Operations Management For Creating Competitive Advantage Tesco

Tesco is the Britain’s biggest and most profitable supermarket chain throughout the world. In my assignment I have focused on the the process of the sales department of tesco. Sales department is involved in pinnacle activity where it sells products in return of money. Turnover is solely generated by the sales department of any Company, same is the case with Tesco PLC . I have advised many operational strategies to successfully run the sales 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.

Introduction

Tesco is Europe’s second largest supermarket and fourth largest in the world. The company was founded in 1924 by John Edward Cohen.Jack ‘the Slasher’Cohen, as he was better known started out 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 has effective supply chain management and information systems, I will debate about the Tesco supply chain management, using PEST 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.

Steps In Process Analysis

The first step to improving a process is to analyze it in order to understand the activities, their relationships, and the values of relevant metrics. Process analysis generally involves the following tasks:

Define the process boundaries that mark the entry points of the process inputs and the exit points of the process outputs.

Construct a process flow diagram that illustrates the various process activities and their interrelationships.

Determine the capacity of each step in the process. Calculate other measures of interest.

Identify the bottleneck, that is, the step having the lowest capacity.

Evaluate further limitations in order to quantify the impact of the bottleneck.

Use the analysis to make operating decisions and to improve the process.

Relating It To The Organization Of My Choice ( Tesco Pvt Ltd )

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

Introduction

WATFORD, England — Tesco and Procter & Gamble are tops when it comes to supply chain, according to a survey of by international food and grocery specialist IGD, based here.

The survey, which was completed by senior executives from 50 international companies 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. In addition to Tesco, other best-in-class retailers include Wal-Mart, Aldi, Lidl, and Ikea.

Process Analysis Of Supply Chain Management In Tesco

In a process flow diagram, tasks drawn one after the other in series are performed sequentially. Tasks drawn in parallel are performed simultaneously.

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

When constructing a flow diagram, care should be taken to avoid pitfalls that might cause the flow diagram not to represent reality. For example, if the diagram is constructed using information obtained from employees, the employees may be reluctant to disclose rework loops and other potentially embarrassing aspects of the process. Similarly, if there are illogical aspects of the process flow, employees may tend to portray it as it should be and not as it is. Even if they portray the process as they perceive it, their perception may differ from the actual process. For example, they may leave out important activities that they deem to be insignificant.

Process Performance Measures

Operations managers are interested in process aspects such as cost, quality, flexibility, and speed. Some of the process performance measures that communicate 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 percentage of the process capacity that actually is being used.

Throughput rate (also known as 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. Flow time includes both processing time and any time the unit spends between steps.

Cycle time – the time between successive units as they are 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 – 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 labor content – the amount of labor (in units of time) actually contained in the product. Excludes idle time when workers are not working directly on the product. Also excludes time spent maintaining machines, transporting materials, etc.

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

Little’s Law

The inventory in the process is related to the throughput 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 throughput rate is equal to 1 / cycle time, Little’s Law can be written as:

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

The Process Bottleneck

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

Saving time in the bottleneck activity saves time for the entire process. Saving time in a non-bottleneck activity does not help the process since the throughput rate is limited by the bottleneck. It is only when the bottleneck is eliminated that another activity will become the new bottleneck and present a new opportunity to improve the process.

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

Starvation and Blocking

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

Process Improvement

Improvements in cost, quality, flexibility, and speed are commonly sought. 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.

Move work away from bottleneck resources where possible – increases process capacity.

Increase availability of bottleneck resources, for example, by adding an additional shift – increases process capacity.

Minimize non-value adding activities – decreases cost, reduces lead time. Non-value adding activities include transport, rework, waiting, testing and inspecting, and support activities.

Redesign the product for better manufacturability – can improve several or all process performance measures.

Flexibility can be improved by outsourcing certain activities. Flexibility also can be enhanced by postponement, which shifts customizing activities to the end of the process.

In some cases, dramatic improvements can be made at minimal cost when the bottleneck activity is severely limiting the process capacity. On the other hand, in well-optimized processes, significant 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-benefit 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

Tesco Supply Chain

Strategic Management of TESCO supermarket: PESTEL analysis, Porter’s 5 Forces analysis, Critical success factors, SWOT Analysis, VALUE CHAIN analysis, TESCO’S strategic options, Core Competences & Cultural Web.

I INTRODUCTION

The food and drink retail sector represents the largest industry in the UK, providing employment for over three million people in primary production, manufacturing and retailing. In 2003 retail accounted for 9% of gross domestic product (Datamonitor, 2003). In recent years UK supermarkets have come under increased scrutiny over their treatment of suppliers, particularly of own-label products, yet the development of strategic supply networks has been an integral part of most supermarket strategies for the past decade.

The report below provides an insight into the supermarket company, Tesco, with emphasis on its external environment analysis and company’s analysis of resources, competence and culture. Two future strategic options are suggested in regards to the resources based strategies.

Tesco is one of the largest food retailers in the world, operating around 2,318 stores and employing over 326,000 people. It provides online services through its subsidiary, Tesco.com. The UK is the company’s largest market, where it operates under four banners of Extra, Superstore, Metro and Express. The company sells almost 40,000 food products, including clothing and other non-food lines. The company’s own-label products (50 percent of sales) are at three levels, value, normal and finest. As well as convenience produce, many stores have gas stations, becoming one of Britain’s largest independent petrol retailers. Other retailing services offered include Tesco Personal Finance.

3.0 INDUSTRY ANALYSIS: PORTER’S FIVE FORCES

3.1 Threat of New Entrants

The UK grocery market is primary dominated by few competitors, including four major brands of Tesco, Asda, Sainsbury’s and Safeway that possess a market share of 70% and small chains of Somerfield, Waitrose and Budgens with a further 10%. Over the last 30 years, according to Ritz (2005), the grocery market has been transformed into the supermarket-dominated business. Majority of large chains have built their power due to operating efficiency, one-stop shopping and major marketing-mix expenditure. This powerful force had a great impact on the small traditional shops, such as butchers, bakers and etc. Hence, nowadays it possesses a strong barrier for new companies who desire to enter the grocery market. For instance, it becomes rather difficult for new entrants to raise sufficient capital because of large fixed costs and highly developed supply chains. This is also evident in huge investments done by large chains, such as Tesco, in advanced technology for checkouts and stock control systems that impact new entrants and the existing ones. Other barriers include economies of scale and differentiation (in the provision of products or services with a higher perceived value than the competition) achieved by Tesco and Asda seen in their aggressive operational tactics in product development, promotional activity and better distribution.

3.2 Bargaining Power of Suppliers

This force represents the power of suppliers that can be influenced by major grocery chains and that fear of losing their business to the large supermarkets. Therefore, this consolidates further leading positions of stores like Tesco and Asda in negotiating better promotional prices from suppliers that small individual chains are unable to match Ritz (2005). In return, UK based suppliers are also threatened by the growing ability of large retailers to source their products from abroad at cheaper deals. The relationship with sellers can have similar effects in constraining the strategic freedom of the company and in influencing its margins. The forces of competitive rivalry have reduced the profit margins for supermarket chains and suppliers.

3.3 Bargaining Power of Customers

Porter theorized that the more products that become standardized or undifferentiated, the lower the switching cost, and hence, more power is yielded to buyers Porter M. (1980). Tesco’s famous loyalty card – Clubcard remains the most successful customer retention strategy that significantly increases the profitability of Tesco’s business. In meeting customer needs, customizing service, ensure low prices, better choices, constant flow of in-store promotions enables brands like Tesco to control and retain their customer base. In recent years a crucial change in food retailing has occurred due to a large demand of consumers doing the majority of their shopping in supermarkets that shows a greater need for supermarkets to sell non-food items. It has also provided supermarkets with a new strategic expansion into new markets of banking, pharmacies, etc. Consumers also have become more aware of the issues surrounding fairer trade and the influence of western consumers on the expectations and aspirations of Third World producers. Ecologically benign and ethically sound production of consumer produce such as tea, coffee and cocoa is viable, and such products are now widely available at the majority of large chains.

3.4 Threat of Substitutes

General substitution is able to reduce demand for a particular product, as there is a threat of consumers switching to the alternatives Porter M. (1980). In the grocery industry this can be seen in the form of product-for-product or the substitute of need and is further weakened by new trends, such as the way small chains of convenience stores are emerging in the industry. In this case Tesco, Asda and Sainsbury’s are trying to acquire existing small-scale operations and opening Metro and Express stores in local towns and city centres Ritz (2005).

3.5 Bargaining Power of Competitors

The grocery environment has seen a very significant growth in the size and market dominance of the larger players, with greater store size, increased retailer concentration, and the utilisation of a range of formats, which are now prominent characteristics of the sector. As it was mentioned above, the purchasing power of the food-retailing industry is concentrated in the hands of a relatively small number of retail buyers. Operating in a mature, flat market where growth is difficult (a driver of the diversification into non-food areas), and consumers are increasingly demanding and sophisticated, large chains as Tesco are accruing large amounts of consumer information that can be used to communicate with the consumer Ritz (2005). This highly competitive market has fostered an accelerated level of development, resulting in a situation in which UK grocery retailers have had to be innovative to maintain and build market share. Such innovation can be seen in the development of a range of trading formats, in response to changes in consumer behaviour. The dominant market leaders have responded by refocusing on price and value, whilst reinforcing the added value elements of their service.

4.0 CRITICAL SUCCESS FACTORS

After a close evaluation of the external analysis of the grocery industry and SWOT analysis presented in Appendix B, 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.

4.1 Branding and Reputation

There are companies 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 transforming the generic into the brand-specific, largely through carefully branded packaging and the promotion of an “every penny counts” environment. The company has a strong brand image, and is associated with good quality, trustworthy goods that represent excellent value.

The product and service development processes of the company have been substantially re-engineered, to facilitate better management of product lifecycles and more efficient delivery of wide ranges of products to customers. Product activity has focused on enhancing core ranges and introducing quality products. Tesco’s innovative ways 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 company is also very successful in terms of customer loyalty due to its loyalty cards system and its general approach to customizing services to the needs of every customer. This is truly evident in terms of tremendous growth of on-line sales where the company has a strong platform to further develop this revenue stream. After considering the fact the nowadays majority of people have less time for shopping, Tesco employed this on-line systems and now became the biggest online supermarket.

4.2 IT Integration

Today companies act in an increasingly 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 operations have become necessities rather than luxuries. Systems that control stock, keep all the stock and deliveries records and analyse business transactions are the lifelines of the company. It can also be said that IT has risen 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 system connects business partners online behind virtual firewalls, bringing more flexibility, scalability, extensibility and integration across the distribution channels. Extranet also helps to extend the key information on business partners throughout the supply chain and facilitate collaborative relationships with partners. Market exchanges hold the promise of extending Tesco’s reach, delivering buyers to their virtual doorstep from around the world. Other examples of the most efficient technological advances that support daily business operations of Tesco are wireless devices, intelligent scale, electronic shelf labelling, self check-out machine and radio frequency identification (RFID) systems. This technology is an effort 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.

4.3 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 years Tesco has been supporting 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. Applying advanced technology in its communications and cooperation with the suppliers, the company aims to control the work of its suppliers and heavily relies on their efficiency. The direct suppliers use a number of sub-contracted suppliers, selected to be best in class in their country. Tesco has established close relationships with the contractors believing that regular and long term orders promote the investment necessary to improve conditions in the supply chain.

Being an international company, Tesco develops various supplier management programmes to survey key suppliers and franchisee satisfaction. The company also takes part in the Ethnical Trading Initiative.

The table presented below gives 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 give 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 highlight that the main threat is potentially coming from Sainsbury’s that possesses a strong brand name and is carefully selects and controls its suppliers.

6.0 TESCO’S STRATEGIC OPTIONS: GENERIC STRATEGIES

Generic Strategies are characterised by an individual retailer’s response to the industry structure. For a giant retailer, such as Tesco, to obtain a sustainable competitive advantage they should follow either one of three generic strategies, developed by Porter.

The first 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 customers value. Tesco will be able to create brand loyalty for their offerings, and thus, price inelasticity on the part of buyers. Breadth of product offerings, technology, special features, or customer service are 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 pursuing a cost leadership strategy Tesco focuses on the creation of internal efficiencies that will help them withstand external pressures. Therefore, it appears reasonable to think that Tesco will have frequent interactions with the governmental/regulatory and supplier sectors of the environment. In accordance to this framework, 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 pursues a strategy of cost leadership or differentiation either in a specific market or with specific products.

The danger some organisation 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.

7.0 MARKET OBJECTIVES AND STRATEGIES IMPLEMENTATION

Strategy frameworks and structuring tools are key to assessing the business situation. Risk and value trade-offs are made explicit, leading to concrete proposals to add value and reduce risk. Explicit plans for action, including effective planning need to be developed by Tesco as the strategic alternative.

From the generic strategies discussed 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.

APPENDIX C

VALUE CHAIN

Primary Activities

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

Inbound logistics

Inbound logistics are placed at the first stage of the value chain as they possess the earliest opportunity to create value. Therefore, the elements of this stage are considered to be upstream activities. The logistical tasks, 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 tries to maintain the level of consumer choice in store (+), whilst improving the efficiency of its distribution system (+). In applying a quality control procedure 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 element of Tesco’ activities are service orientated. Hence, operations 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 obtain future competitive advantage Tesco has to consider expanding further in terms of operating hours in those places, where it does not occur or opening new Metro and Express stores (P+). However, this might be restricted by law or planning councils, which is essentially takes away competitive advantage (-).

Outbound logistics

The third stage of the value chain is the outbound logistics that is concerned with delivering the product to the customer. Tesco currently adds value in its home delivery service (+). However, other tangibles 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 achieved through 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

Marketing and sales are placed under downstream elements of the value chain. Clubcard gives further discounts and loyalty for the customers (+). However, Tesco may also decide to attract more customers by advertising via radio, local newspaper and national T.V. e.g. the “lower prices” advertising campaign or more discounts offers (+). With a more customer sophistication and their awareness of ethical business practices, it may give the company some constraints in terms of selling environmentally friendly products (-). In return, Tesco 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+).

Support Activities

Company Infrastructure

Planning and control functions are the ones that account to provide the continued focus on the costs and cash control of the company’s operations (+). And departments such as profit protection whose main jobs are to reduce shrink. The company has now increased its staff count who are 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

HRM is regarded as up and downstream activity, covering everything from recruitment to management development. The company aims to increase the number of training schemes 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 activity and is the ability to provide new innovative product ranges/ solutions that anticipate customer needs. It also remains a key competitive advantage, adding value, as Tesco’s brand name gives the product vitality (+). However, installation and capital investment is a long term process and needs total commitment of the staff. But who will be responsible for the service provision and the floor personnel? (-).

Support Activities

Company Infrastructure

Planning and control functions are the ones that account to provide the continued focus on the costs and cash control of the company’s operations (+). And departments such as profit protection whose main jobs are to reduce shrink. The company has now increased its staff count who are 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

HRM is regarded as up and downstream activity, covering everything from recruitment to management development. The company aims to increase the number of training schemes 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 activity and is the ability to provide new innovative product ranges/ solutions that anticipate customer needs. It also remains a key competitive advantage, adding value, as Tesco’s brand name gives the product vitality (+). However, installation and capital investment is a long term process and needs total commitment of the staff. But who will be responsible for the service provision and the floor personnel? (-).