Tesco-Case Study

Tesco is the UK’s largest food retailer, with a sales turnoverof more than 67.5 billion. While it has some 638 stores in centralEurope, and some 636 in the Far East, most are in the UnitedKingdom and Northern Ireland, where it has nearly 1,800. Thisnumber has increased rapidly as Tesco entered the convenience storemarket with deals such as the Tesco Express alliance with Esso torun grocery shops at petrol stations. The product range held by thestores has grown rapidly in recent years, and currently stands at65,000 stock-keeping units (skus) depending on the size of thestore as Tesco broadens its presence in the ‘non-food’ market forelectrical goods, stationery, clothing and the like.This massiverange is supported by 3,000 suppliers, who are expected to provideservice levels (correct time and quantities) of at least 98.5 percent by delivering to Tesco within half-hour time ‘windows’.Volumes are equally impressive. In a year, some 2.5 billion casesof product are shipped from suppliers to the stores.

Tesco states that its core purpose is ‘to create value forcustomers to earn their life- time loyalty’. Wide product range andhigh on-shelf availability across that range are key enablers ofthat core purpose. So how do you maintain high availability of somany skus in so many stores? This question goes to the heart oflogistics management for such a vast organisation. Logistics isabout material flow, and about information flow. Let us look at howTesco deals with each of these in turn.

Tesco operates Composite distribution centres (called regionaldistribution centres, RDCs), which can handle many products atseveral temperature ranges. The opportunity is to provide acost-effective daily delivery service to all stores. Typically, acomposite distribution centre can handle over 60 million cases peryear on a 15-acre site. The warehouse building comprises 25,000square metres divided into three temperature zones. Eachdistribution centre (DC) serves a group of between 100 and 140retail stores. Delivery vehicles for composite depots can useinsulated trailers divided into chambers by means of movablebulkheads so they can operate at different temperatures. Deliveriesare made at agreed, scheduled times. Ambient goods such as cans andclothing are delivered through a separate grocery distributionnetwork which relies on a stocked environment where orders arepicked by store. This operation is complemented by a strategicallylocated trunking station which operates a pick to zero operationfor fast-moving grocery on merchandise units that can be placeddirectly on the shop floor.

So much for the method of transporting goods from supplierthrough to the stores, but how much should be sent to each store?With such a huge product range today, it is impossible for theindividual store to reorder across the whole range (store-basedordering). Instead, sales of each product line are trackedcontinuously through the till by means of electronic point of sale(EPOS) systems. As a customer’s purchases are scanned through thebar code reader at the till, the sale is automatically recorded foreach sku. Cumulative sales are updated every four hours on TescoInformation Exchange (TIE). This is a system based on InternetProtocol that allows Tesco and its suppliers to communicate tradinginformation. The aim of improved communication is to reduceresponse times from manufacturer to stores and to ensure productavailability on the shelf. Among other things, TIE aims to improveprocesses for introducing new products and promotions, and tomonitor service levels. Based on the cumulative sales, Tesco placesorders 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 distributioncentres by ordering only what was needed to meet tomorrow’sforecast sales. For fast-moving products such as types of cheeseand washing powders, the aim is day 1 for day 2: that is, to ordertoday what is needed for tomorrow. For fast-moving products, theaim is to pick to zero in the distribution centre: no stock is leftafter store orders have been fulfilled and deliveries to stores aremade as soon as the product is picked, which increases the stockavailability for the customer. The flow of the product into thedistribution centre is broken into four waves and specific productsare delivered in different cycles through the day. This means thatthe same space in the distribution centre can be used several timesover.

Question-Case study

Differentiate between Tesco’s logistics and marketing channels?