Strategic Logistics – Tesco

Tesco case studyDiscuss the wider role of warehousing and distribution within the overall company strategy, and explain how it has enabled Tesco to become more competitive in the food retail industry.

Warehousing is an important activity in the distribution of raw materials through to the finished goods. It plays an important part in the supply chain within which it operates and its roles and objectives should be determined by the objectives of the supply chain. Warehousing can be costly in terms of people, facilities and equipment as its performances will impact directly on overall supply chain performance. The role of the warehouse and distribution centre is to “facilitate the movement of goods from suppliers out to customers; in order to achieve this effectively they may have to hold stock” (Rushton, 2000).

Tesco has four main methods of warehousing and distribution. These are:1.Regional ambient distribution centres – these are for room temperature products such as dry groceries.

2.Bonded warehouses3.National distribution centres – these are for slower moving and more durable lines such as hardware and textiles. There are also three centres that handle health and beauty lines.

4.Composite distribution centres – there are eight composite centres in the Tesco warehousing network. They are composite because they handle every type of fresh and frozen foods.

In particular, Tesco’s composite distribution centres have provided the company with a number of benefits that has made them more competitive than any other supermarket. Firstly, the move of daily deliveries of composite product groups to all stores in waves has provided Tesco with the opportunity to reduce the levels of stock they hold at all their stores, and also to reduce the need for storage facilities at store level. The result of this is seen at store level in the better use of overall floor space which allows for more selling space and in stock terms by a continuous reduction. The second benefit this has given to Tesco is the improvement of quality resulting in the reduction in wastage as products reach the store in a more desirable condition.

The use of better forecasting systems minimises loss of sales due to out of stocks and the introduction of more rigorous application of code control results in longer shelf life on delivery which in turn enables Tesco to satisfy and exceed legislation requirements on food safety. Thirdly, the introduction of composite delivery has added benefits in productivity terms. The economies of scale and enhanced use of equipment provides reduced capital costs and operationally reduces costs through less congestion within the store. Throughout the system there is an emphasis on maximising productivity and efficiency on operations, enabled by planned involvement in various new technologies.

Tesco is an extremely successful company and a major part of its success has been due to its distribution network, Tesco has successfully applied lean distribution and just in time strategy into their distribution network. Using just in time within their distribution network gives Tesco a competitive advantage over its competitors by reducing inventory costs and improves scheduling. It also insures proper protective maintenance and stress quality in all phases of production from quality by suppliers to quality within Tesco. For Tesco this has given its customers a number of benefits such as:•Queue and delay reductions•Quality improvements, reduces waste and wins orders•Cost reduction increases margins and reduces selling prices•Variability reductions in the workplace reduces wasteAll these benefit in turn enables Tesco to respond faster in meeting the customer’s needs at lower costs and with higher quality results in a major competitive advantage for Tesco.

The value chain concept was first introduced by Michael Porter in 1985. The value chain model is used to describe the activities within an organisation which together create a product or service. It is the cost of these value activities and the value that they deliver that determines whether or not best value products and services are developed. Porter identified the value chain as a means of analysing an organisations strategic activities in order to understand the behaviour of costs.

From Porters Value Chain I will be focusing on the inbound logistics and outbound logistics factors of the value chain as these are the ones that apply to Tesco’s logistics strategy.

Inbound logistics include the receiving, warehousing and inventory control of input materials. All processes such as distributing stock to the manufacturing departments are done here. Operations are the value creating activities that transform the inputs into the final product. The inbound logistics is of critical importance in the Tesco value chain because of the strong bond between Tesco and its suppliers. Tesco needs to make sure that the stores get the right products at the right price, the right quality and at the right time. Balance between these elements is important so that at the end the customers get what they want. The inbound logistics is one of Tesco’s competitive advantages and deals with response of products, staff scheduling, facilities planning, stock control and storing. Outbound Logistics are the activities required to get the finished product to the customer, including warehousing, order fulfilment. The activities concerned with displaying Tesco’s produce for their customers to view e.g. supermarket shelves.

But it is not enough to only look at the internal capabilities of Tesco for that reason the value network is useful in understanding inter-organisational links and relationships. Tesco has an enormous supplier power which gives them competitive advantage and makes the entire link between the supplier and Tesco an important strategic capability. Tesco leaves the responsibility at the supplier, so they can focus on their stores, online shop and the most valuable area, the consumers. The suppliers make Tesco profitable and give them the kind of differentiation and advantage that makes them the market leader in the UK.

Information and communication systems offer organisations new ways of developing logistics and supply chain strategies that improve customer service. Explain how this might have assisted Tesco’s logistics strategy.

Information and communication technologies have come to play a crucial part in the world of business in recent years. Theorists have proposed that for business operations, logistics and supply chain practitioners to be competitive in the industry they need to be efficient and effective. In order to be efficient and effective it is important to invest in the application of electronic technology because the application of relevant modern technology will assist logistic organisations to deliver goods and services of the right product, in the right quantity, in the right condition, at the right time, at the right place, at the right cost and for the right customer.

The application of relevant technology must be efficiently and effectively managed. Business revolution in logistics and supply chain has been brought about by the use of electronic technology. Information and communication technologies have helped businesses in the supply chain to be integrated so that processes and activities in the supply chain have been able to be properly coordinated with the assistance of electronic technology. Common electronic technologies available are barcode systems, electronic points of sale (EPOS) and electronic data interchange (EDI).

Tesco has used information and communication systems to build links to suppliers by transmitting the information gathered through scanning and checkout technology to them immediately and with the help of EPOS and EDI. This means forecasts and stock requirement have greater accuracy leading to increased sales, reducing ordering times, fewer shortages and wastages. Tesco also use technology such as Radio frequency identification (RFID) within their company. RFID helps to achieve easier, faster and paperless packing processes. Using RFID key performance indicators can automatically be measured at it allows labour costs to be reduced.

By this technology Tesco distribution networks have gained achievements in the following areas:•Delivered quantities versus what was ordered (availability or service)•Delivery time lines•Rejection of products•Level of damagesThe advantages this has had for Tesco’s logistics strategy are that information contained on the tag can be updated and changed and are less vulnerable to being damaged as they are not as easily defaced as barcodes are. Also RFID tags can be read from a distance and can be read through packaging material therefore is time saving. Mixed pallets of different products can be read at once by one scanner therefore reducing the time significantly.

Tesco uses a bar-coding system to scan their products, the barcode contains details of the products, it assists Tesco’s logistics by collecting information about the product and exchanges it at the warehouse and sales at the store. It also encourages domestic and international competition between supply chains in terms of their shippers, carriers, warehouses, wholesalers and retailers. The ID systems allow channel members to quickly track and communicate movement details with a low probability of any errors which could be costly. Tesco’s use of barcode systems has many benefits such as; it improves checkout accuracy where few errors are made as it is all done electronically.

There is an average of 15% of time saved using the barcode reader than manually inputting the prices also there is improved customer service for Tesco something every company needs in order to stay popular and in business. In addition to this, the checkout till can store sales information and as a result of that it can also be used to create the orders for stock replacement therefore saving Tesco having to employ someone to go around checking the stock levels for them and because of this the company does not need to buy as much stock that is not going to be bought, this makes the stock control more efficient as well as having less money tied up in stock or running out of certain items on the shop floor.

Another information and communications technologies Tesco use is Electronic Point of Sales (EPOS). This type of technology in particular has revolutionised the process of paying for products because it is used for the scanning of goods which takes a note of the product, price and records the transaction. This system can recognise when a product needs to replenished which for Tesco is an advantage because it provides them with an instant record of transactions at the point of sale. Therefore replenishment of products can be coordinated in real time to ensure that stock-outs are minimised. It also speeds up the process of dealing with customers when a large number of products are bought. This also relates to Tesco’s club card system which rewards customers with discounts for continuing to shop with them where they collect points each time they spend money in the store. This is an extremely useful advantage because the cards with the customers personal details is linked to their actual purchases therefore allowing Tesco to obtain much needed marketing information about their customers.

Tesco use electronic data interchange within their company. It is the “computer to computer exchange of structured data for automatic processing” (Rushton, et al 2006). This type of technology is used to exchange important information that is needed for the running of the business. It helps Tesco’s logistics by providing timely information about their customers’ sales that is accurate and very efficient because it does not require staff to get the information manually. EDI can be used to send invoices, bills, confirmation of dispatches, shipping details and any information that the linked organisations choose to exchange. Using EDI gives Tesco’s a number of benefits such as, information only needs to be entered into the computer system once, transactions are made faster and there is a reduction in costs and error rates. The use of this technology gives Tesco a sustainable competitive advantage by the management of the space-time network that links Tesco to its environment.

One of Tesco’s most valuable forms of technology is its website www.tesco.co.uk. The secret behind the success of Tesco’s internet shopping is an extremely well organised logistics system. Its purpose is to ensure that Tesco’s stores have the right products delivered against the agreed delivery schedules and in good condition, enabling the stores to provide a consistently high level of customer service. Integrating computer technology with its existing physical logistics systems, Tesco is actively putting itself in prime position to benefit from the increasing interest in electronic shopping.

Information and communication systems within Tesco has assisted Tesco’s logistics strategy in terms of the benefits it has had on the actual company and its customers in the way they provide a good customer service which in turn has allowed it to be one of the leading retailers in the UK. For the customer Tesco’s information and communications systems have made the running of checkout services faster and more efficient therefore reducing the queuing times. Tesco’s have been able to order fewer goods and then only order them in when they are needed; this saves money for Tesco and gives the customers fresher food.

The benefits for Tesco in having a successful information and communications systems are due to the more efficient stock control, there is a much less chance of goods being out of stock, checkouts are more efficient and more computerised than they used to be therefore causing less chance of errors made by staff, mainly due to the barcode reader. The use of information and communication systems has enabled Tesco to use sales forecasts and profiles leading to more efficient use of shelf space and has assisted Tesco’s logistics strategy because there is little warehouse space required in each supermarket due to distribution systems and has given management the ability to monitor the performance of checkout staff more efficiently and effectively.

BibliographyBooks

•Fernie, J. Sparks, L. (2004) Logistics and Retail Management: Insights into Current Practice and Trends from Leading Experts Kogan•Gattorna, J. (1998) Strategic Supply Chain Alignment: Best Practice in Supply Chain Management Gower Publishing Ltd•Hines, T. (2004) Supply Chain Strategies: Customer Driven and Customer Focused Butterworth-Heinemann•Rushton, A. Oxley, J. Croucher, P. (2000) The Handbook of Logistics and Distribution Management, The Institute of Logistics and Transportation London: Kogan•Rushton, A. Croucher, P. Baker, P. (2006) The Handbook of Logistics and Distribution Management, Chartered Institute of Logistics and Transport in the UK London: KoganWebsites•www.tesco.com/corporate•http://www.provenmodels.com/26/value-chain-analysis/porterJournals•Gurãu, C. Ranchhod, A. Hackney, R. (2001) “Internet Transactions and Physical Logistics: Conflict or Complementarily?” in Logistics Information Management, Vol 14 no.1/2, pp. 33-43