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Tesco Supply Chain Management

Tesco Supply Chain Management

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Tesco Supply Chain Management case study
Tesco Supply Chain Management case study

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Published by: msziera t on Apr 22, 2013
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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.
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the quantity of orders from retailers to wholesalers becomes the smaller wave compared with the wave of actual sales because of subjectivity. MacLaurin streamlined Tesco's operations. Subjectivity goes also into the wholesaler‟s decision.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. has become a “pull system” that produces only the quantity sold. closing most of the smaller stores and opening large 30.0 DEFINING ISSUES 3. Terry Leahy. and manufactures share information. What was formerly a “push system”. Lidl and Netto also entered the UK. In order to optimize the system as whole. information. Several warehouse stores like Costco and discount stores like Aldi. The phenomenon may be avoided if retailers. In the 1990s. Page 2 of 11 . since the order cycle is different. He had introduced new pricing policy of lowering prices to match those of Asda. information sharing is required.7 per cent. manufacturing quantities fluctuate significantly. lan MacLaurin become Tesco's first CEO from outside the Cohen family. and the cash flow into one seamless stream. These were successful moves. The entire supply chain must be improved in balance. behind Sainsbury's at 19 per cent. It is important to construct a system that creates unity throughout the supply chain. Tesco also introduces a centralized distribution system. in which the product was sent downstream and sold. Such a phenomenon is called the “bull whip” effect or Forester effect. 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. the UK supermarket industry faced of 16. The other major competitors were Asda and Safeway.000 square foot stores in the suburbs.In 1985. wholesalers. which resulted in Tesco's prices begin 4-5 per cent lower than those at Sainsbury's and Safeway. thus. become the new CEO. 3. However. services. A large number of bottlenecks exist on a supply chain. Tesco's marketing director. In 1997. added fresh food and its own label for food products. The emphasis is put on maximizing a consumer‟s worth by conflating products.

Wal-Mart stores will have RFID on pallets or corrugated boxes of products from their top 100 suppliers beginning January 1. The ultimate goal is to provide perfect value to the customer through a perfect value creation process that has zero waste. and vertical departments to optimizing the flow of products and services through entire value streams that flow horizontally across technologies. To accomplish this. Metro of Germany. lean thinking changes the focus of management from optimizing separate technologies. assets. and less time to make products and services at far less costs and with much fewer defects. Simply. less space. less capital. and the U. assets. compared with traditional business systems. A lean organization understands customer value and focuses its key processes to continuously increase it. 3. Supply chain management In such a situation. and with very fast throughput times. instead of at isolated points. Page 3 of 11 . information management becomes much simpler and more accurate. 2005. Promotion of RFID has been incorporated in EJapan strategy as well. Tesco of Britain.Figure 1. Eliminating waste along entire value streams. Department of Defense also decided to use RFID similarly. RFID attracts attention as a new data career that uses the Internet. Also. and departments to customers. Companies are able to respond to changing customer desires with high variety. lean means creating more value for customers with fewer resources. high quality. low cost.2 LEAN SYSTEM The core idea is to maximize customer value while minimizing waste.S. creates processes that need less human effort.

4. 5. Page 4 of 11 .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. 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.0 PROBLEM STATEMENT Tesco‟s supply chain improvements described indicate that supply chain management has the potential to improve a firm's competitiveness. The original seven muda are:        Transport (moving products that are not actually required to perform the processing) Inventory (all components. They did it before but they must do it for their new suppliers around the world. However. Using just in time within their distribution network gives Tesco a competitive advantage over its competitors by reducing inventory costs and improves scheduling. Tesco has successfully applied lean distribution and just in time strategy into their distribution network. Tesco‟s supply chain capability is as important to a company's overall strategy as overall product strategy. QUESTIONS AND THEIR SOLUTION: 5. Firm‟s supply chain management encourage management of processes across departments. it is not enough.1. It also insures proper protective maintenance and stress quality in all phases of production from quality by suppliers to quality within Tesco.0.

better knowledge of consumption of each type of consumables at store. such as extra personnel and inventory stockpiles to fall back on if something goes wrong. • Contingency plan: buffer stock of full dollies is still held aside • supplier‟s distribution center for the items has disappeared. reduced lead times. 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. making the system flexible. • Reduced inventory case as RDC was converted into Cross-docks.5.porting goals include eliminating disruptions to the system. • Reduction in stock points too. • The no.e.2. and reduced space requirements. i. reducing costs their also. operating costs were offset by overall profits in a long run • increasing its share in every format • Better forecasting ability. 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. The risks stem from the absence of buffers. increased productivity and equipment utilization. Page 5 of 11 . reduced amounts of scrap and rework. and flexibility. smooth flow of operations. Of logistical activities for a pallet to reach the final storing point reduce to 200%. The possible results of risks include lost sales and lost customers. personnel and organization. • Converting RDC as cross-docks. The ultimate goal of a lean system is to achieve a balanced. Key benefits of lean systems are reduced inventory levels. • Increase in loyalty of customer leading to increase in sales and more certainty in demand too. high quality. and eliminating waste. The building blocks of a lean production system are product design. process design. • Reduced Transportation costs due to milk runs. • “customers as pacemaker” regulating the provision stream • increased the frequency of deliveries to the retail stores • shipping dollies directly up to POS. Sup. • Reduced costs. and manufacturing planning and control.

there are components that are considered "waste". sometimes also referred to as the Toyota Production System (TPS).Inventory — or Work In Process (WIP) is material between operations as a result of large lot production or processes with long cycle times. Prevent the occurrence of defects instead of scrapping or repairing. 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. Page 6 of 11 .Defects — producing defective products is pure waste.Processing — unnecessary processing steps should be eliminated. materials or services through the value stream. 7. and handling.Waste from Overproduction — producing more than is required by the customer or marketplace which generates unnecessary inventory. Lean Manufacturing. adds cost or time without creating value becomes the target for elimination. is about the systematic elimination of waste.Waste of Motion — of the workers. step or process that does not add value for the customer. Combine steps where possible. Lean concepts improve operating performance by focusing on the continuous flow of products. 4. Like lean manufacturing. There are a number of waste types which are: 1. Whether you are manufacturing a product or providing a service. 6. Any activity or process that consumes resources.Waiting — a worker waiting for a machine to finish a cycle. 2. To achieve this. Waste can include any activity. 3. machines.5. This reflects system problems. but in the service industry as well. not only in production or manufacturing operations. waiting for a supervisor to answer a question.3. 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. 5. Searching for tools or parts due to the inappropriate location of these items is considered waste of motion. Lean focuses on the "big picture" or improvements in the entire business process as opposed to incremental improvements. or waiting for information or materials reflects an interruption to flow and need to be eliminated. the various forms of waste must be identified and eliminated. Lean concepts are purely about creating more value for customers by eliminating activities that are considered waste.Waste from Transportation — multiple handling or movement of products does not add any value to the product. It is the business process system that can significantly improve a company's profitability.

Lean Manufacturing involves removal of all unnecessary costs (i. each recognizing their own strengths in particular markets. Lean manufacturing is 'lean' because it produces products using fewer resources than traditional 'job shop‟ and 'mass production' methods. Over time the countries in which Teseo operates have changed slightly. these withdrawals have been made as part of asset-swaps with other leading global retailers. Waste elimination is translated into customer satisfaction (i. both as a reaction to the Asian economic crisis of the 1990s. 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. delivery etc). for example.Pioneered by Wal-Mart . though it is still not represented in continental western Europe . Lean Manufacturing combines the advantages of craft and mass production systems. which meant assets were cheap. 'waste'). 5.but subsequently taken up by most large retailers .e. and in some cases. recognizing the lack of scope to become the market leader and/or the desire to invest elsewhere. but also due to a more positive sense of the scale of the market opportunities in China and Japan. it is the same as Just-in-Time (JIT) Manufacturing. The strategic approach to store internationalization has seen Teseo develop different solutions for diverse markets. from raw material sourcing through manufacturing through final delivery to the shop floor. Lean retailing aims to "cut out the fat" (waste) from the retail sourcing process to maximize profits for the retailer. First steps were then made into the Asian market. Major attention is given to "just in time" delivery to cut inventory costs. whilst avoiding the disadvantages of each. In this regard. In many cases. In some 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. using distinct formats and tailoring the product and service offer to the local market. Withdrawals from some markets have been made (Palmer. It includes product development. even the invoicing for that automatic order is automatized as well. quality. cost. 5). Behind the scenes people. supply chains. production.4. improved performance.e. 2004. Page 7 of 11 .lean retailing relies on the use of Barcodes to manage every step of the product value chain. During this time Teseo also re-entered Ireland through a major acquisition. processes and systems have been enhanced and rolled out initially as 'Teseo in a Box' and more recently as the Teseo Operating Model. distribution and customer service. 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. the difference being that Lean Manufacturing encompasses the whole business rather than just manufacturing. and to investments in IT infrastructures to allow stores to share sales data in Real Time with their suppliers.

for example. For example. the composite model has been effectively exported to thesecountries. Ln other situations there is an attempt to rethink the supply system and the technology needed and use this as the platform moving forward. Whilst the Teseo name is not used.As can be readily understood. so as to react quickly to demand. It is too early to judge the success or otherwise of this US venture. It also opened major centers in Poland and the Czech Republic. often with the same logistics service partners. eg Ireland and Hungary. Environmental. partly because the model of practices and processes has been built up from scratch. extended a centre in Hungary (and added another fresh food distribution centre) and developed a new composite site in Ireland. In November 2007. They focus on providing faster. Years in the planning. the internationalization of Teseo at store level brings supply chain issues as well. Fifty stores had opened by the end of February 2008. easier neighborhood retailing with an emphasis on fresh food and fresh prepared meals at affordable prices. CA).500 product lines. employment and organic credentials are stressed. there has been a degree of colocation of production with distribution. The processes are now embedded in the Teseo Operating Model. Korea. In some cases. lean operation and to Page 8 of 11 . although a 'pause' in development was announced in April 2008 to reflect on the learning from these early developments. this US entry is intended to achieve 200 stores by February 2009 and to eventually develop into a major chain. but it has attracted considerable attention. Teseo finally opened its much heralded Fresh and Easy stores in California and Nevada. the need is for a supply system that can be adaptable. Based on extensive consumer research with US families and a trial store built secretly. with expansion into Arizona. As internationalization continues. based on the UK composite model. Whilst this is not unknown in. The in-store processes are simplified. neighborhood. in 2003/4. though it does rely on core processes from the Teseo Operating Model. self-checkout and automated replenishment. its operations are based on the Teseo Operating Model. so the infrastructure and the processes in the supply chain need to keep pace with or even lead the developments. Teseo buys products on a global basis and this also has to be 'fitted in' to the ever changing pattern of supply and demand. In supply terms. UK suppliers with particular expertise have co-located production facilities at the head office and distribution hub (Riverside. the Fresh and Easy operation is a little different to other Teseo operations. Teseo opened the largest distribution centre in Asia at Mokchon. but with reduced complexity. With formats and products varying by country and with time. The store format is different to Teseo stores elsewhere.000 sq ft and hold around 3. Fresh and Easy stores average about 10. At the same time. linking processes to the service centre in India. For example. the attempt here is to move towards a low-touch. The systems are advanced. but new faculties to meet expansion needs are required. including extensive display-ready packaging. This simplification has reduced payroll and other costs. Japan.

The strategic alliance will facilitate Tesco‟s entry into the foreign market by renting stores from Safeway in prime locations. The sizes of the stores are 10. The stores are much smaller than supermarkets such as Wal-mart. However. The emphasis is on fully automated. however (Uwins. which shows Tesco are not prepared to go in direct competition with them.000sq ft selling around 3. topup groceries . losses would be much higher than if they rented them. employees and partners. Furthermore. 55) and the distribution systems performance has had to improve as the store development programme has moved on. strategic alliances can be risky too. they can have „first picks‟ on store locations. Store stock levels and availability were initially poor.rethink traditional approaches. convenience retailing as we know it in the UK . it puts Tesco in a vulnerable position of either purchasing the stores it rents or move elsewhere. Tesco have invented a new format in America. By Tesco being the first major competitor in the „convenience‟ market. and share profits. A strategic alliance can be defined as cooperative agreements between potential or actual competitors. This concept is known as first mover advantage. perhaps the reason no other company has broken into the market before is because it is not profitable or not in demand. one-touch replenishment supported by deep shelves. 4). it will cost the company money. terminating the contract. Therefore. Page 9 of 11 . an American supermarket. 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.a small shop selling a wide range of fresh. a strategic alliance allows companies to share the fixed costs and reduces the risks involved in entering new markets. Tesco announced that they would form an alliance with Safeway.500 items (Telegraph). use of returnable crates and retail-ready merchandizing and packaging. At Riverside. Furthermore. Either way. 2007. suppliers. eg solar power. 2007. developed (Stites. Tesco predicts Americans will prefer the convenience of a smaller store providing it caters for their needs. doughnuts and little else (Telegraph). However. pick-by-line has been introduced and various environmental initiatives. There is extensive recycling of packaging. where a convenience store means a petrol station selling cigarettes.does not exist in the US. If Safeway go bankrupt and have to sell its stores. If Tesco purchased the buildings and the project was unsuccessful.

dependability. in order to make improvements in operation. As cited previous. The future retains numerous distinct scenarios for Tesco.6. To sustain this location it is significant to advance its services all the time. Tesco's Supply Chain Management Strategy is its long-term goal. Besides. Tesco made good planning and control in its capacity. Tesco will require advancing its product variety by proposing more non-food items. 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. One of their likely future strategies could be dedicated to gathering a spectacular clientele service. Page 10 of 11 . The business has currently developed into a worldwide business. Tesco measures quality. as they have currently developed enough. Although they have made some improvements. there are still some disadvantages in its operation.0 CONCLUSION Overall. speed. Tesco is the market foremost in the UK. and how Tesco are going to get advantages over its competitors. flexibility and cost. supply chain and quality.

Supply chain management: text and cases. Wang. from blogspot: http://siibblog.d. Scoring points: how Tesco continues to win customer loyalty. 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.industrialtimestudy. Scoring points: how Tesco continues to win customer loyalty. J. (n. T. (2010).blogspot.d. New York. McGraw-Hill Create p.com/lean. and Phillips. T. Tsutomu Araki Sophia University "A SUPPLY CHAIN MANAGEMENT SYSTEM BASED ON RADIO FREQUENCY IDENTIFICATION" (2006) 3. J. England. Dublin.blogspot. Retrieved 04 2. Lean Thinking. Shah. In D. Journals 1. November 14. Construction supply chain management: concepts and case studies.0 REFERENCE Book 1. India: Pearson Education Inc 5. 2nd Online: 1. 2005. Womack and Daniel T. 1995 (ISBN 1-86076-010-4) 6. Enterprise networks and logistics for agile manufacturing. Jones.html 7. C. (2013). Operation Management. Humby.” Fortune.html 2. Bicheno.com/2009/07/casestudylean-supply-chain. (n. Hunt. Pryke. USA. Buckingham. Oak Tree Press. and Jones. James P. Retrieved 4 2. 1st 10. 2. C. Humby.). http://siibblog.com/2009/07/case-studylean-supply-chain.7. 1st 8. 2nd 9. Womack. A. T. 2013. (2007). S.html Page 11 of 11 . 1994 (ISBN 0 9513829 5 0) 9-The European Handbook of Management Consultancy.P. (2007). Ireland. and Phillips. 2nd Edition. 2013. Hunt. T. (2009). D.T. Simon & Schuster. Rahman. “Teaching the Big Box New Tricks. (2009).. L. J. 1st Ed.). PICSIE Books. from Industrial time study: http://www. Cause and Effect JIT: The Essentials of Lean Manufacturing.

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