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606-015-1
ICMR Center for Management Research
Tescos Supply Chain Management Practices
This case was written by Indu P, under the direction of Gupta V,
ICMR Center for Management
Research (ICMR). It was compiled from published sources, and is
intended to be used as a basis
for class discussion rather than to illustrate either effective
or ineffective handling of a
management situation.
2006, ICMR Center for Management Research
ICMR, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India
Email: [email protected].
www.icmrindia.org
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2
606-015-1
Tescos Supply Chain Management Practices
Customer focus and commitment to value has propelled Tesco into
a leadership position
developing a dynamic virtuous circle comprising scale,
efficiency and innovation within the supply chain.1
- Stuart Ross, Director, Supply Chain & Distribution, Tesco,
2005.
Tesco, the UK-based grocer, is an example of a success story.
They have learned how to go beyond Wal-Mart. They came to Dan Jones
ten years ago and asked, How would Toyota run a
grocery business? And theyve been working hard to become the
Toyota of the grocery business ever since.2
- James Womack, Co-Author, The Machine that Changed the World,
and Lean
Thinking, 2005.
INTRODUCTION
In December 2005, AMR Research (AMR)3 announced the Second Annua
l Supply Chain Top 25
- a list of leading companies that had employed demand driven
supply chain practices and technologies successfully. UK based
retailing giant Tesco was ranked 9th in the list, preceded by
Dell, P&G, IBM, Nokia, Toyota Motors, Johnson & Johnson,
Samsung Electronics and Wal-Mart.
AMRs report ranked the companies based on past performance and
future potential on the basis of their supply chain management
(SCM) capabilities. The return on assets and inventory turns were
given weightage of 25% each and 10% was for growth in sales in the
previous 12 months. The remaining weightage of 40% was given to the
opinion of AMR Research, based on a structured voting methodology
across AMRs team of analysts. Commenting on Tescos achievements,
analysts at AMR commented, The UK based grocer was the first to
really succeed with direct to consumer sales, while maintaining
killer inventory turns and growth. 4 (Refer Exhibit I for
details
of top ten companies in Supply Chain Top 25).
Tesco is renowned for its best practices in SCM, which included
lean management and using RFID technology. The company has gained
and maintained advantage over its competitors by incorporating
innovations in its supply chain like point of sale data, continuous
replenishment system triggered by customer demand, primary
distribution, cross dock
5 Distribution Centers and
1 Competitive Logistics Collaboration the Manufacturers
Response, Cranfield Management
Development Centre, November 03, 2005. 2 Quinn, Francis J, The
Lion of Lean: An Interview with James Womack, Supply Chain
Management
Review July 1, 2005 3 Boston (USA)-based AMR Research provides
research and advice to enhance business process
performance and cost savings, using the latest technology. It
provides research and advice on several
important business initiatives including supply chain
transformation, new product introduction, customer
profitability, compliance and governance. 4 Friscia, Tony,
Marah, Kevin O and Souza, Joe, The AMR Research Supply Chain Top 25
and the New
Trillion Dollar Opportunity, AMR Research Report, November 2004.
5 Cross-docking is a practice in the logistics industry. Materials
are unloaded from an incoming truck
trailer or rail car and loaded in outbound trailers or rail
cars, eliminating the need for storage in between.
This can be done when changing the vehicle or to sort material
intended for different destinations or to
combine material from different origins.
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3
use of a single vehicle to serve several stores. In 2001, the
Sigma Project6 commended Tescos
SCM efforts, Only in the most integrated supply chain
organizations, such as Dell Computer, Wal-Mart, Tesco and
Volkswagen, does SCM appear to mean the integrated management
of
materials, information and financial flows from raw material
extraction to end-user.7
BACKGROUND NOTE
Tesco was founded in 1919 by Jack Cohen (Cohen), who invested
his servicemans 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
Stockwell and the first two letters of Cohens 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 companys 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) Act
8 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, Tescos P ile 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. Tescos 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, Tescos 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 companys turnover had
reached 1 billion.
In 1985, Ian MacLaurin (MacLaurin) became the first CEO of Tesco
from outside the Cohen family. MacLaurin realized the need to
streamline Tescos operations. He closed down most of the smaller
stores and was instrumental in opening several large 30,000 square
foot stores in the suburbs. Tesco also introduced a centralized
distribution system, added fresh foods and its own
label for food products. All these moves proved quite
successful.
In the 1990s, Tesco introduced several customer-centric products
and services such as One in Front,9 loyalty card10, grocery home
shopping and Tesco personal finance. As the supermarket industry in
the UK faced saturation and due to low population growth, the
industry was not
6 Project SIGMA aims to provide clear, practical advice to
organizations to help them make a meaningful
contribution to sustainable development. 7 Charter, Martin,
Kielkiewicz-Young, Aleksandra, Young, Alex and Hughes, Andrew,
Supply Chain
Strategy and Evaluation, The Sigma Project R&D Report,
January 2001. 8 The act allowed suppliers to fix the prices of
goods and retailers were not allowed to sell the goods at
lower prices. 9 Under the One in front scheme, Tesco store
personnel ensured that if there was more than one person at
any counter, another counter would be opened for the person
second in line. This way, no customer would have to wait at
check-out counters.
10 Loyalty cards are a part of loyalty programs, which aim to
retain customers. These c ards reward customers when they make
purchases from the company in the form of points that accumulate
over time. These points can later be redeemed for
cash/gifts/discounts. Thus, they provide incentives to customers
for returning to the stores of a particular company.
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4
expected to grow well in 1992. At this time, Tesco was the
second largest supermarket chain in the UK with a market share of
16.7% behind Sainsburys (19%). Tescos other competitors were Asda
and Safeway. In early 1990s, several warehouse stores like
Costco
11 and assortment stores like
Aldi12
(1990), Lidl13
(1994) and Netto14
(1990) also entered the retailing sector in the UK.
In 1997, Terry Leahy (Leahy) became the CEO of Tesco. Leahy had
introduced new pricing
policies in Tesco in 1993, when he was marketing director. Leahy
had suggested lowering Tesco's
prices to match those of Asdas, and this resulted in prices wh
ich were 4-5% lower than those at
Sainsburys and Safeway. Leahy also introduced the Clubcard15 in
1995.
TESCOS SCM INITIATIVES
Tescos SCM relied heavily on the concept of Process Improvement
and was guided by its core
purpose of creating value for customers so as to earn their
lifetime loyalty. The key period for
Tescos supply chain initiatives was between 1983 and 1996;
during this time, the company
introduced several systems including point of sale scanning,
centralized ordering, centralized
distribution, automated warehouse control and electronic data
interchange (EDI).
Graham Booth (Booth) was Director, Supply Chain, Tesco between
1985 and 2002. He felt that it
was necessary to have replenishment triggered by customers, for
which, using the same set of
suppliers along with cross dock distribution centers (DC) and
vehicles supplying to all store
formats would be ideal. The items for all the stores could be
procured from the same set of
suppliers and bulk supplies could result in higher discounts.
The replenishment system could use
milk runs16
to larger stores for supplying the smaller stores also. This way
operating smaller stores
would also be profitable.
In 1995, Booth approached Daniel T. Jones (Jones) in Cardiff
Business School, for improvements
that could be made to Tescos supply chain. Jones, James P Womack
(Womack) and Daniel Roos
were the authors of The Machine that Changed the World
(published in 1991), a book explaining
the concept of Lean Production.17 As Jones suggested, Booth
invited cross functional experts
from Tesco and from Britvic18
- a company that supplied cola to Tesco. The team started
mapping
the prevailing supply chain system for cola in Tesco.
11 Costco Wholesale Corporation is the largest membership
warehouse club chain in the world, and
headquartered in Issaquah, Washington, USA. As of July 2005,
Costco operated through 356 locations
across the world. 12 Aldi is an international hard discount
supermarket chain based in Germany. Aldi is Germany's first
real
discount supermarket. Aldi is known for spartan stores with low
prices on a limited range of goods. As of
2005 Aldi was operating in more than 12 countries. 13 Lidl was
founded in Germany in 1930s, is a European discount supermarket
chain of German origin that
operates 5,000 stores. As of 2004, Lidl was the fifth largest
supermarket chain in Germany. 14 Netto is a chain of discount
supermarkets based in Denmark with presence ac ross six European
countries. 15 Under the Clubcard scheme, customers become members
by paying a joining fee and providing personal
details such as name, address, date of birth, e-mail, family
members, dietary requirements and product
preferences. 16 The term milk-run is used to refer to a single
truck which cycles around multiple suppliers collecting
freight. The name is derived from the milk runs of farmers
collecting milk from their dairy cows
throughout the pasture. 17 The essence of lean, which Toyota
pioneered, is to eliminate waste and progressively remove all
the
activities within the company that do not contribute to the
value of the product supplied to the customer. 18 Britvic is a
British producer of soft drinks. It was founded as the British
Vitamin Products Company in
the mid nineteenth century in Chelmsford, changing its name to
Britvic in 1971. It has undertaken a
series of mergers and owns the UK franchises of Pepsi and 7 Up.
It also produces popular soft drink
Tango.
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5
The group traced the backward journey of cola can / bottle from
a checkout counter at Tesco stores to Tescos regional DC, to the DC
of Britvic, the warehouse at Britvics bottling plant, filling lines
of the cola and ultimately to the can / bottle supplier. Jones and
his research team which accompanied the team asked questions at
every step of the process. The questions ranged from the necessity
to keep excessive stock at stores, warehouses and bottling plants,
to missing products in the shelves, to the reasons why sales
associates had to re-sort the delivered products.
Tesco and Britvic realized that at each point of supply chain
there were several opportunities for making improvements and reduce
costs. Tesco realized that its supply chain system could be
considerably improved. There was a lot of unnecessary handling
while the stock moved from the supplier, to the DC and then to the
store. Tesco discovered that soft drinks had 170 touch points and
spent 20-40 days in transit at seven different stocking points. The
machines were utilizing only 30 to 50% of the time effectively and
the remaining time was spent unproductively, either waiting for the
next batch to arrive or undergoing repair. Similarly, the trucks
were used effectively only for 30 to 50% of the time and the
remaining time they were queued up or were plying empty.
In order processing, it was found that orders were processed not
individually but in batches once a day or once a week, depending on
the product and the location of the stores. The processing passed
through eight different systems. The projections and the demand
that was forecasted by the sales team was amplified, mainly due to
long lead times, poor product availability, waiting to obtain
full
truck loads and different ordering cycles.
The supply chain review process was an eye opener for Tesco.
Based on these findings Jones and Womack, who till then
concentrated on codifying and adapting Toyotas manufacturing and
production, started studying the ways in which 'muda' (in Toyota it
meant excess interruption, misalignment, unnecessary work or
ingrained redundancies that add no value for customers) could
be removed from companies like Tesco.
Booth felt that a major overhaul was required in the way goods
traveled from the suppliers place to Tescos store shelves. During
the late 1990s, Tescos loyalty card was gaining popularity and home
shopping was being developed. To create value for customers, Tesco
concluded that it was necessary to introduce a continuous
replenishment (CR) system where products were replaced immediately,
triggered by the point of sale data. Multiple replenishments were
soon introduced and Tescos trucks started leaving the DCs every few
hours, carrying stocks of items that were
close to being sold out.
Within the stores, Tesco worked towards reducing the handling of
goods and streamlining the ir flow. For example, for some goods
like soft drinks which needed quick replenishments, shelves were
replaced with wheeled dollies
19. The dollies were rolled from suppliers into the delivery
trucks and then to the stores. Once in the stores, the dollies
were rolled to the point of sale to take the place of the usual
sales racks. This process did away with handling problems and
reduced the number of touches
20, when employees moved products from large pallets
21 to roll cages
22 and then
to the stores shelves.
For these products, Tesco achieved availability of 99.8%. The
use of dollies reduced the need for handling, as they were loaded
at the end of production line and wheeled through till they reached
the supermarket. Tesco then extended this facility to severa l
ambient grocery
23 products. After the
19 Low mobile platforms that roll on casters, used for
transporting heavy loads. 20 Touches referred to human effort made
in transporting the product. 21 A pallet is a flat transport
structure made of wood or plastic which can support a variety of
goods in a
stable fashion while being lifted by any mobile forklift device.
The goods are placed on top of the pallet,
and can be secured to it by straps or stretch-wrapped plastic
film. 22 Roll cages (also known as roll containers or roll pallets)
are half-pallet-sized platforms, with four running
castors beneath and with a wire cage mounted on the platform to
contain goods during transport. Roll cages are
used to transport goods within the factory, by lorry to a
warehouse or retail store and within the store. 23 Ambient grocery
includes pre-prepared food products that can be kept at room
temperature and require
heating/cooking before eating. These include dry instant hot
snacks and dehydrated main meals.
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6
supply chain was revamped by applying lean solutions, Tesco was
able to reduce the touch points for soft drinks from 170 to 20, and
the transit time was reduced to 1-3 days. The time between filling
the cola bottle and customer buying it, fell to five days from 20
days. For fast moving products, Tesco replaced warehouses with a
cross-dock and to meet a sudden increase in demand a small buffer
was maintained (Refer Exhibit II for Tescos operations before and
after implementing Lean Solutions).
Tescos trucks collected dollies from the DCs to deliver them at
different stores under the DC. In
each of the stores, the trucks collected empty dollies and
returned them to the suppliers, while
collecting full dollies and taking them to the DCs. While
multiple trips did result in higher carrying costs as the number of
miles traveled went up, the increase in the cost of transportation
was
compensated for by a greater decrease in inventory costs.
In the late 1990s and early 2000s, Tesco entered into agreements
with several suppliers including P&G, Unilever and Coca Cola to
change the distribution schedules. Weekly deliveries were
replaced by daily deliveries, and the suppliers also agreed to
place the cans and bottles on wheeled pallets, which could be
placed directly into shelf fixtures. The use of lean solutions in
managing
the supply chain was one of the factors that helped Tesco double
its net profits between 1999 and 2005 (Refer Table I for Tescos
financial performance between 1998 and 2005).
Table I
Tescos Revenue and Profit (1998-2005)
Year Ended Group Revenues
( million)
Profit Before
Tax ( million)
Net Profit
( million)
Earnings Per
Share (pence)
26 February 2005 37,070 1,962 1,366 17.72
28 February 2004 33,557 1,600 1,100 15.05
22 February 2003 25,280 1,361 946 13.54
23 February 2002 25,401 1,201 830 12.05
24 February 2001 22,585 1,054 767 11.29
26 February 2000 18,796 933 674 10.07
27 February 1999 17,158 842 606 9.14
28 February 1998 16,452 760 532 8.12
Source: www.tesco.com.
According to Booth, We experimented first with retail systems
linked to distribution processes,
and then moved on to inventory management, key performance
measures, store design, product mix, supplier relationships, and
ultimately our supply chain strategy.24 After the
implementation
of lean solution, lead times came down from 14 days to two days.
The suppliers lead times reduced from a maximum of 18 days to three
days. Due to these efforts, Tescos stock holding
reduced from 4.4 weeks to 2.5 weeks. The food range stock
keeping units (SKUs) increased from 5,000 to 40,000 and the service
levels improved to 98.5% from 92%.
MANAGING THE SUPPLY CHAIN
As of 2005, Tesco had 2,365 stores across the world, 1,780 of
which were in the UK opera ting on 24.2 million square feet of
retail area. In the UK, Tesco operated primarily through four types
of
stores (Refer Exhibit III for Tescos store format). The companys
international operations were
24 Leaning Toward, www.strategy-business.com, Summer 2005.
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7
spread in 12 countries across the world. The sheer s ize of
Tescos operations called for high
efficiency in supply chain. Even if the service level was at
99.9%, it still meant six million service failures.
Through effective supply chain and step change program, Tesco
was able to achieve cost savings to the tune of 270 million in
2004-05. The step change program involved identifying the processes
in the supply chain that needed transformation. Then the activities
were mapped, feasibility was assessed and the new process was
implemented. After the process was implemented, it was measured
against the desired output. One of the programs under the step
change program was continuous replenishment a system to provide the
customers the right product at the right time. Other step change
programs were: implementation of RFID, through which any object
could be tracked; use of replaceable shelves which reduced the time
used by staff in arranging the items on shelves; and self service
checkouts which were used by around 60,000 customers every week as
of 2005. The changes made by Tesco through Step Change program have
made routine operations simpler for the staff and they had more
time to attend to customers.
Customers have also benefited because of improved product
availability.
In charge of the program was the Step change program manager
based in its head office, and under him/her, there were 11 project
managers, who continuously monitored and assessed how new
technology and processes can simplify day to day activities in
Tesco. The team worked with
other functions and brought out new plans to control costs and
implement step changes.
The step change program has eliminated several unnecessary
processes, and has helped Tesco achieve sizeable cost savings.
These savings were used to reduce prices further. According to
Boston Consulting Group, Since Wal-Marts entry in the UK, Tesco has
doubled its efforts and actually raised its market share. It did
this by installing a Step Change team to lower costs and increase
responsiveness to customers. It invested the savings in lower
prices and reinforced a good-better-best pricing architecture with
a range of products under its own label.25 (Refer
Exhibit IV for some of the Step Change programs in Tesco).
Tesco focused on every step of its supply chain to ensure that
customers can find the products they need in Tesco, and at the
lowest possible prices. In order to minimize costs, Tesco sourced
materials from all across the world. It picked up products from its
domestic suppliers through
Tescos owns trucks.
SOURCING
Tesco sourced raw materials locally from several parts in the UK
and in 2002, the company established regional buying offices in
Scotland, Wales and Northern Ireland. The national buying team took
care of sourcing from suppliers in England while regional buying
teams did so for Scotland, Wales and Northern Ireland. The buying
team helped Tesco assess local market conditions and develop closer
relationships with suppliers. As of 2004, Tesco had more than 180
suppliers in Scotland. Tesco sourced 1.4 billion worth of products
from Ireland in 2004 (Refer
Table II for highlights of sourcing from Scotland and
Britain).
The international sourcing team of Tesco was based in the UK and
sourced from different parts of the world. Sourcing hubs play an
important role in procuring non-food items. They chose the
locations for sourcing, negotiated prices, placed orders and
checked the quality of the products. Tesco's buying offices in the
UK worked directly with the sourcing hubs in the UK, while the hubs
in other locations in Europe and Asia were managed by a support
team.
Tesco established an international sourcing hub in Hong Kong
during the 1970s and worked directly with the manufacturers to
provide competitive prices. It had several smaller hubs across Asia
and Africa. In 1999, Tesco started procuring products like apparel,
toys, electrical, household products, homeware, outdoor furniture
and sports equipment from Southern China. In 2001, a global buying
and sourcing super hub was established in Hong Kong, mainly to take
advantage of
lower costs in Asian countries like China, Thailand, India,
Mauritius, Bangladesh and Sri Lanka.
25 Dancing with the 800-Pound Gorilla, The Boston Consulting
Group, September 2002.
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Tesco regularly sourced clothes from India and in 2004 more than
four million T-shirts sold in its
stores across the world were procured from South India. It was
estimated that Tescos sourcing from India would cross 95 million by
2006. Tesco also sourced fabric from China, Bangladesh,
Sri Lanka; these were then consolidated in Taiwan and were sent
on to the UK. Tesco started sourcing products for its Central
European markets, which were highly cost conscious, from India.
Table II
Tesco and Local Suppliers
Tesco was the largest customer for British agricultural
products.
- 97% of Tescos fresh beef is British;
- 90% of fresh lamb and chicken is British;
- 95% of fresh pork is British;
- All fresh, UHT and organic milk comes from British farms, as
do all of the fresh eggs.
Tesco was the largest customer for Scottish agriculture. More
than 1,000 Scottish products were
sold in Tescos stores in Scotland and the labels included the
county and farm from which the supplies were obtained.
- 181 Scottish companies supply product lines to Tesco, with 676
million of product
purchased:
- Over 1,200 Scottish farmers supply fresh quality beef and lamb
to Tesco
- More than 8,500 tonnes per annum of Scottish cheese was sold
in Tesco stores in 2002;
- 2.4 million pints of fresh Scottish milk are sold each
week;
- All UK Tesco stores sell Scottish caught fish.
Source: Tesco Corporate Responsibility Review, 2005.
PRIMARY DISTRIBUTION
Tesco served its network of stores through its logistics and
warehousing arm Tesco Distribution. As of 2004, Tesco had 26 DCs
and 18 Consolidation centers (CCs) in the UK. Five CCs were
located overseas, three in Spain, one each in Italy and the
Netherlands. Through the CCs, smaller
loads from suppliers in that region were consolidated, before
being shipped to the UK. (Refer Exhibit V for the details of DCs of
Tesco in the UK).
Tesco has changed its DCs into cross docking operations, where
products from different suppliers,
heading for the same store were consolidated. Activities like
inventory holding and order picking, which were carried out at DCs,
were shifted to the location of the manufacturers, due to which
Tesco was able to decrease its inventory holding by one
third.
Tesco pioneered the primary distribution process, where it took
on the responsibility of delivering
goods from the manufacturers factory into its own distribution
network and then to DCs. Tesco
started off with primary distribution in 2001, to help it gain
more control over its supply chain.
Primary distribution helped Tesco use its distribution fleet to
the optimum level through
backhauling. As of 2005, more than 65% of the goods from
suppliers to Tescos DCs were carried
by the companys own or a contracted fleet. The suppliers sold
Tesco goods at factory gate
prices26 excluding the distribution costs.
26 Factory Gate Pricing involves identifying the component costs
of a product and then separating the
transport element. These costs include raw materials; labeling
and packaging; marketing; labor; transport
etc. It is the comparison between the transport component,
current cost and the retailer's potential costing
which will then decide how the goods will be moved in the
future.
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9
Primary distribution has helped Tesco manage inbound goods
efficiently, leading to cost savings. The process was highly
effective especially with small suppliers who had limited
distribution capabilities. By using primary distribution, Tesco
improved the movement of goods from the factories of suppliers to
its own DCs and to its stores. The smaller suppliers too have
reaped many
benefits, as they could concentrate on production and also
supply the products at a better price.
Before setting up its primary distribution system, Tesco held
meetings with groups of 30 to 40 suppliers in similar categories,
briefing them as to the processes and benefits. Then the suppliers
were asked to provide details regarding their supply chain
facilities, schedules, and locations and the costs involved in
supplying the products to Tesco. Integrating the data obtained from
all suppliers, Tesco designed a new supply chain. Then, Tesco
reached agreements with the suppliers on the frequency and timings
of deliveries and pick up schedules. Tesco addressed the issues
that
were brought up while planning its supply chain initiatives.
Tesco started off primary distribution with 120 suppliers of
frozen foods for a period of six months. By 2002, 20% of all
products in the UK were delivered through primary distribution and
80% of the frozen foods were collected and delivered to Tesco by a
third party fleet. In 2003, about 30% of all inbound freight into
the DCs, equivalent to 10,000 deliveries a week from 500 suppliers
was through primary distribution. By March 2004, primary
distribution was extended to include fresh produce, ambient grocery
and frozen products. Through primary distribution efforts,
by 2004, delivery on time improved by 14% and the stock holding
was minimized.
Tesco and its suppliers went in for Collaborative P lanning,
Forecasting and Replenishment (CPFR)
27 to analyze demand patterns. The system was used to decide on
the offline stocking
point28
, and to adjust production volumes and the stock to be held.
After initial hiccups, mainly due to suppliers reluctance to agree
to CPFR, as they were used to forecasts that were carried out in
batches and through central DCs, Tesco implemented CPFR. For
primary distribution, Tesco decided to pick up products from the
suppliers as against the earlier practice, where suppliers used to
deliver stocks at Tescos delivery centers.
CONTINUOUS REPLENISHMENT SYSTEM
In the traditional replenishment system, a store decided on the
products that were needed. The order was centralized and given to
the suppliers, who delivered the goods to regional DCs. After all
the suppliers have delivered their goods at the DC, They were
delivered to each store. In the traditional method, the sales data
for the day was posted at the end of the day and orders were made
for the next day and delivered the following day (Refer Figure I
for Tescos traditional supply chain).
Tesco introduced the CR system in 1999. The CR system of Tesco
was based on the orders obtained from the checkout counters at
different stores. The orders were placed several times a day and
the suppliers made several deliveries to the DC. As and when the
items arrived, they were assembled and dispatched to the stores.
The same system was followed for both food and non-food products.
The main aim of using CR was to cut costs, reduce lead times,
improve product
availability and maintain accuracy of orders.
In 2000, CR was provided for ambient grocery and was extended to
fresh foods by 2001. By 2002, CR encompassed clothing, bread and
morning goods
29 and was then extended to all other
categories. CR proved to be one of the key factors in Tescos
plans to improve the availability of
products.
27 CPFR is defined as a business practice for business partners
to share forecast and results data through the
Internet, in order to reduce inventory costs while at the same
time, enhancing product availability across
the supply chain. 28 Any stock that was excess of full truck
load was known as offline stock. These stocks were used as a
buffer against peaks and troughs in demand and were also used as
safety stocks against delivery failures. 29 Morning goods were the
products used for breakfast. These included pastries, sandwiches,
croissants,
bread rolls, muffins, etc.
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606-015-1
10
Figure I
Tescos Traditional Supply Chain
Note: The replenishment required arrival of all the suppliers
vehicles at the depot, after which final delivery to the stores was
carried out.
Adapted from www.tesco.com.
Continuous replenishment received the required support from
Point of Sale (POS) data. Tesco had real time data infrastructure
in place, and this provided data about the sales as and when
they
happen, helping to improve stock availability. Sales data from
the individual stores was routed to the head office, which was able
to gain access to data from over 1,200 stores, during peak times.
A
total of about 1,500 sales transactions (each transaction having
50 to 100 items) were recorded per second.
Tesco also used point of sale (POS) data to understand consumer
behavior, project sales and
manage stocks at individual stores. According to Simon Alcock,
Technical Specialist at Tesco, Managing the supply chain is
critical for Tesco in maintaining its leadership in the industry.
If
customers cant find the product they like on the supermarket
shelves, then they cant buy it. The
media has highlighted out of stocks as an issue for some of our
competitors, this solution (POS) will help us tackle the
problem.30
In the CR system, there was a continuous flow of data between
head office, depots and stores to
replenish stocks through an automated order process. Tesco
posted data every hour on each of the 40,000 product lines.
Multiple deliveries improved the availability, quality and variety
of products.
To the extent possible, products were cross docked to the
trucks, thus reducing handling and stock holding. Through this
system, Tesco was able to improve availability, maintain optimum
stock and
offer wider range of products. The average replenishment time
(time between order being placed and order arriving at the
distribution) which was earlier between 48 to 72 hours was reduced
to 24
to 36 hours and the goods reached the stores from DC within 24
hours.
In the UK, sales density was higher than in other markets.
Shelves needed to be replenished more often as the sales were
higher; stores that were fully stocked in the morning needed to be
refilled
by noon. In such a scenario, the availability of goods was of
prime importance. Tesco developed
an e-procurement program, called The Tesco Information Exchange
program31
(TIE). TIE linked all Tesco stores to their suppliers including
farmers; any surge in demand for farm products was
directly conveyed to the farmers. Using CR based on TIE, Tesco
launched its 'Full and Fresh' program in 2003; here, fresh food
deliveries were made twice a day. Every week Tesco collected
freshly harvested items from farms as per prior agreements. For
this, the orders were fed directly to the picking units in the
fields, where the required items were packed and dispatched so as
to be
available on the shelves the next day.
30 Tesco Real-Time, Point-of-Sales Data Infrastructure Handles
1500 Transactions a Second, Microsoft
Customer Solution Retail Industry Case Study, December 2004. 31
TIE linked with its suppliers using Electronic Data Interchange. By
1995, 1,300 suppliers were a part of the
system. By 1999, TIE received 130,000 hits per month. Using TIE,
Tesco could share all the sales and stock
information with the suppliers. The suppliers were able to deal
with orders and invoices online. They had
access to the Point of Sale data, which detailed how their
products fared across Tescos retailing network. The suppliers could
respond to the changes in demand quickly and ensure optimum
supply.
Store Order
Calculation
Central
Order Processing
Production
Scheduling
Transport to Depot,
Awaiting Delivery
Batched Delivery to
Stores once a Day
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11
Another factor that helped CR was the introduction of handheld
computers for staff in the stores. All
Tesco stores in the UK were provided with handheld computers to
provide key information to the sales people. These devices have
helped in simplifying stock and order operations as the staff
could
communicate with the central replenishment system to access real
time data about the levels of stock and delivery schedules (Refer
Figure II for Tescos Continuous Replenishment Supply Chain).
Figure II
Tesco Continuous Replenishment Supply Chain
Suppliers Primary Distribution Depots Delivery
Adapted from www.tesco.com.
Tescos customer service desks had access to the company's
intranet and all the key processes were automated. Tesco introduced
self service checkouts, on a trial basis at 21 stores. These
have
helped in reducing queuing and congestion and the cus tomers
were given a wider choice (Refer Table III for details of products
delivered per week in different Tesco stores).
ADOPTING RFID TECHNOLOGY
Tesco started using RFID technology, which it called radio bar
codes, on a trial basis from January 2003. The company started by
tagging Gillette product lines, mainly to understand the
technology
and how it would help in reducing shoplifting and pilferage. The
trial ended by August 2003. Before adopting RFID, Tesco posed three
questions Does RFID improves the customer's
experience? Does it simplify the employees processes? Does it
reduce costs?
In June 2003, Tesco extended the use of RFID to managing the
sale of DVDs at its Sandhurst hypermarket. Tescos DVD supplier
Entertainment UK was also actively involved in the project.
The RFID tag was embedded into the packaging and as customers
took DVDs off the shelf, the
message was sent to a central system that could be accessed by
both Tesco and Entertainment UK. By accessing the system,
Entertainment UK was able to replenish the DVDs quickly. The
trial
continued till January 2004.
Table III
Tesco Deliveries Per Week
Tesco Extra Tesco Superstore Tesco Metro Tesco Express
Fast Moving Goods > 21 12 14 7
Slow Moving Goods 6 5 4 3
Frozen Food 7 7 6 6
Beer, Wine & Spirits 6 5 3 3
Produce & Chilled >21 14 7 7
Non-Food 7 7 5 3
Source: Tesco Account Watch, IGD Research, 2004.
Receive Orders
More than Once
a Day
Smoothed Goods in Profile
Eliminates Traffic
Logjam
Store Orders Assembled as
Stock Arrived
Multiple Deliveries
Efficient Fleet Utilization,
Faster Replenishment
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To use RFID technology in its supply chain, Tesco started
tagging cases from DC in Milton Keynes to two stores in
Peterborough and St.Neots. In September 2003, when the trials
began, the tagging was carried out at the DCs. In December 2003,
tags were placed at the point of production. The tags were used to
monitor the route of the product from supplier to the DC and then
to the stores. In 2004, Tesco carried out another trial by tracking
the movements of packaged goods from six suppliers, and then
non-food items began to be tagged in a phased manner.
After successful completion of the pilot program in January
2005, Tesco announced incorporation of more than 4,000 bar code
readers and 16,000 antennae across 1,300 Tesco stores and 35 DCs in
the UK. By December 2005, RFID was extended to toiletries,
batteries and mobile phones which were tracked from the central DC
of Tesco to 98 superstores located across the UK. Tesco set a
deadline of September 2006, for its suppliers to adopt RFID tags
(Refer Table IV for use of RFID in Tesco).
The main advantage of RFID over bar codes was that it used
microchips to transmit product codes to scanners without human
intervention and the products could be tracked throughout the
supply chain. RFID provided more information compared to bar codes.
RFID was touted as a system that provided unique identification and
security for each package right from the time it is
manufactured
to the time it is sold (Refer Exhibit VI for details of RFID
enabled supply chain).
Tesco used RFID technology because it helped in measuring and
controlling every aspect of the supply chain. It enabled faster
processing of goods, lowering costs and higher employee efficiency
through improved availability of goods. Other benefits that RFID
presented were the option to trace the products from source to
consumer, the option to automatically scan the entire shopping
trolley resulting in quicker checkout, and reduction in thefts as
the scanners at the exit could identify the products that were not
paid for.
LOOKING AHEAD
In the East European Markets, Tescos logistics and supply chain
were not well developed and relied heavily on deliveries from
suppliers. This was a viable proportion for the large stores but
not for the smaller ones. As Tesco planned to expand smaller stores
in Eastern Europe, developments in the supply chain became
necessary. In Thailand and Korea automated DCs have been
operational. For Tesco to gain an edge over other multinational
retailers entering these markets, it
was necessary to build viable supply chain solutions.
Tesco was in the process of developing an international supply
chain. In Hungary, Tesco opened Fresh Produce DC and Ambient
grocery DC in 2002 and in 2004; a composite DC and a fresh food DC
were opened. In March 2003, Tesco opened 1.5 million sq ft DC in
Korea. In 2003, the first DC in Poland was opened in Warsaw. In the
same year a 260,000 sq ft DC with a capacity of 29,000 pallets was
opened in the Czech Republic. In 2004, Tesco opened a 209,000 sq
ft
composite DC in Dublin, to supply products to all the Tesco
stores in Ireland.
Table IV
Radio Barcodes in Tesco
Better, Simpler, Cheaper are Guiding Principles of Tesco
Better (for customers)
Improved Availability
Know what we have got and where it is
Improved service for the customer
Reduced prices
Simpler (for Staff)
Contd
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13
Contd
One touch replenishment
Improved accuracy in all areas
Many tasks will become much simpler / redundant
Cheaper (for Tesco)
Reduced costs
Reduced shrink
Reduced waste
Reduced stock holding
Reduced Prices
Source: EPC Global US Conference, 2004.
Consumer demand had become the main driver in store deliveries.
Tesco has been able eliminate touch points for products like colas
by using bottles on cages which were directly rolled onto delivery
trucks and then to the retail floor. On an average total touches
were reduced from 150 to 50. Inventory stocking points were reduced
from five to two. Tesco was able to provide more products based on
the demand patterns in different stores. According to analysts,
Tesco was successful in implementing its supply chain strategy, as
its stores were located close to one another in the UK and the
strategy might not be successful in countries like USA where the
stores of
retailers are widely dispersed.
After the implementation of Lean Strategy, inventory holding and
order picking which was earlier carried out at the DCs was done by
the manufacturers themselves. This has helped Tesco to reduce the
supply chain cost by 20%. The effective use of SCM has helped Tesco
to become the lowest cost retailer in Britain. Tesco has also been
able to achieve higher margins and profits. Depot space utilization
was at 90% in 2003 as against 85% in the year 2002. The lower
space
utilization served to provide higher capacity during peak
seasons like Christmas and Easter.
It isnt Tesco alone that has benefited from lean solutions; some
of its suppliers like Br itvic have benefited too. Britvic improved
the flexibility of the filling lines and started producing in small
batches according to the customers' orders. Lean solution has
reduced the need for it to stock a large inventory of finished
goods. Suppliers to Tesco were not required to maintain DCs as the
goods were picked up immediately. Every year Tesco held suppliers
conferences around the world, where suppliers met the board members
to get an insight into Tescos business needs and emerging customer
trends.
Industry analysts felt that full-scale implementation of RFID
would not be easy. The RFID tag was quite expensive at 50p each and
was suitable for high value products like electronic goods and CDs.
For low cost products like soft drinks, they turned out to be
expensive relative to the price of the product. Several suppliers
might not be able use them on each product individually. Another
challenge with the use of RFID was that the scanner could not read
the tags correctly when they
were close to metals or liquid.
Tescos Primary Distribution too had many loopholes and often,
the suppliers were ready with the goods, while Tesco was not
equipped to collect them. The timeliness and reliability of pick
ups by trucks nominated by Tesco, was not always better than those
of the suppliers. According to Richard Brasher, Commercial
Director, Tesco, The primary distribution network (between
suppliers and distribution centers) isnt optimised yet. Im
basically not in a position to say that
Tesco is offering the most competitive rate and always turns up
at factories or depots on time. 32
32 Watson, Elanie, Tesco Admits Failures,
www.foodmanufacture.co.uk, December 05, 2005.
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Exhibit I
Supply Chain Top 10
Rank
2005
Rank
2004
Company AMR
(40%)
ROA
(25%)
Inventory
(25%)
12 Months
Growth
Composite
Score
1 1 Dell 346 13.1 86.8 18.7 19.37
2 3 Procter & Gamble 289 11.4 5.7 18.5 13.23
3 4 IBM 278 13.2 16.7 8.0 12.89
4 2 Nokia 234 14.1 12.7 7.0 11.54
5 6 Toyota Motor 231 4.8 11.1 34.0 11.24
6 7 Johnson & Johnson 191 16.0 3.0 13.1 10.91
7 - Samsung 110 15.7 9.2 31.5 10.67
8 5 Wal-Mart 241 8.5 7.1 10.3 10.41
9 9 Tesco 207 6.7 24.3 8.5 9.66
10 8 Johnson Controls 172 5.4 24.2 17.3 9.21
Source: www.amrresearch.com.
AMR Research Opinion based on panel of experts forced rank
order
ROA: 2004 Net Profit/2004 Total Assets
Sales/Inv.: 2004 Sales/2004 Year-End Inventory
Composite Score = [(AMROpinion/10)*40%] + [(ROA*100)*20%] +
[(Sales/Inv.)/5)*20%] + [(Twelve
months growth*100)*20%]
Exhibit II
Tesco Before and After Lean Solution (Example of Cola)
Before Lean Solution :
- Five storage locations between bottler and consumer
- Six order-entry points
- 20 day throughput time
- 98.5% service level (Grocer Industry Average 92%)
After Lean Solution :
- Two storage locations
- One order entry point
- 5 day throughput time (75% reduction in total inventory)
- 99.5% service level.
Source: Lean Enterprise Institute.
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Exhibit III
Tescos Store Format
Tesco Express, in convenience stores format, typically occupies
an area of 3000 square feet. Initially, Express stores were opened
as petrol forecourt shops and the first Tesco Store was
opened in 1994 and as of 2005 there were around 546 Tesco
Express Stores. The stores sold 7000 Lines of products fresh
produce, wines and spirits. The stores also had an in-store
Bakery.
Tesco Metro occupied an area of around 7000 15000 square feet
and was opened in 1992.
The stores were located in city centers and offer a wide range
of products including fresh foods, takeaways and lunchtime items.
There were 160 such stores as of 2005.
Tesco Superstore was opened during 1970s, and several stores
were added during 1980s and 1990s, as of 2005 there were 446
Superstores occupying area of 13.9 million square feet. Over
the years, several non-food ranges became a part of the Tesco
Superstore.
Tesco Extra operated in area of around 50,000 to 100,000 square
feet. In 1997, Many superstores were converted into Extra stores.
Tesco Extra provided a wide range of food and
non food items including homeware, clothing, health equipment,
beauty products apart from seasonal furniture.
Source: www.tesco.com.
Exhibit IV
Tescos Step Change Program
Through Step Change productivity program, Tesco identified
savings from its own operations. Some of the Step Change programs
are:
- Increasing the volume of products going through primary
distribution channel to 50%, by collecting more products from
suppliers on the way back from stores to distribution centers
thereby reducing the number of miles trucks drive empty.
- Using hand held scanners in all stores, allowing staff to
access product and stock
information at the shelf edge.
- Establishing a dedicated clothing distribution centre handling
all clothing going into the UK stores, so that suppliers have the
option of delivering to just one distribution centre rather
than several or to hundreds of stores.
- Productivity gains lead to cost savings, which can be invested
in reducing prices.
Adapted from www.tesco.com.
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Exhibit V
Tescos Distribution Centers (2003)
No. of Stores Served
National Distribution Center
Fenny Lock 780
Daventry 780
Brackmills 780
Klin Farm 780
Composite Distribution Center
Magor 129
Temperature Controlled
Chepstow 94
Middleton 2 74
Hinckley 86
Snodland 87
Doncaster 91
Harlow 104
Didcot 88
Southampton 56
Livingston 78
Unity 420
Belfast 33
Regional Distribution Centers
Welham Green 90
Middlewich 130
Thurrock 129
Crick 92
Weybridge 96
Middleton 1 370
Strood 281
Dundee 77
Antrim 37
Source: Tesco Account Watch, IGD Research, 2004.
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Exhibit VI
RFID Enabled Supply Chain
Supplier
RFID Tag is attached to the label or is embedded into packaging.
Each product has a unique number enabling it to be tracked within
the suppliers own supply chain. Once the retailer places
an order, the supplier picks the order and verifies the correct
quantities that have been filled by using readers at the loading
bay doors.
Retailer Warehouse
As the order is unloaded, the readers at the unloading bay
verify the delivery against what was
ordered. Access to information will be in real time and allows
increased flexibility in the operation. For example, the retailer
may decide to immediately direct part of the unloaded
product to a vehicle being loaded for delivery straight to the
store.
Retailer Store
Upon delivery, readers at the backdoor check what the store has
ordered against what the RDC has delivered, automatically updating
the book stock. As a customer buys a product off the
shelf, it allows staff to replenish the item with what is in
stock. If there is no stock available in store, the system will
alert staff as soon as the next delivery is unloaded.
Adapted from www.tesco.com.
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Additional Readings & References:
1. Food Stores Create Global Marketplace , BBC News, March 31,
2000.
2. Labi, Aisha, The Virtual Grocer, Time Europe, October 30,
2000.
3. Charter, Martin, Kielkiewicz-Young, Aleksandra, Young, Alex,
Hughes, Andrew, Supply Chain Strategy and Evaluation, The Sigma
Project R&D Report, January 2001.
4. What Webvan Could Have Learned from Tesco, Strategic
Management, Wharton,
October 10, 2001.
5. Seybold, Patricia, Shopping Online at Tesco, The Hindu
Business Line, March 07, 2002.
6. Dancing With the 800-Pound Gorilla, The Boston Consulting
Group, September 2002.
7. Braithwaite, Alan, Achieving World Class Supply Chain and
Logistics in the Chemical Industry, EPCA Logistics Meeting, Monaco,
November 12, 2002.
8. Jones, Daniel T., Clarke Philip, Creating a Customer Driven
Supply Chain , ECR Journal,
Winter, 2002.
9. Ross, Stuart, Supply Chain Management Supporting New Products
Implementation in Tesco, www.eltrun.aueb.gr, September 2003.
10. Jones, Daniel T., How Lean is the Grocery Supply Chain , IGD
Supply Chains of the
Future Conference, March 23, 2004.
11. Donoghue, Andrew, Proceed With Caution, www.zdnet.com.au,
May 11, 2004.
12. Clarke, John, Clear Vision: Confirming Performance Tesco ,
EPC Global US Conference,
September 30, 2004.
13. Account Watch Tesco, Institute of Grocery Distribution,
October, 2004.
14. Friscia, Tony, OMarah Kevin, Souza Joe, The AMR Research
Supply Chain Top 25 and The New Trillion Dollar Opportunity, AMR
Research Report, November 2004.
15. Watson, Kathy, Tesco Rolls out Secure Supply,
www.foodmanufacture.co.uk, December
13, 2004.
16. Tesco Real-Time, Point-of-Sales Data Infrastructure Handles
1500 Transactions a Second, Microsoft Customer Solution Retail
Industry Case Study, December 2004.
17. ADT Announces Tesco to Purchase RFID Readers , www.adt.com,
January 11, 2005.
18. UK : Tesco / Sainsbury: Food for Thought , Datamonitor,
January 12, 2005.
19. Underhill, William, Another Giant On the Rise , Newsweek
International, April 25, 2005.
20. Knights, Miya, Schedule System Shortens Tesco Checkout
Queues , VNUNet.com, June 09, 2005.
21. Off the Peg: Tesco and the Garment Industry in Asia,
www.corporatewatch.org.uk, June 2005.
22. Kleiner, Art, Leaning Toward Utopia,
www.strategy-business.com, Summer 2005.
23. Quinn, Francis J., The Lion of Lean: An Interview with James
Womack , Supply Chain
Management Review July 01, 2005.
24. Tesco This Sceptered Aisle , The Economist, August 04,
2005.
25. Time for Supply Chain Quid Pro Quo,
www.foodmanufacture.co.uk, September 06, 2005.
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26. Womack, James P., How Lean Consumption Transforms
Manufacturing & Supply
Chains , Industry Week Smart Manufacturing Conference
Bloomingdale, Illinois, September 20, 2005.
27. What Toyota Knows about Supply Chains , Supply Chain Digest,
November 04, 2005.
28. Tesco Store Managers Use Handhelds for More Time on the
Sales Floor, www.editricetemi.com, November 26, 2005.
29. Watson, Elanie, Tesco Admits Failures ,
www.foodmanufacture.co.uk, December 05, 2005.
30. www.tesco.com.
31. www.tescocorporate.com.
32. www.tescofarming.com.
33. http://retailindustry.about.com.
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