Operations Management At The Tesco Supermarket Business Essay

Tesco is the Britain’s biggest and most profitable supermarket chain throughout the world. In my assignment I have focused on the process of the supply chain management of Tesco. I have advised many operational strategies to successfully run the supply chain process and the major issues relating to process. The department has to bring the security measures in consideration as well, for which they use bar codes and security codes on the products, which help in reducing the chance of being theft and eventually preventing the store from loss. My report covers different aspects relating to process issues; capacity issues quality matters, marketing issues and finance issues.

The coordination among operation, financial issues, marketing strategies and customer satisfaction is highlighted in this report. Tesco is generating more turnover every time by using best latest technology for example, self checkouts and strategies like reduce to clear strategies, cut of prices, buy one get one free, Tesco gift cards, double up vouchers offer, shopping reward for petrol and etc. In my report I have also tried to cover the international market approach of Tesco, which at present operating in 13 countries.

1.0 Introduction

The second largest retailer in Europe is Tesco and fourth largest in the world. John Edward Cohen.Jack founded the company in 1924. He was known as a market stall trader in the east end of London in 1919. The name Tesco was first used on tea and was formed from the initials of Cohen’s tea supplier, T E Stockwell, combined with the first two letters of Cohen. Tesco Stores Limited was incorporated in 1932.

Tesco being the huge retailers have effective supply chain management and information systems, I will debate about the Tesco supply chain management, using value chain analysis model. The issues Tesco is having within its supply chain process and the strategic issues. I will comment on all such issues and problems then I will recommend some suggestions using appropriate operations management strategies.

What Is Process Analysis?

An operation is composed of processes designed to add value by transforming inputs into useful outputs. Inputs may be materials, labour, energy, and capital equipment. Outputs may be a physical product (possibly used as an input to another process) or a service. Processes can have a significant impact on the performance of a business, and process improvement can improve a firm’s competitiveness.

I have researched about the leading retailer organization in the UK Tesco Ltd and the process I have chosen in Tesco to analyse is its supply chain system and processes.

What is Supply Chain Management?

“The planning and management of all activities involved in sourcing and procurement, conversion, and all Logistics Management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence. Supply Chain Management integrates supply and demand management within and across companies.”

(The Council of Supply Chain Management Professionals (CSCMP) from Grant et al. (2006 p. 15)

Overview of Tesco Supply Chain Process

Watford in England, Tesco and Procter & Gamble are leading organizations when it comes to supply chain, according to a survey of international food and grocery specialist IGD, based here. The senior executives from 50 international companies taken a survey in November 2005, showed the characteristics of a leading retailer to include sales and profit growth, a strong customer focus, an integrated supply chain, a distinct business model, and strong collaborative relationships.

Process Analysis of Supply Chain Management in Tesco

The Process Analysis Diagram below shows the Tesco’s process of procurement in its Supply Chain. Its illustrates how Tesco purchasing system works in it information systems.

Purchasing Process of Tesco

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In a Tesco’s Purchasing process flow diagram, processes starts one after the other and performed sequentially. Processes works in parallel are performed simultaneously.

In the above diagram, raw material is held in a storage bin at the initial stage of the process. After the last task, the output also is stored in a storage bin.

The Process starts from a websites and then using the budgeted amount it requests for the fill out purchase request approval form and it can be a request for the quote from supplier. Then the message if approves goes to the department (purchasing manager) which is responsible for the approval of the purchases and will get approved from there and it send the message to the request quote from supplier which from there goes to supplier and the supplier receives the message and starts manufacturing or arranging delivery for the organization. The purchasing manager sends that approved message to the inform source of decisions from where its goes to the requestor and the whole process goes on in the same way.

5.2 RMA Processing System

The analysis diagram below explains the process of RMA in Tesco. It begins from the request and through the number of sequential processes it ends up either in receiving goods or the returns of goods.

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The complete RMA process is quite clear from the above figure that how it works, Let me tell you about it in points.

A complete RMA request is submitted and it goes to Customer Relations Management.

The Customer Relations Management receives the request and reviews it with an intention to either accept it or reject it.

Then if the request approves or CRM say yes then it will create a return of goods order in ERP. If it says No then the system sends the customer with rejection information.

After creating return of goods order in ERP it provides the customer with an RMA number.

At the end of the process customer returns the goods and send them back to the company.

On the other side in the process the company match the RMA number of the customer and receive the goods.

6.0 Process Performance Measures

The Operations managers are usually interested in processing aspects such as cost, quality, flexibility, and speed. Some of the performances measuring processes, which help communicating these aspects, include:

Process capacity – The capacity of the process is its maximum output rate, measured in units produced per unit of time. The capacity of a series of tasks is determined by the lowest capacity task in the string. The capacity of parallel strings of tasks is the sum of the capacities of the two strings, except for cases in which the two strings have different outputs that are combined. In such cases, the capacity of the two parallel strings of tasks is that of the lowest capacity parallel string.

Capacity utilization – The amount of the process capacity that is actually being utilized.

Throughput rate Or Flow Rate – the average rate at which units flow past a specific point in the process. The maximum throughput rate is the process capacity.

Flow time (also known as throughput time or lead time) – the average time that a unit requires to flow through the process from the entry point to the exit point. The flow time is the length of the longest path through the process. The flow time includes the processing time and any time the unit takes between steps.

Cycle time – It is the time in between successive units in return of output from the process. Cycle time for the process is equal to the inverse of the throughput rate. Cycle time can be thought of as the time required for a task to repeat itself. Each series task in a process must have a cycle time less than or equal to the cycle time for the process. Put another way, the cycle time of the process is equal to the longest task cycle time. The process is said to be in balance if the cycle times are equal for each activity in the process. Such balance rarely is achieved.

Process time – the average time that a unit is worked on. Process time is flow time less idle time.

Idle time – time when no activity is being performed, for example, when an activity is waiting for work to arrive from the previous activity. The term can be used to describe both machine idle time and worker idle time.

Work In process – the amount of inventory in the process.

Set-up time – It is the time required to prepare the equipment to perform an activity on a batch of units. Set-up time usually does not depend strongly on the batch size and therefore can be reduced on a per unit basis by increasing the batch size.

Direct labour content – the amount of labour (in units of time) actually contained in the product. It excludes the idle time where workers are not working directly on the product. It also excludes the time spent on maintaining transporting materials, machines, etc.

Direct labour utilization – the fraction of labour capacity that actually is utilized as direct labour.

6.1 Little’s Law

In the process the stock is related to the flow rate and throughput time by the following equation:

W.I.P. Inventory = Throughput Rate x Flow Time

This relation is known as Little’s Law, named after John D.C. Little who proved it mathematically in 1961. Since the flow rate is equal to 1 / cycle time, Little’s Law can be written as:

Flow Time = W.I.P. Inventory x Cycle Time

http://www.netmba.com/operations/process/analysis/

6.2 The Process Bottleneck

In This process capacity is usually determined by the slowest series task; that is, having the slowest throughput rate or longest cycle time. This slowest task is known as the bottleneck. The Identification of the bottleneck process is a most critical aspect of process analysis since it not only determines the process capacity, but also provides the opportunity to increase that capacity.

Managing time and saving time in the bottleneck process saves time for the whole process. Saving time in a non-bottleneck task does not assist the process since the flow rate is restricted by the bottleneck. It is only happens when the bottleneck is finished that another process will become the new bottleneck and presents a new opportunity to improve the process.

If the new slowest activity is much faster than the bottleneck, then the bottleneck is having a major impact on the process capacity. If the new slowest task is only little faster than the bottleneck, then increasing the throughput of the bottleneck will have a limited impact on the process capacity.

6.3 Starvation and Blocking

The process of Starvation occurs when a downstream activity is idle with no inputs to process because of upstream delays. The process of Blocking occurs when an activity becomes idle because the next downstream activity is not ready to take it. Both the starvation and the blocking can be decreased by the addition of buffers that hold stock between tasks.

7.0 Process Improvement

The common issues like cost, quality, flexibility, and speed are usually improved. The following lists some of the ways that processes can be improved.

Reduce work-in-process inventory – reduces lead-time.

Add additional resources to increase capacity of the bottleneck. For example, an additional machine can be added in parallel to increase the capacity.

Improve the efficiency of the bottleneck activity – increases process capacity.

Try to keep the work away from bottleneck activities where possible and thus improve process capacity.

Increasing the availability of bottleneck resources, for example, by the addition of an additional shift – increases process capacity.

Decrease non-value adding activities – reduce cost, reduces lead-time. Non-value adding tasks incorporate transport, rework, waiting, testing and inspecting, and support activities.

Redesigning the product for effective manufacturability – can improve several or all process performance measures.

The flexibility can be made better by outsourcing specific processes. Besides this by postponement, which shifts customizing activities to the end of the process results in the enhancement of the flexibility?

In some cases, dramatic improvements can be made at minimal cost when the bottleneck activity is severely limiting the process capacity. Moreover, in well-optimised activities, essential investment may be required to achieve a marginal operational improvement. Because of the large investment, the operational gain may not generate a sufficient rate of return. A cost-effective analysis should be performed to determine if a process change is worth the investment. Ultimately, net present value will determine whether a process “improvement” really is an improvement

8.0 Financial Evaluations of Tesco’s Supply Chain

Tesco’s Total Supply Chain Management Costs metrics attempt to segment cost centres into process based activity.

8.1 Order Management Cost

Customer Service Cost

Cost centres that have to do with entering customer orders, reserving inventory, credit check, consolidating orders, processing inquiries and quotes.

Finished Goods Warehouse Cost

Cost centres that has to do with the storage, receiving, picking, and shipment of finished good products.

Outbound Transportation Cost

A cost centre that implicates the cost associated with the transportation (all modes including export) of finished goods products.

Contract and Program Management Cost

Cost centres that have to do with the initiation and on going management of customer contracts including master agreements, compliance to volume based incentives, and other special incentives.

Installation Planning and Execution Costs

Cost centres that have to do with the planning and execution of product installation at customer designated locations.

Accounts Receivable Cost

Cost centres that have to do with the processing and closure of customer invoices including collection.

8.2 Material Acquisition Cost

Purchasing Cost

The cost centres associated with both the strategic as well as the tactical parts of the purchasing process.

Raw Material Warehouse Cost

The cost centres associated with the receiving, storage, and transfer of raw material product.

Supplier Quality Cost

The cost centres allocated to supplier qualification, product verification and ongoing quality systems for raw materials.

Component Engineering and Tooling Cost

The cost centres allocated to the engineering (design and specification) and tooling costs for raw materials, i.e. packaging.

Inbound Transportation Cost

Cost centres allocated with the transportation (all modes including import) of raw material and/or purchased finished good products.

Accounts Payable Cost

Cost centres that have to do with the processing and closure of supplier invoices including credit and disputes.

8.3 Planning Cost

Demand Planning Cost

It is a cost centre for unit forecasting and overall demand management.

Supply Planning Cost

The cost centre for supply planning includes overall supply planning, distribution requirements planning, master production planning, production scheduling.

Supply Chain Finance Control Cost

The cost centres in finance allocated to reconcile unit plans with financial plans, account and control supply chain cost centres, and report financial performance of the supply chain SCOR (Supply Chain Operations Reference) card.

8.4 Inventory Carrying Cost

Opportunity Cost

Inventory dollars times the cost of money for your company.

Obsolescence Cost

The further costs of obsolescence in the form of accruals and/or write offs.

Shrinkage Cost

The costs of shrinkage in the form of accruals and/or write offs.

Taxes and Insurance Cost

The cost centres allocated to the payment of taxes and insurance for inventory assets.

8.5 IT Cost for Supply Chain

Application Cost

Cost centres briefing the fixed costs are associated with supply IT application costs to Plan, Source, Make, Deliver, and Return.

8.6 IT Operational Cost for Supply Chain

The centres of costs summarizing the ongoing expenses associated with maintenance, upgrade, and development of IT costs to support Plan, Source, Make, Deliver, and Return.

9.0 Tesco Operations Management Theory (Value Chain)

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9.1 Primary Activities

(Currently, Adds value (+), losses value (-), Potential to add value (P+))

Inbound logistics

In the start of the process inbound logistics are put at the earlier stage of the value chain, as they possess the earliest opportunity to create value. That’s why; the components of this stage are considered to be upstream activities. The supplying activities, in this case, include the receipt of goods from suppliers, storage of goods, handling & transportation of goods internally and placing the products on the shelves. Tesco aims to keep the level of consumer choice maintained in store (+), whilst improving the efficiency of its distribution system (+). In implementing a quality control regulations concerning damaged goods and products, it provides an excellent opportunity to reduce costs unfairly incurred by the company, therefore preventing these costs being passed on to the consumer (P+).

Operations

The production components of Tesco’s activities are service focused. So, processes could be the second upstream opportunities that enable services and products to be provided, tasks such as opening every day in accordance with trading hours, maintaining the shelves, and the stock (+). In order to gain future competitive advantage success Tesco has to consider extending further in terms of operating hours in those places, where it does not occur or opening new Metro and Express stores (P+). However, law might restrict this or planning councils, which is essentially takes away competitive advantage (-).

Outbound logistics

The 3rd stage of the value chain analysis is the outbound logistics that is concerned with delivering the product to the customer. Tesco is currently adding value in its home delivery service (+). Besides these, other concerns that have to be improved are those of parking facilities, trolley collectors, till staff and systems to gain competitive advantage, if executed more efficiently than competitors, they will add value by saving the customer time (+), whilst increasing the turnaround (+). Adding value could be gained by the implementation of a trolley deposit system, keeping them tidy and enabling customers to get to and from the premises quicker, as well as making these facilities readily available and quicker to obtain (P+).

Marketing and sales

Obviously Sales and Marketing are placed under downstream elements of the value chain. Clubcard allows more discounts and loyalty for the customers (+). Moreover, Tesco can also decide to attract more consumers by advertising via radio, local newspaper and national T.V. e.g. keeping the “lower prices” on advertising campaign or further discounts offers (+). By more customer awareness of ethical business practices, it may give the company some constraints in terms of selling environmentally friendly products (-). In return, the company can take it as an advantage and provide customers with more of the recycling points and include information in their advertisements, adding value for customers who will believe that by choosing to shop at Tesco, people are helping the environment (P+).

9.2 Support Activities

Company Infrastructure

The Planning and Control activities are the ones that account to provide the continued focus on the costs and cash control of the company’s operations (+). Moreover areas such as profit retaining whose main jobs are to reduce shrink. The Tesco has now added more staff that is involved in upgrading its anti-fraud software (infrastructure/technology, interdependence), and installing new security systems, which aim to reduce internal theft, an expense the customer will now not have to cover in the price of their purchases (+).

Human resource management

Human Resource Management is regarded as upstream and downstream process, covering everything from recruitment to management development. The company wants to increase in the number of training ideas and further develop its recruitment programmes so to pass on to the customer the benefits of a well recruited, well trained staff, not the costs (+). Tesco continues to invest in customer service (+), where training is also linked directly to pay, so the staff are motivated to learn, and are encouraged to improve their approach to customers and service provision quality. (P+).

Technology development

It is a downstream task and it has the ability to provide new innovative product ranges/ solutions that anticipate customer needs. It becomes as a competitive advantage, adding value, as Tesco’s brand name gives the product vitality (+). Capital Investing and Instalment is a long-term strategy process and needs total commitment of the staff.

10.0 CRITICAL SUCCESS FACTORS

It is crucial to consider internal operational effectiveness of Tesco in the form of identifying critical success factors of the company within the food-retailing sector.

10.1 Branding and Reputation

There are industries that have always understood that they were selling brands before the product. Tesco is a brand and also serves as the core strategic advantage. The company was spreading like wildfire changing the generic into the brand-specific, largely through carefully branded packaging and the promotion of an “every penny counts” environment. The company has a powerful corporate identity and brand image, and is associated with good quality, trustworthy goods that represent excellent value.

The product and services development processes of the Tesco have been re-engineered, to facilitate better management of product lifecycles and more efficient delivery of wide ranges of products to customers. Product tasks have always tried to enhance core ranges and introducing quality products. Tesco’s system full of innovation of improving the customer shopping experience, as well as its efforts to branch out into finance and insurance have also capitalized on strong brand reputation.

The Tesco is also very successful in respect of customer trust and loyalty due to its loyalty cards system and its general approach to customizing services to the needs of every customer. This is evident in respect of fast growth of on-line sales where the company has a strong platform to further develop this revenue stream. After under taken the fact the in these days most of the people has less time for shopping, Tesco employed these on-line systems and now became the biggest online supermarket.

10.2 IT Integration

Nowadays the companies act in a fast growing dynamic and complex environment, giving more difficulties making forecasts and adapting themselves to the continuous changes. In order to be able to compete in this kind of world, it is necessary to innovate at an extraordinary speed, continuously improving the products, services and processes. For Tesco activities have become needs rather than comfort. The Tasks that control inventory, keep all the inventory and deliveries records and analyse business transactions are the lifelines of the company. It can also be said that IT has reached beyond its traditional support role and taken up a central role in business strategy formulation.

Extranet system employed by the company, enables Tesco to use the Internet to create proprietary and customised information flows between the company and its business partners. The Communication system connects business partners online behind virtual firewalls, bringing more flexibility, scalability, extensibility and integration across the distribution channels. Extranet is also assisting to expand the key information on business partners throughout the supply chain and facilitate collaborative relationships with partners. Market Shares and exchanges hold the promise of expanding Tesco’s reach, delivering buyers to their virtual doorstep from around the world. Some examples of the most efficient innovative technological advances that support daily business activities of Tesco are wireless devices, intelligent scale, and electronic shelf labelling, self check-out machine and radio frequency identification (RFID) systems. This technology change to maintain Tesco’s ability to handle an increase in product/service volume while controlling costs; it also enables to be innovative and market oriented.

10.3 Supplier Management

Tesco, like many other grocery chains companies, sources its goods from overseas manufacturers who are more competitive on price and volumes. For many successful years, Tesco has been helping British jobs and expertise by encouraging large branded suppliers to develop exclusive production facilities. But in recent years the company has realised the need to look abroad for products no longer available in UK, bud tried to do it through long-established UK partners. The foods continued to be heavily UK-based due to the very successful range of prepared foods.

As a major retailer selling diverse product range, they work with many different suppliers around the world, with employees from many different cultures and ethnic groups. Therefore, it is the company policy and company’s main approach to have unique relationships with suppliers. Using latest and advanced technology in its communications systems and cooperation with the suppliers, the company aims to control the work of its suppliers and heavily relies on their efficiency. The direct market ventures use a number of sub-contracted suppliers, selected to be best in class in their country. Tesco has created close and strong relationships with the contractors believing that regular and long-term orders promote the investment necessary to improve conditions in the supply chain.

Tesco being an international retail company, it develops various supplier management programmes to survey key suppliers and franchisee satisfaction. The company also help in the activities of Ethnical Trading Initiative.

The table shown below shows a strategic comparative analysis, comparing Tesco’s successful factors discussed above with the same factors of the main competitors’ in the UK grocery industry. The scores have been giving with the scale from 0 to 5

CSF

Sainsbury’s

Asda

Safeway

Branding

5

3.5

3

IT Integration

4

3

3

Supplier Management

5

3

4

Total

14

10.5

11

The results show that the significant threat is potentially coming from Sainsbury’s that possesses a strong brand name and is carefully selects and controls its suppliers.

11.0 Recommendations On Operational Strategies

An individual retailer’s characterise Generic Strategies by response to the industry structure. To obtain a sustainable competitive advantage Tesco should follow either one of three generic strategies developed by Porter.

The first technique or strategy of cost leadership is one in which Tesco can strive to have the lowest costs in the industry and offer its products and services to a broad market at the lowest prices. This strategy will be based on the Tesco’s ability to control their operating costs so well that they are able to price their products competitively and be able to generate high profit margins, thus having a significant competitive advantage. If Tesco uses another strategy of differentiation, than it has to try to offer services and products with unique features that customer’s value. Tesco will be able to create brand loyalty for their offerings, and thus, price inelasticity on the part of buyers. The Broadness of the product offerings, technology, special features, or customer service is popular approaches to differentiation.

The last strategy of focus can be either a cost leadership or differentiation strategy aimed toward a narrow, focused market. In case of a cost leadership strategy Tesco focuses on creating internal efficiencies that will help them withstand external pressures. That is why; it appears reasonable to say that Tesco will have frequent interactions with the governmental/regulatory and supplier sectors of the environment. In accordance to this, while both overall cost leadership and differentiation strategies are aimed at the broad market, Tesco may also choose to confine their product to specific market areas or may choose to offer a smaller line of products to the broad market, thus pursuing a strategy of focus or niche (Porter, 1980). In other words, Tesco uses a strategy of cost leadership either in a specific market or with specific products.

The threat some industries face is that they try to do all three and become what is known as stuck in the middle. In case of Tesco it is not appropriate, as they do have a clear business strategy with a clearly defined market segment.

11.1 Market Objectives And Strategies Implementation

The strategy structuring tools are key to assessing the business situation. Risk and value trade-offs are made explicit which leads to concrete proposals to add value and reduce risk. Explicit ideas for action, including efficient planning need to be developed by Tesco as the strategic alternative.

Generic strategies about I have talked above, Tesco is likely to employ two strategic options that are also likely to be primary market objectives of focus on market development though partnerships and diversification through new product development.

12.0 CONCLUSION

The success of the Tesco shows how far the branding and effective service delivery can come in moving beyond splashing one’s logo on a billboard. It had fostered powerful identities by making their retailing concept into a virus and spending it out into the culture via a variety of channels: cultural sponsorship, political controversy, and consumer experience and brand extensions.

In a fastly changing market environment with high competition pressure Tesco have to adopt new expansion strategies or diversified the existing in order to sustain its leading market position in an already established retailing market. Tesco must have to adapt to the rapidly changing circumstances. The Strategy of a company should be regarded as a process of continuous learning, which includes learning about the goals, the effect of possible actions towards these goals and how to implement and execute these actions. The effectiveness of an implemented strategy and the speed of its implementation will therefore directly depend on the quality of Tesco’s cognitive and behavioural learning processes.

In big companies like Tesco strategy should be analysed and established at various levels within the hierarchy. All the levels of strategy of Tesco should be related and mutually supporting. The strategy of Tesco at a high level defines the businesses in which Tesco will compete, in a way that focuses resources to convert distinctive competence into competitive advantage.

13. References

(The Council of Supply Chain Management Professionals (CSCMP) from Grant et al. (2006 p. 15)

Porter M. (1980) How Competitive Forces Shape Strategy, The McKinsey Quartely, Spring 1980, pp.34-50;

Ritz (2005) Store wars, Business Review, Vol. 11, April, pp.22-23;

Veliyath R. and Fitzgerald E. (2000) Firm Capabilities, Business Strategies, Customer Preferences, and Hypercompetitive Arenas: The Sustainability of Competitive Advantages with Implications for Firm Competitiveness, Competitiveness Review, Vol. 10 Issue 1, pp.56-82;

Key Concepts In Business Practise, Jonathan Sutherland and Diane Canwell,

Published 2004, By Palgrave MacMilan.

Krajewski, Ritzman and Malhotra. “ Operations management” 9th Ed

13.1 Figures and Tables

Purchasing Process

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RMA Process

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Value Chain

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