SCM 303 Introduction to Supply Chain Management: Tesco

TESCO, Every Little Helps

By: Eric Wells and Kristin Hamelrath

http://www.tesco.com

At Tesco, “[they] make what matters better, together” (Core Purpose). With over 530,000 employees in twelve different countries, Tesco works together to serve tens of millions customers every week in stores and online. Like most corporations, Tesco began small and grew gaining popularity and market share. In fact, it was founded in 1919 by Jack Cohen from a market stall (immobile temporary structure) in London’s East End (Tesco History). Tesco is primarily known as a British grocery market leader with market shares of 29% in the UK (Tesco Market Shares). It is less famously known for providing a range of simplistic personal banking options including mortgages, credit cards, and personal loans. Tesco expanded into the financial services sector in order to reward loyal customers for shopping at Tesco (Tesco Bank). Something really unique about Tesco is their supply chain strategy and how they are constantly evolving from a culture of “more is better” to “making what matters better” (Core Purpose).

Tesco has recently made many changes to their business practices, specifically their supply chain. This has added many unique features to their supply chain. Tesco has said in order to improve their supply chain they need to start working closer to their suppliers, “Our version of this is called ‘producer club’, a social community where we share our intellectual property with producers and farmers” (Food Manufacture). Tesco has shifted their focus to working with suppliers to reduce problems facing the food supply chain. In the late 2000s Tesco has shifted to a vertical supply chain, focusing primarily on distribution. They have also implemented more flow principles and lean principles, and adjusted to a “just in time” inventory system (Tesco SC Transformation). Tesco has also tried to reduce supply chain complexity from their system. By reducing the complexity from their system they have greatly cut waste from their process.

One very unique process that Tesco uses in their supply chain is a statistical model that uses weather to predict customers buying behavior (Tesco Supply Chain Analytics). Tesco now compares historical weather data to sales data in over 3000 stores to see what products increase in demand, and decrease in demand. They also understand the importance of context. A 70 degree day can mean two different things if one area is predominantly hot while another is predominantly cold. They also factor in the duration of weather. Tesco informed “And people are more likely to break out the barbecue when a sunny days follows a prolonged cold spell” (Tesco Supply Chain Analytics). Tesco has stated that they have reduced their out of stock for warm weather items by a factor of four and that there is a 97% change of people coming into this store and finding what they need.

Tesco’s supply chain “wins” in a variety of ways. The underlying cause of their supply chain success stems from communication. A majority of their communication is with their suppliers, in order to more purchase, transport, and hold more efficiently. The other main area of communication is within the company. Tesco has shifted their promotional pricing program from having one stock controller at each store decide the demand for upcoming sales promotions. Tesco has shifted to having their supply chain analytics team review promotions and use historical data to create a predictive model. The team then uploaded this onto a web based system that will allow a stock controller see the sales predictions for their individual store. This has saved Tesco over £50 Million in stock outs (Tesco Supply Chain Analytics)

Tesco also does a great job communicating with their suppliers to reduce waste as much as possible. Tesco has worked hard with their suppliers to create their biggest winner with innovation in their packaging. This program is called “Retail-Ready Packaging”. The concept is that items that are stocked at Tesco should be more than shelf ready they should be retail ready. “One-touch replenishment is popular at Tesco. The idea is to use secondary packaging that lets store personnel put multiple primary units on a shelf in one movement rather than removing all 12 from a corrugated shipper and placing them one at a time on a shelf.” (Retail-Ready Packaging) There is a 5 step process that Tesco follows to ensure that their items are retail ready:

Easy to recognize in the warehouse within 2 seconds
Easy to open in less than 5 seconds
Easy to replenish with only one touch
Easy to shop
Easy to collapse/break down in 2 seconds

The most desired skill/attribute for Tesco is their ability to communicate both internally and externally. When Tesco increases communication externally with suppliers they decrease waste from ordering too much of a perishable item that goes bad on the shelf, or too little of an item that has a high demand. Communication with suppliers and the packaging companies also allows them to create one-touch replenishment and increase efficiency within their store. Internal communication is also greatly desired because it allows them to more accurately project sales forecast and demand forecast, and keep inventory close to the perfect level and greatly reduce the amount of stock outs that occur.

Tesco also has a tremendous use for historical data. Having access to this data allows them to perform numerous functions. Historical data allows them to access previous weather trends and sales, and predict in the future how independent factors such as weather will affect demand. Historical data also allows Tesco to see how promotions affect demand and which types are more efficient. They can then communicate this information internally which helps stores stock controllers choose the amount of an item they should order for their stores upcoming promotion.

Although Tesco is a leader in their market with a winning supply chain, they still face certain threats. The most notable threats are increased competition and possible future price increases. As stated in the beginning paragraph, Tesco had market share of 29% but that was a drop from 30% the prior period (Tesco Market Shares). The 1.5% drop is attributed to a decline in sales by about 3.1%. Tesco’s largest competitors are Aldi and Lidl which are forcing Tesco to reduce prices in an effort to retain customers. Tesco looks to their supply to chain to reduce costs which in effect would reduce the price the customer pays. However, while Tesco is looking to reduce supply chain costs, they face the threat of an increase in prices whether its attributable to transportation or production costs. See below for a SWOT analysis of Tesco’s supply chain.