QUESTION ONE [50]

Read the scenario below and answer the questions that follow.

Tesco is the UK’s largest food retailer, with a sales turnover of more than €67.5 billion. While it has some 638 stores in central Europe, and some 636 in the Far East, most are in the United Kingdom and Northern Ireland, where it has nearly 1,800. This number has increased rapidly as Tesco entered the convenience store market with deals such as the Tesco Express alliance with Esso to run grocery shops at petrol stations. The product range held by the stores has grown rapidly in recent years, and currently stands at 65,000 stock-keeping units (skus) depending on the size of the store as Tesco broadens its presence in the ‘non-food’ market for electrical goods, stationery, clothing and the like. This massive range is supported by 3,000 suppliers, who are expected to provide service levels (correct time and quantities) of at least
98.5 per cent by delivering to Tesco within half-hour time ‘windows’. Volumes are equally impressive. In a year, some 2.5 billion cases of product are shipped from suppliers to the stores. Tesco states that its core purpose is ‘to create value for customers to earn their lifetime loyalty’. Wide product range and high on-shelf availability across that range are key enablers of that core purpose. So how do you maintain high availability of so many skus in so many stores? This question goes to the heart of logistics management for such a vast organisation. Logistics is about material flow, and about information flow.

Let us look at how Tesco deals with each of these in turn. An early reform for supermarket operation was to have suppliers deliver to a distribution centre rather than to every store. During the 1980s, distribution to retail stores was handled by 26 depots. These operated on a single-temperature basis, and were small and relatively inefficient. Delivery volumes to each store were also relatively low, and it was not economic to deliver to all stores each day. Goods that required temperature-controlled environments had to be carried on separate vehicles. Each product group had different ordering systems. The network of depots simply could not handle the growth in volume and the increasingly high standards of temperature control. A new distribution strategy was needed. Under the ‘composite’ distribution system, many small
depots with limited temperature control facilities were replaced by composite distribution centres (called regional distribution centres, RDCs), which can handle many products at several temperature ranges. The opportunity is to provide a cost-effective daily delivery service to all stores. Typically, a composite distribution centre can handle over 60 million cases per year on a 15-acre site. The warehouse building comprises 25,000 square metres divided into three temperature zones: frozen (25°C), 2°C (chilled) and 12°C (semi-ambient). Each distribution centre (DC) serves a group of between 100 and 140 retail stores. Delivery vehicles for composite depots can use insulated trailers divided into chambers by means of movable bulkheads so they can operate at different temperatures.

Deliveries are made at agreed, scheduled times. Ambient goods such as cans and clothing are delivered through a separate grocery distribution network which relies on a stocked environment where orders are picked by store. This operation is complemented by a strategically located trunking station which operates a pick to zero operation for fast-moving grocery on merchandise units that can be placed directly on the shop floor. 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 bar code reader at the till, the sale is automatically recorded for each sku. Cumulative sales are updated every four hours on Tesco Information Exchange (TIE). This is a system based on Internet Protocol that allows Tesco and its suppliers to communicate trading information. The aim of improved communication is to reduce response times from manufacturer to stores and to ensure product availability on the shelf. Among other things, TIE aims to improve processes for introducing new products and promotions, and to monitor service levels. Based on the cumulative sales, Tesco places orders with its suppliers by means of electronic data interchange (EDI). As volumes and product ranges increased during the 1990s, food retailers such as Tesco aimed to destock their distribution centres by ordering only what was needed to meet tomorrow’s forecast sales. For fast-moving products such as types of cheese and washing powders, the aim is day 1 for day 2: that is, to order today what is needed for tomorrow. For fast-moving products, the aim is to pick to zero in the distribution centre: no stock is left after store orders have been fulfilled and deliveries to stores are made as soon as the product is picked, which increases the stock availability for the customer. The flow of the product into the distribution centre is broken into four waves and specific products are delivered in different cycles through the day. This means that the same space in the distribution centre can be used several times over.
Questions:

1.1 Discuss how Tesco collaborates with its suppliers to streamline logistics processes. (15)

1.2 Identify and discuss Tesco’s core competencies that contribute to its competitive advantage and how do these competencies differentiate Tesco from its competitors. (15)

1.3 Briefly analyse Tesco’s cost leadership strategy and how does this strategy contribute to its competitive advantage. (20)

QUESTION TWO [20]

Warehousing and distribution services can get complex, especially when products need to be shipped from location to location without delay. Inventory management becomes more complex when items need to be organized and kept track of in a warehouse for a longer period of time.
With this regard,

Examine the major influence of inventory management systems and routing softwares on reducing warehouse and inventory holding costs. Provide real life examples to substantiate your discussion. (20)

Answers to Above Questions on Tesco Case Study

Answer 1: An analysis of the Tesco case study indicates that the company has a good network with its supplier in order to ensure smooth logistic processes and cost efficient performance within its operation. The important activities within its supply chain process that supports its collaboration with its supplier include consolidation through its distribution centre, temperature controlled logistics, just in time inventory system, supplier performance monitoring and many more.