Question: Tesco PLC is the UK’s largest
Tesco PLC is the UK’s largest food retailer, with a revenue of about £51 billion for the financial year 2016–17. Across 11 countries in Central Europe and Asia, Tesco employs about 440,000 people making it a truly global business and now it has approximately 6,800 stores (including franchises). Tesco continues to see growth in most countries, however, whilst about half of the Tesco stores are outside the UK, the UK business still dominates, accounting for over two thirds of the revenue. With this in mind, the remainder of this case focuses on Tesco UK.
Between 2010 and 2013 the number of stores in the UK rose quickly from 2,300 to 3,146, and this was partially due to the opening of further Tesco Express stores (smaller convenience stores, which are now by far the most numerous), 54 of which opened over a 6-month period in 2013. Since 2013 the rate of increase in the number of stores has slowed, reaching 3,433 in 2017 (see Table 1.1 for a breakdown of the different store formats). The slowing rate of new store openings is mainly due to the increase in online sales in common with many other retailers. Consistent with the multi-channel approach (discussed in Section 2.1.3), Tesco UK operates an online Tesco store (Tesco.com), where its full range of products, estimated at around 75,000, is available. This channel offers delivery of products can direct to the customer’s home or, by using ‘Click and Collect’, the customer can choose a convenient Tesco store (or other location) from which to pick up their order.
When Tesco.com was first opened, Tesco online orders were ‘picked’ from stores open to the public (rather than distribution centres). However, since 2009 Tesco UK has operated a number of ‘dark’ stores dedicated to the fulfilment of online orders.
Tesco’s UK stores as of 2017
As shown in Table 1.1 there are now six Tesco.com dark stores. Dark stores, otherwise known as dotcom stores, are distribution centres (DC) that exclusively process online orders and are not open to consumers from the general public. They may be similar to conventional supermarkets laid out with aisles of shelves but, dissimilar to retail stores, there are no shop assistants or check-outs. Online orders are processed and optimised picking routes are created, which take into account the store layout. The online orders are then picked 24 hours a day, 7 days a week, by DC employees, known as ‘personal shoppers’, who normally are processing multiple orders at the same time.
I recent years the product range offered by Tesco has expanded quickly, establishing a presence in the non-food market for such items as entertainment, toys, electrical goods, clothing, gardening and the like. This extensive range is supplied by thousands of suppliers, who are contracted to meet specified service levels (in terms of both timing and quantities) by delivering to Tesco within specific time ‘windows’. Considering just England 270 suppliers are each supplying more than 1,250 products. The annual quantities delivered to Tesco stores by suppliers are staggering at around 2 billion cases of product. This is part of a virtuous circle where Tesco develops economies of scale with its suppliers, allowing it to provide attractive offers for consumers, which results in Tesco selling more, and increased economies of scale and this the cycle continues. This is an important element of the Tesco business model.
Material flow from suppliers to stores
An early improvement for supermarket operation was to ensure suppliers delivered to depots rather than to every store. During the 1980s, 26 depots distributed to retail stores and these depots were small and not so efficient with just a single-temperature operation - no chiller or freezer areas. It was not economically viable to deliver to each store every day, because delivery volumes were relatively low. Any products that needed temperature-controlled conditions were transported on special separate vehicles. Ordering system were not common across product groups but instead differed leading to further inefficiencies and complexities. This depot network was unable to process the volume growth and the more demanding standards for temperature control, therefore an improved distribution strategy was required.
Fresh food depots, which provided a number of different storage temperature environments, replaced many of the existing small depots which had insufficient temperature control facilities. The opportunity was to provide a cost-effective daily delivery service of fresh product to all stores, based on the idea that commonly, a fresh food depot can process over 80 million cases per year with a 40-acre site. The depot building provides three temperature zones: -25C (frozen), 1°C (chilled) and 12°C (semi-ambient). Each depot serves a group of between 50 and 500 retail stores. To enable fresh food delivery vehicles to, not only operate at different temperatures, but be able to vary the space available at each temperature, insulated trailers were used which were divided into chambers by means of movable bulkheads. Using both in-house and outsourced logistics, deliveries to stores are made within scheduled time windows. Long shelf life food and non-food products, such as dried food and electrical items, are delivered separately.
Tesco has introduced different retail store formats (as shown in Table 1.1) – Extra, Superstore, Metro, Express and One Stop – which vary considerably in size from 6,500 square metres (Extra) to 150 square metres (One Stop). They also stock different product ranges and are strategically positioned in different locations from out of town (Extra) to city centre (Express). The resulting variety in terms of both product ranges, location and size and design of store presents major challenges to supply chain management. For instance, delivering to a Tesco Express in the middle of London will require frequent small deliveries using small vans facing strict restrictions in delivery times. On the other hand, a Tesco Extra will require lorry load deliveries of a much wider product range (Tsinopoulos and Mena, 2010).
In September 2018 Tesco announced its plans to launch a chain of discount stores. Chief executive Dave Lewis claimed that Jack’s – named after Tesco founder Sir Jack Cohen – would be cheaper than Aldi or Lidl. Jack’s stores will sell 2,600 products – far fewer than the 35,000 carried by a Tesco Superstore – with 1,800 branded ‘Jack’s’. This compares to the reduced variety offered by Lidl and Aldi. It is a strategy to drive lower prices through aggregating demand onto fewer suppliers and improving distribution and retailing efficiencies through the simplicity, and reduced volatility in demand, enabled by lower variety.
Information flow
So much for the method of transporting goods from supplier through to the stores, but how much should be sent to each store? With such a huge product range today, it is impossible for the individual store to reorder across the whole range (store-based ordering). Instead, sales of each product line are tracked continuously through the till by means of electronic point of sale (EPOS) systems. As a customer’s purchases are scanned through the barcode reader at the till, the sale is recorded automatically for each stock-keeping unit (SKU). Cumulative sales by store are updated frequently on Tesco Information Exchange (TIE), a system based on Internet technology. TIE enables Tesco and its suppliers to more effectively communicate trading information to reduce leadtimes from manufacturer to stores and to maintain high product availability on Tesco’s shelves. TIE enables many improvement initiatives, such as improving the introduction of new products, running promotions, and monitoring service levels.
Using sales information on TIE Tesco places orders with its suppliers by means of electronic data interchange (EDI). During the 1990’s, volumes and product ranges increased and food retailers such as Tesco reduced stock in their depots by ordering only what was required to meet the next day’s forecast sales. For fast-moving products such as washing powders and certain types of cheese, the aim is day 1 for day 2: that is, to order today what is needed for tomorrow. The target is to pick to zero in the depot so no stock is left after the store orders have been fulfilled. This way the same space in the depot can be used many times over. To improve product availability at stores during a given day, and meet fluctuations in demand through the day, deliveries to stores are made in two waves, at specific times and within defined windows.
Questions
1. Describe the key logistics processes at Tesco UK.
2. What do you think are the main logistics challenges in running the Tesco UK operation?
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