TESCO’S SUPPLY CHAIN MANAGEMENT PRACTICES
Introduction
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 gained 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.
Background
Tesco was founded in 1910 by Jack Cohen, who invested his serviceman’s gratuity of £30 in a
grocery stall. He opened his first stall in 1929. Influenced by the supermarket I America, Cohen’s
maxim for the retail was ‘pile it high and sell it cheap’. Tesco opened its first self-service store in 1948
and its first supermarket in 1956. The company continued to expand during 1960s, and opened its
first superstore, with an area of 90,000 square feet, in 1967.
By 1967, Tesco’s image had become very downmarket at a time where shoppers were
becoming more demanding. To arrest the downslide in its fortunes, Tesco overhauled its stores,
concentrating on its superstore and refurbishing its remaining smaller stores. Tesco diversified into
petrol retailing in 1974. By 1979, he company’s turnover had reached £1 billion.
In 1985, Ian MacLaurin became Tesco’s first CEO from outside the Cohen family. MacLaurin
streamlined Tesco’s operations, closing most of the smaller stores and opening large 30,000 square
foot stores in the suburbs. Tesco also introduces a centralized distribution system, added fresh food
and its own label for food products. These were successful moves. In the 1990s, the UK supermarket
industry faced saturation. Tesco’s was now the country’s second largest supermarket chain with a
market share of 16.7 per cent, behind Sainsbury’s at 19 per cent. The other major competitors were
Asda and Safeway. Several warehouse stores like Costco and discount stores like Aldi, Lidl and
Netto also entered the UK. In 1997, tesco’s marketing director, Terry Leahy, became the new CEO.
He had introduced new pricing policy of lowering prices to match those of Asda, which resulted in
Tesco’s prices being 4-5 per cent lower than those at Sainsbury’s and Safeway.
Tesco’s SCM initiatives
The key period for Tesco’s supply chain initiatives was between 1983 and 1996, when the company
introduced several systems including point of sale scanning, centralized ordering, centralized
distribution, automated warehouse control and electronic data interchanged (EDI).
Graham Booth was Tesco’s Supply Chain Director from 1985 to 2002. Looking to improve
Tesco’s supply chain practices, he felt that it was necessary to have a stock replenishment system
triggered by customers. Booth approached Dan Jones of Cardiff Business School. Jones, James
Womack, and Daniel Roos were the authors of The Machine that Change the World, the book that
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famously explained the concept of ‘ Lean Production’ pioneered by Toyota. The essence of lean is to
eliminate waste and remove all activities that do not contribute to the value of products. Using Jones’
knowledge of Toyota’s manufacturing methods, Tesco set about finding ways in which ‘muda’ (waste
in all its forms) could be eliminated.
At Jones’ suggestion, Booth set up a team of cross functional experts from Tesco and Britvic –
a company that supplied cola to Tesco, to analyse the supply chain system for cola. They traced the
journey of cola can backwards from a Tesco checkout counter, to Tesco’s regional DC, to the DC of
Britvic, the warehouse at Britvic’s bottling plant, the filling lines of the cola and ultimately to the can
supplier. The team realized that there were several opportunities for making improvement and
reducing costs. There was a lot of unnecessary handling where the stock moved from the supplier, to
the DC and then to the store. The drinks had 170 touch points1 and spent 20-40 days in transit at
seven different stocking points. The machines were utilizing only 30 to 50 per cent of the time
effectively, with the remaining time spent unproductively, either waiting for the next batch to arrive or
undergoing repair. Similarly, the trucks were used effectively for only 30 to 50 per cent of the time, the
remaining time they were queued up or playing 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 products and the location of the stores. The processing
passed through eight different systems. The projections and the demand 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.
Booth felt that a major overhaul was required in a way goods traveled from the suppliers to
Tesco’s stores shelves. Consequently, Tesco decided to introduce a continuous replenishment (CR)
system whereby products were replaced immediately, triggered by point of sale data. Multiple
replenishment were soon introduced and Tesco’s 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 the handling of goods and streamlining their flow. For
example, for some goods like soft drinks which needed quick replenishments, shelves were replaced
with wheeled dollies2. The dollies were rolled from the 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 way with the handling problems and reduced the number of touches,
when the employees moved product from large pellets3 to roll cages4 and then to the stores’ shelves.
For these products, Tesco achieved availability of 99.8 per cent. The use of dollied reduced the need
of handling as they were loaded at the end of production line and wheeled through until they reached
the supermarket. After applying lean solutions, Tesco was able to reduce the touch point for soft
drinks from 170 to 20, and the transit time was reduced to one to three days. Table 1 details the
performance improvements.
Tesco’s trucks collected dollies from 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
collected full dollies and taking them to the DCs. While multiple trips did result in higher carrying costs
as the number of mile travelled went up, the increase of the cost of transportation was compensated
for by a greater decrease in inventory costs.
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