Information Flow from Supplier to Supermarket
Large supermarket stock-outs primarily result from issues in their complex supply chain systems that involve a vast network of organisations, facilities and activities. Problems with the distribution system, bullwhip effects and ineffective retail processes are also major factors (Emerald). In Tesco’s case, different products have different supply chain systems which can often be difficult to manage. This report presents an analysis of the complicated information flow between the Supermarket, its warehouse and suppliers; and the potential root causes of some of its stock-outs. Furthermore, an analysis is made of a function that could be outsourced by the Supermarket, and its use of dynamic capacity and demand shaping strategies to manage customer demand.
Stock-outs and their Potential Root-Causes
Planning problems in the Supply Chain: Lettuce and Courgettes- Tesco primarily sources these items from southern European countries such as Spain, which have recently been hit by adverse weather conditions. Consequently, suppliers have been unable to produce and ship the usual amount of vegetables to meet the same amount of demand (Rodionova, 2017). To minimize its ordering and inventory costs, Tesco most likely places high-frequency, low EOQ orders of its vegetable stock due to their perishable nature. Taking this supply for granted, and poor forecasting and planning may have led Tesco to order insufficient quantities of these items to meet demand.
Poor Reorder-Cycle Inventory management system or Replenishment problems: Heinz Ketchup This item may have run out-of-stock due to a combination of factors such as ineffective ordering practices or weak replenishment. As a frequently promoted item at the store, Heinz ketchup has a high demand, but may not receive adequate attention for reorder necessities from the store management (Balasubramanian et al., n.d.). To replenish these stocks, it is likely that Tesco follows a lengthy reorder-cycle system for this item where stocks are only checked and ordered at fixed intervals. Therefore, Tesco may not place an order upstream as high demand depletes the quantity of this item. By following the ROC style of order placing, Tesco may only order these items monthly or weekly to keep its order costs low instead of ordering frequently as required.
Alternatively, weak replenishment practices at the store or warehouse could have led to a stock-out. For instance, Tesco may have held this product in a backroom area at the store but not on the shelf. Factors such as insufficient or busy staff who don’t replenish the shelf frequently, bad planogram execution, inadequate shelf space resulting from allocating space to slow-moving items, or poor back-room inventory handling procedures resulting from excessive inventory levels that lead to congestion may have prevented the store personnel from getting the product onto the shelf. (Gruen, Corsten and Bharadwaj, 2002; Aastrup and Kotzab, 2009; Balasubramanian et al., n.d.)
Upstream replenishment issues at the warehouse level resulting from insufficient inventory to meet demand, longer lead times of delivering the item form the warehouse to the store, infrequent or no replenishment of the distribution centre could have also led to a stock-out of this item. Additionally, the product may have been available at the warehouse but not transported to the store due to lack of communication about the inventory data between the retailer and the warehouse.
Poor Reorder-Point replenishment patterns: Baked Goods-Wholemeal Bread – Bakery stock-outs vary by time of day and/or day of week. The out-of-stock rate for baked good is low in the morning and afternoon perhaps due to overnight stocking practice, but high in the evening. Also, on Sundays when labour is normally at a lower level, high demand items like baked goods get depleted due to poor replenishment patterns. Tesco most likely follows a Reorder-Point system of inventory management for its fast-moving items which are probably ordered in advance upon reaching an inventory level that prompts an action to replenish the items. Assuming that there is very little replenishment lead time between ordering and procuring the baked goods and by setting an inadequate reorder-point, Tesco possibly had a stock out due to an unanticipated rise in demand, as a result of weak forecasting, during the replenishment lead time; or due to an increase in the replenishment lead time as the order may have been held up by the supplier and arrived later.
Bullwhip Effect: P&G Pampers Active Fit Large Bag (Diapers)
Variable demand patterns cause demand volatility issues which tend to be amplified upstream in the supply chain. A bullwhip effect occurs either because suppliers produce more than the inventory levels required by the retail stores or far below them. The bullwhip effect across the supply chain can result in high inventory related costs due to higher production whereas as significantly low inventory levels can make it difficult for the manufacturer, and therefore, Tesco to serve its customers due to a stockout (Croson and Donohue, 2005; Balasubramanian et al., n.d.).
Initially, Tesco may have faced lower than expected demand for diapers resulting in excess inventory. An inaccurate demand forecast may have caused the retail store management to lower the supply on future inventory orders of diapers thereby amplifying this effect further down the supply chain whereby the warehouse may have ordered an even lower amount of the item; potentially causing the manufacturer futher reduce its demand forecast and produced even less. An unanticipated rise in customer demand,thus, may have led to a stockout as a concequence.
Outsourcing Potential of Advanced Analytics, including Big Data and CRM tools and its Implied Benefits.
As part of the retail industry, Tesco most likely uses some form of tracking methods to gather and analyse huge amounts of customer and inventory data which can provide valuable insights to identify and remedy stock-out causes and clearly oversee its operations. According to consulting firm McKinsey, Big Data solutions offer future potential to generate productivity gains between $30 billion and $55 billion across the entire retail industry (McKinsey & Company, 2015). For instance, Tesco can use its loyalty card programme to gather important information about customer spending habits to carry out targeted advertising and promotion (Ferguson, 2013). While gathering large amounts of data is relatively simple, sorting through and mining this information to deal with potential stock-outs and other operational issues poses a significant challenge (McKinsey & Company, 2015). Furthermore, installing and managing complex advanced analytics, Big Data and large scale CRM software requires substantial investment in capital, human resources and training.
To prevent loss of sales from stock-outs, Tesco can outsource this function to a third-party big Data and Analytics firm that already has advanced technical skills, expertise, and infrastructure in place to effectively gather, collect and analyse all the data that will be useful for improving Tesco’s sales services, supply chain, and in-store operational efficiency regarding inventory management. Outsourced mining of data also offers Tesco numerous operational and economic benefits as the challenges of gathering and monitoring complex data concerning customers and inventory is transferred to a third-party that has the capacity to consolidate all this information across its own infrastructure. Additionally, these firms will not cost Tesco as much as it would cost to have a specialised in-house department to carry out this task. The supermarket can also utilize the outsourced firm’s innovative solutions that incorporate data acquisition, analysis and management to provide vital information about consumer spending, and inventory levels to prevent stock-outs and adequately satisfy customer demand.
This provides Tesco with greater competence to improve and refocus its resources towards its core functions of warehousing, logistics and inventory management instead of spending on expensive software, analysts and other associated costs thereby reducing fixed and indirect costs for the Supermarket (Sweeney, 2007). Third-party Analytics and big data management also enables the collection and analysis of past customer purchases to accurately predict future demand forecasts and take the necessary actions to further prevent stock-outs (Brown et al., 2011).
Chasing Variable Demand with Dynamic Capacity: Implementation and Drivers
Demand can vary and so can the number of people at checkout as a result. For instance, in peak and off-peak periods, short -term mechanisms are required to ensure that sufficient capacity is available to meet demand (slack and lewis). In this case, supermarkets use dynamic capacity to chase variable demand. Tesco uses chase strategy to control capacity level by altering the extent of resources such as varying the number of staff and/or the hours worked, or by using customers as a resource by way of self-service to deal with demand volatility (Armistead and Clark, 1991).
For instance, the number of people operating the tills varies with demand. When long ques begin to develop, more tills become operational to speed up the checkout process and additional store staff is utilized to operate the check-outs. Simultaneously, by installing automated scanning and payment machines, Tesco also uses another chase demand strategy to encourage customers to engage in self-service by checking out and paying for the goods themselves rather than going to a human-operated checkout. In the latter case, one or two members of staff is assigned to assist customers with using this service. This helps avoid customer queing at peak-times and prevents loss of customers who do not wish to stand in long ques. In off peak times, there are fewer tills in operation and less staff is required. In this case, Tesco limits its staff-operated checkout service provisions to push customers to use the self-service checkout machines.
This enables Tesco to manage variable demand patterns, balance capacity and demand in the short-term, and maximize revenue through satisfied customers. By adjusting levels of activity and matching checkout service capacity to demand levels within the supermarket, Tesco benefits by flexibly, efficiently and continually utilizing its operational resources to keep up with demand. This helps Tesco maintain effective capacity, maximize efficiency and accomplish service quality levels offered to customers. Cost savings is also achieved by leveraging staff and machines for varaiable demand as resources are minimized in off-peak times and maximized in peak periods, allowing Tesco to ensure that its resources are not underutilized and used to their full potential. Furthermore, this strategy primarily requires unskilled employees to perform the jobs for low pay. As the skill-level requirement for “chase” is low, Tesco is able to save significantly on training costs (Sasser, 1976).
Demand Shaping: Implementation and Drivers
Product mark downs and de-promotions are an example of demand shaping at the supermarket. This is done to influence customer demand levels at certain times so that they match inventory levels. Demand shaping strategy also helps smooth out customer demand during inventory excesses and shortages, therefore, improving efficiency (Ervolina et al., 2007). Through careful customer management, this strategy enables Tesco to maintain efficient inventory levels.
Tesco implements demand shaping by adjusting prices and advertising though marketing practices to increase or decrease demand in order to profitably align it with supply. For instance, when the Supermarket has excess inventory of a certain item, it reduces the price on that product by heavily discounting the item and carries out aggressive marketing to stimulate higher customer demand by encouraging shoppers to come to Tesco to buy more of that item. This enables Tesco to correct the excess supply situation which could otherwise result in inventory obsolescence and write-offs.
In contrast, when there is shortage of an item due to limited inventory, Tesco tries not to aggressively sell that product by reducing advertising and de-promoting the item. This stimulates less demand by encouraging customers to buy less of that product. This form of demand shaping prevents the item’s demand from exceeding its supply which would otherwise require emergency procedures to cope with the excess demand such as paying higher prices for the inventory items, or for accelerating the procurement order; and adding staff overtime shifts to deal with the high demand; all of which could consequently increase costs and reduce profits.
By recognizing supply issues, demand shaping enables Tesco to create sales programs to imporve those issues and better coordinate its supply and selling activites as a result. This leads to increased profitability and ensures sufficient supply is available to meet demand generated.