and 1990s, the retailer invested in computerized checkouts, HR management systems, automated stock control systems, and pricing systems to increase the efficiency of its business operations (Hill & Hill 2011). Tesco still invests in innovative business solutions. An example is the “virtual grocery store” developed in 2011 in S. Korea to allow passengers to purchase items via their cell phones at their convenience (Muller, Vermeulen & Glasbergen 2012). The ‘Homeplus’ solution contains real pictures of groceries arranged as they would appear in the actual store. The images are cast onto large screens mounted in train stations.
The ‘Homeplus’ initiative comes with a Quick Response (QR) barcode that allows commuters to scan items through their smartphones. The scanned goods are included in a shopping basket in an instance. Subsequently, deliveries can be made at the customer’s home. This Smartphone technology saw Tesco rise to the second position in S. Korea, a country with over 10 million smartphones in use (Muller, Vermeulen & Glasbergen 2012).
Tesco also deployed the ‘Lotus’ solution that enables its Thai customers to trace the source of their products. Using the ‘Tesco Lotus,’ which is based on QR technology to scan, customers can search for a product’s nutritional information and source using their phones. Through Tesco Lotus, the retailer earned over $3bn in 2014 (Tesco 2015). The QR codes enhance the retailer’s interaction with its customers. The same technology has also been used to promote products in UK stores during Christmas.
Tesco has also invested in shelf management solutions to support demand rises. For example, Tesco adopted the RFID technology to monitor product flows within its supply chains (Hadfield 2006). RFID tags have led to competitive advantages in service delivery and SC efficiency. The retailer has also improved its delivery through its online shopping platform, introduced in 1999 when other players considered internet marketing costly. The firm’s revenue from the Tesco online channel grew by 11% in 2014, an indication of the sector’s resilience in market turbulence.
The home delivery service is another innovation that has contributed to Tesco’s revenue growth. The home shopping service, including the loyalty card, also helps Tesco consolidate its customer base. This system involves a store-based approach where customers receive goods from the nearest store upon placing an order (Hill & Hill 2011).
This model helps reduce overhead costs related to transportation and minimize delays in delivery. Tesco also introduced an online distribution system, dubbed the Vanderlande system, in its Tesco.com stores in 2010 (Muller, Vermeulen & Glasbergen 2012). This solution has made delivering services more effective, increasing the revenue contribution of the online segment.
Tesco adopted R&D in its multi-channel strategy to turn around dwindling sales in 2013. Its UK sales had declined by 1.5% in 2014 while overseas growth was stagnating (Tesco 2015). The retailer adopted a new focus centered on non-rigid fulfillment options for shoppers. It launched “one-hour home delivery slots” for more than 98% of shoppers in the UK (Tesco 2015, para. 5). Besides, Tesco came up with “click & collect drive-through” collection points totaling 1500 at its grocery stores (Tesco 2015, para. 6). This solution accounted for two-thirds of Tesco’s online sales in 2014 (Tesco 2015). However, the home delivery service is still widely used.
Another innovation relates to the dedicated ‘dotcom stores’ in certain areas. The stores differ from regular stores in the sense that they contain online orders. In this model, Tesco staff picks and loads customer orders into vans that serve specific routes. The orders are laid out in a consolidation buffer that contains an automated storage and retrieval system that allows easy removal of the stored goods. The maintenance of this automated system has been outsourced to Vanderlande Company. The investment has enhanced the convenience and sales performance of Tesco’s online segment.
Supply Chain: Tesco Risks and Mitigation Strategies
Tesco has encountered a range of SC problems working with its suppliers. In 2013, Tesco’s meat segment faced serious credibility issues when it was discovered that its canned beef products were contaminated with traces of horsemeat (Hogbin & McSherry 2014). This SC risk was attributed to fraudulent practices by its supplier (Silvercrest) and Tesco’s subpar quality checks.
In response, Tesco implemented a range of mitigation strategies and controls. The retailer instituted regular tests to ensure the meat products received from suppliers meet expected quality standards. The second strategy involved sourcing beef products from suppliers accredited by the British Retail Consortium (Hogbin & McSherry 2014). Tesco also visited the Silvercrest plant and discovered that the processor sourced meat from an unknown supplier from Poland. Subsequently, the supplier was blacklisted. The retailer also performed over 20,000 tests on its beef products to ascertain their quality.
Another SC problem relates to the financial risk of international operations. In 2013, Tesco experienced a sharp drop of up to 5% in sales in its Thai, Slovakian, and Irish businesses (Hogbin & McSherry 2014). The declining sales were attributed to the financial crisis that reduced the purchasing power of customers. As a response, Tesco adopted a value-oriented retail approach that involved a low-cost product line dubbed ‘Everyday Value’ to compete with low-cost providers such as Aldi (Wood & McCarthy 2014). Another initiative involves ‘The Big Price Drop,’ which aims to reduce prices for over 3,000 common food items to thrive in a low-growth environment.
Tesco also faces an SC risk related to the crowding of the supply chain by intermediaries. The complicated food supply chain affects value addition and makes the purchasing process very lengthy leading to SC delays. As a mitigation strategy, Tesco initiated an audit of the entire supply chain to cut out dysfunctional suppliers and intermediaries. The exercise will involve over 7,000 plants distributed across 12 countries (Hogbin & McSherry 2014). Further, the retailer considers establishing a single processing chain similar to that of Waitrose (Hogbin & McSherry 2014). The aim is to create streamlined SCs to mitigate risks associated with delays/low inventory and low-quality standards.
Tesco Supply Chain: Technology & Competitive Advantage
Tesco utilizes advanced technology to drive its business transformation. The retailer owns Dunnhumby, an analytics solutions vendor, for big data analysis (Mukerjee 2013). The SC analytics function helps Tesco “cut waste, optimize promotions, and monitor demand fluctuations,” contributing to cost savings of about £16 million annually (Mukerjee 2013, p. 119).
The firm’s SC analytics team developed a Matlab-based model that forecasts the effect of weather on purchase behavior (Mukerjee 2013). This program predicts inventory flows using meteorological data. In this way, Tesco can maintain optimal inventory levels to ensure on-shelve availability of fast-moving goods throughout the day. For example, using this statistical model, Tesco established that demand for firelighters and barbecue meat is high during cold days. As a result, the retailer can maintain optimal stock levels throughout, hence, a distinct competitive advantage.
Through the weather modeling program, Tesco was able to reduce out-of-stock products, ensuring a 97% likelihood that a shopper will get the items he/she wants (Ma, Ding & Hong 2010). Furthermore, the cost savings accumulated to £6 million. The predictive model has also been useful in analyzing Tesco’s multiple promotions to determine demand to maintain optimal stocks during the campaign. It allows Tesco to identify the marketing strategy with the most returns and popularity.
For instance, Tesco found that the popularity of the “buy one, get one free” promotion is higher than that of a “50 percent discount” sale, especially for the non-perishables (Ma, Ding & Hong 2010, p. 134). Therefore, the system gives Tesco a competitive advantage by supporting its marketing/promotion function and estimating the ROI for a promotion. The historic market/sales data is archived in a data infrastructure called Teradata.
Tesco has also utilized 3D graphics in its business processes, including shelf management. In grocery stores, shelf management should reflect considerations such as consumer demand, weather changes, and promotions. Stores usually use planning programs based on 3D graphics to design an optimal shelf layout (Karolefski 2009). Tesco collaborates with IBM’s laboratory in Israel to develop an app that distinguishes particular products from the merchandise on a store’s shelf (Karolefski 2009). The mobile app then displays pictures of the products and rates them according to cost or nutritional content.
Tesco also uses a web-based image recognition technology in shelf management for its London stores. The technology allows staff to take real-time pictures of the shelves and upload them into the system. An image recognition tool then establishes the identity of the goods through a search of Tesco’s online database to determine alterations to the original shelf layout (Karolefski 2009).
Subsequently, the anomalies can be corrected. The technology is a source of competitive advantage because it enables Tesco to make its stores appealing and enhances the shopping experience. It also ensures consistent on-shelf availability, enhances efficiency, and simplifies the shopper’s search for items of interest, contributing to more sales.
Tesco Supply Chain Management: Conclusion
Tesco, plc has implemented a range of operational strategies centered on customer focus to manage its complex supply chains. It utilizes vertical integration, lean principles, and complexity management innovations to enhance its delivery system, inventory levels, and operational costs. Vertical integration with its suppliers has contributed to quality products and minimized the supply chain risk. Through the deployment of a range of technologies, including supply chain analytics, 3D graphics, and online stores, Tesco has been able to improve the shopping experience and acquire competitive advantages.
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