VALUE CHAIN MANAGEMENT ANALYSIS

 

 

Table of Contents

Introduction. 2

Linkage between suppliers and consumers in Tesco. 5

First step is Activity analysis. 5

Reverse logistics. 5

Detailed retail supply chain of Tesco. 6

The integration of the 5 goals. 8

Effective flowthrough. 9

In-store range. 9

Linking marketing with supply chain. 9

Primary distribution. 11

Time plan for introducing store specific ranging. 12

Network management 13

Adding value through outsourcing. 14

Ways in which food sourcing adds value are. 14

Goal setting programme. 15

The interaction between the Global Sourcing Team and the Local Country Teams in Tesco  15

An area wise distribution of the cost of goods sourced (Goods like produce, grocery, and protein) 16

A comparison of how cost of goods sourced compare across each of the 3 regions Central Europe, Asia, and UK. 17

Sourcing from Central Europe. 17

Generation of value through sourcing from central Europe. 18

Sourcing non-food items. 18

The interaction between Local Team and the Central European Regional Team.. 19

Diagram showing how increased commonality, rationalization of ranges and suppliers are leading to addition of values. 20

A graph to show how decrease in non food product price through lead to increased sales  21

Role played by Technology in value addition. 21

HRM and its role in generation of value. 23

Conclusions. 23

REFERENCES. 24

 

Introduction:

Large business organisations constitute not only a single strategic business unit, but a culmination of several business units. The business units which may number anywhere from 4 to as many as 20 or more cannot be considered as a single, separate and disparate entity (Balakrishnan and Cheng, 2009). Rather the business units are attached to each other like a string completing a full circle, where each complements the predecessor and the successor. The breakdown of any one entity in the chain can have a telling effect on the whole chain itself. Now depending on the type of sector chosen the units in the business chain vary in number and complexity (Calza and Passaro, 2007). For example unlike a software company the units/ operational units in company which deals with products/goods are much larger in number. As explained in the previous lines the units in operation are linked and performance of one affects the performance of the other units linked to that unit. Value chain management comes in this picture (Girod and Rugman, 2009). Value chain management fine tunes the operational performance of each separate unit of the business, so that the concerted performance of each unit helps to attain the business, its targeted quality and performance target.

The company chosen for value chain management analysis is TESCO. It is one of the top retail market players in UK. TESCO has transformed itself through years and have also expanded into international geographical areas also like Asia, Europe and North America (Gunasekarana and Ngai, 2008). The investigation into its value chain management will help to understand how Tesco thrives to imbibe value in its operational units.

 

 

The six units or business functions across which the improvements/benefits of value chain will be studied are, research and development, design of products and services, production, marketing and sales, distribution and customer services.

The six business functions described above are dependent upon the following primary activities like inbound logistics, operations, outbound logistics, marketing and sales and services (Hakansson and Ford, 2007). Supporting these primary activities are supporting activities like procurement, technological development, human resource management and development and lastly firm infrastructure.

 

Fig 1: Integration of business functions and activities (primary & secondary)

(Source: Hult et al.2007,p.578)

The analysis of value chain will be done in a step by step process, commencing with (i) activity analysis, (ii) value analysis, and ending with (iii) evaluation and planning.

 

 

 

 

 

MANUFACTURER

                    Distributor

 

 

Retailer

 

 

CONSUMER

Tesco

Linkage between suppliers and consumers in Tesco:

 

 

 

 

 

 

Fig 2: Linkage between suppliers and consumers in Tesco

(Source: Naylor et al.2008, p.112)

First step is Activity analysis:

The activity analysis is analysis of the primary and secondary activities in the backdrop of the six business functions.

Reverse logistics:

International suppliers
Domestic suppliers
Own manufacturing centre
Transportation via

1. Airway

2. Railway

3. Roadway

 

 

City Hub

Retail

Stores

 

 

Customers

Reverse logistics

 

 

 

 

 

 

 

 

 

 

Fig 3: Reverse logistics in Tesco.

Source: Peelen, E. (2007)

The above diagram is a brief explanation of the value chain of Tesco. The products and goods are procured directly from the manufacturers; in this case the farmers as well as the small and medium scale enterprises manufacture the products or process the food products (Sanders et al. 2010). The distribution of the products/goods from the warehouses or store houses or the frequent distribution of stocks between various stores is taken by Tesco rather than outsourcing it by any third parties. The direct involvement of Tesco in the distribution system helped it to implement intelligent distribution systems, which took care of fuel cost as well as saved the transportation time.

Detailed retail supply chain of Tesco:

18%
9%
46%
8%
19%
Raw material and supplier inbound
supplier transformation
Retailer inbound logistics

1. primary

2 Transport

Retailer secondary Dc operations order assembly
DC delivery to stores
In-store logistics

(back door to shelf)

order management
Availability costs

1Markdown

2. Waste

3. Lost sales

4. Customer dissatisfaction

Goods/Material flow
Information and cash flow

 

 

 

 

 

 

 

 

 

 

 

 

(Percentage indicating internal supply chain participation)

Fig 4: Total retail supply chain

Source: http://www.tescoplc.com/index.asp?pageid=153

The above diagram is a representation of how the retail supply chain of Tesco works. The contribution of the internal supply chain leads to better management of the entire supply chain itself (Brandenburg, 2012).  The contribution or involvement of order management is highest (46%) in all. This is due to the reason that effective order management saves on time and cost by reducing the lag time between placing an order and fulfilment of order.

In order to come up with an effective supply chain Tesco took initiatives to develop 5 main factors which are as follows:

  1. Reducing time lag between products replenishments
  2. Making all products with greater demand always available in the store
  3. Easy and fast flow of products
  4. Efficient management of networks
  5. Improvement in the inbound flow of product

The measures taken by Tesco in order to execute its 5 goals mentioned above are:

  1. Continuous replenishment
  2. Management of in-store range
  3. Efficient Flow through
  4. Network management
  5. Primary distribution

 

 

 

 

 

 

The integration of the 5 goals:

Store order calculation
Central order processing
Production/ Scheduling
Production/Transport to Depot
In Depot awaiting delivery
Batched once per day (delivery to store)
Store

Continuous replenishment as was before improvement:

 

The main problem with “production/transport to department” was that the arrival of the suppliers vehicle at the depot happened in such a delay that the delivery to store from depot got delayed due to which order taking could not be scaled up.

 

 

 

 

 

Fig 4: Continuous replenishment as was before improvemen

 

Fig 5: Continuous replenishment before improvement

Source: Christopher, M. (2008)

All suppliers

(Suppliers receives order more than once per day according to their profile)

The highway leading from suppliers to the stores
Primary distribution

(The smooth flow of goods produced eliminates/reduces the traffic bottle necks)

Delivery

(The deliveries happen not once but multiple times. This leads to efficient  fleet utilisation and faster replenishments

Tesco Depots

This lead to continuous flow of goods as orders come in due to “smoothed goods-in profile”. Unlike before when the orders were received in batch, this time the orders come in a continuous flow. As stock arrives the store orders are assembled.

 

Stores

 

Stores

Delivery

(The deliveries happen not once but multiple times. This leads to efficient  fleet utilisation and faster replenishments

Continuous replenishment as was after improvement:

All suppliers

(Suppliers receives order more than once per day according to their profile)

The highway leading from suppliers to the stores
Primary distribution

(The smooth flow of goods produced eliminates/reduces the traffic bottle necks)

 

 

 

 

 

 

Tesco Depots

This lead to continuous flow of goods as orders come in due to “smoothed goods-in profile”. Unlike before when the orders were received in batch, this time the orders come in a continuous flow. As stock arrives the store orders are assembled.

 

 

 

 

 

Fig 6:Continuous replenishment after improvement

Source: Gong, Z. (2008)

The above 2 diagrams are a brief explanation of how small improvements lead to effective addition of value in a system. Unlike before where Tesco relied on batch order system, the new system was engineered to mimic the activities of a system in continuous flow.

Effective flowthrough:

The various bottle necks were reduced or eliminated through the use of flowthrough. Flow through resulted in a closer collaboration between the retailers and suppliers (Hai, 2010). Fowthrough in actuality reduced the time taken to move a product from order status at the suppliers to the store from as much as 50%. Almost 83% of the store replenishments takes place through flowthrough mechanism.

In-store range:

Till now was shown what Tesco did to add value to its supply chain management system. The reason of improving supply chain management is obviously linked with a higher purpose which is addition of value into its products. The need to imbibe value in its supply chain management emanated from a different perspective which is “what customers want” (Hallgren and Olhager, 2009). And this is the linkage between supply chain management and marketing.

Linking marketing with supply chain:

Evolution of continuous replenishment:

1999 2001 2003 2007 2011
Retek Trade Management and Merchandise Planning
Ambient grocery
Fresh foods ·         Direct Store deliveries

·         Clothing

·         Bread and morning goods

 

·         Production Planning

·         Transformation

 

Moving towards a store specific order placements

 

Table 1: Development through ages from general order placing mechanism towards customer profile specific order placing

Source: Lamming, R. (2009)

Way back in 1999, when the idea of placing orders based on specific customer profile of a store was yet to set in, Tesco still drolled out orders which was meant for all and everyone. Meaning the order for items to be replenished was not based on any specific algorithm based on customer needs and wants (Mdhani, 2011). The order served customers ranging from brand conscious to value conscious. This led to scenarios where some products or categories of product had very fast stock turnover or some significantly long stock turnovers. The problem was with those which had really long stock turnovers (Olhager, 2010). These products were either shelved off with new products or were sold at a highly discounted price.

The introduction of Tesco Clubcard paved the way to get an insight into what customers really want or more specifically the products that they buy frequently. The Tesco Clubcard turned out to be quite the trump card (Sabri and Shaikh, 2009). The Clubcards through its unique features helped Tesco to track which products are brought by which customers. The linkage with Tesco Clubcard and supply chain is the ability of Clubcard to not only assess the frequently bought products but also in which geographical area and in which particular store exactly (Selldin and Olhager, 2007).

Customer disappointment
Due to variety of reasons

1. Price factor

2. Availability factor

3. Value factor

Tracking customer feedbacks and reviews through clubcard
Store specific  developments to meet customer wants and demands

·         Promotions

·         Space

·         Range

·         Price

Supply                  Buy                                 Distribute                   In-store range                            Sell

 

 

 

 

 

 

 

 

 

 

 

Clear and Log€ical Explanation/Discussion

 

Fig 7: Integration of supply chain with customer needs and wants

Source: http://www.tescoplc.com/index.asp

The frequent distribution of goods from the distribution centre to the retail stores involves significant cost. The Club Card in this matter helps Tesco to assess the products which are frequently bought, so that those products can be kept overstocked (Balakrishnan and Cheng, 2009). This reduces the need to place frequent orders of those products which are in constant huge demand. The decrease in need to place frequent orders does 2 important things, it (i) reduces the time required to place the order to almost nil, (ii) Frees up space to accommodate those products which are not on the priority list after that.

Primary distribution:

Adoption of  primary distribution as a of the methods to smooth out the flow of goods lead to further addition of value (Christopher, 2008). The multiple daily deliveries from the distribution centre to the stores lead to cost reduction. This is due to the reason that multiple deliveries involved transportation in king size trucks. The king size trucks due to its sheer size helped to gain economy of scale. The multiple trips easily sufficed the fuel costs with extrinsic benefits received through the process.

The benefits of primary distribution are:

  1. Significant cost reduction
  2. Jobs simplified for producers and manufacturers
  3. Opening new door for more efficient distribution
Tesco targets to make its store fall back inline with customer profile with 2 years
STORE A

Core ranges are:

·          Value product

·          Finest product

STORE B

Core ranges are

·         Value product

·         Finest product

STORE B

Core range:

·         Value product

First 8 months                                   Next 4 months                                             Next 12 months
  1. Price reduced significantly for customers

 

 

 

 

 

 

 

Fig 8: Target to achieve in the next 2 years.

Source: Gunasekarana, A. and Ngai E. W. T. (2008)

Time plan for introducing store specific ranging:

Fig 9: Introduction of store specific ranging

Source: Hallgren, M. and Olhager, J. (2009)

Time plan of introducing store specific ranging shows that the whole plan was executed within a time span of only 4 years starring from 2002 and ending at 2005 (Mason-Jones et al. 2008). The most time consuming affair is the store specific ranging roll out, where it started at end of 2003, took the whole of 2004 and finalized in mid 2005.

Network management:

One of the 5 major goals set up by Tesco to revolutionize its distribution system was the efficient Network Management. Network management involved timely coordination and synchronization of information and resources across the various distribution centres and retail stores. The grocery network as of now consists of 15 locations and 9 mega sites as well as 7 fast moving regional sites and 5 medium moving sites. These locations and sites delivered on an average of 25 million cases per week (Olhager et al. 2010). And have a capacity to increase the daily deliveries to all stores by atleast 600 times.  Out of all these locations almost 86% of them had technology in place to keep an ambient temperature so that the stored foods don’t go bad. Tesco brought all temperature controlled units under one roof, that way, the single unit would be scaled up to contain huge quantity of food as well save fuel by pulling the plug on remaining storage centres (Sanders et al. 2010). The stores which were taken off the cold storage unit list were used as trunking centres. These trunking centres are used to service stores with frozen foods as well as those food items which needs to be kept at low temperatures. The various locations and sites that ceased working as a stand alone cold storage units formed the composite units which serviced other stores.

The benefits of the planning out such an effective Network Management are:

.tescoplc.com/files/pdf/Events/philip_clarke_2002.pdf [Accessed 28th December 2012

Effective network management lead to lower costs, improvement in inventory management and enhancement in customer service and reliability. Effective network management also lead to improvement in visibility, control and performance of the entire supply chain.

Till now the analysis has focused only on supply chain management, but without analysing how Tesco adds value through outsourcing, it will be a job done half heartedly.

Adding value through outsourcing:

How value is added?

  1. Through food sourcing strategy
  2. Through non-food sourcing strategy
Main Items Constituents
Constituents of food sourcing Produce Meat , fish, and poultry Chilled products Grocery Items Health , beauty and household
Constituents through non food sourcing Clothing General merchandise and electrical Goods not for resale

 Table 2 :food and non food sourced products

Source: Calza, F. and Passaro, R. (2007)

Ways in which food sourcing adds value are:

  1. Better quality products
  2. Simplification of global supply chain
  3. Cheaply priced products.

Goal setting programme:

Tesco aims to come up with the above mentioned value addition through a goal setting programme, as described below:

  1. Bulk buying
  2. Scaling up of the global supply chain
  3. Use of economy of scale
  4. Promoting the in-house brand
  5. Establishment of a sustainable supply base spread across the globe

Source: Gong, Z. (2008)

Planning

Using customer information from the CRM database specific to the country to create country specific product profile

 

 

 

Selling

This enables the local teams to concentrate more on aspects like sakes and merchandising.

 

 

Sourcing

The plan to source the products are developed by help of central food sourcing teams and hubs spread across globe

 

Transportation to the depots

Tesco inbound logistics systems is tuned to bring in the products in an efficient way.

Buying

The demand across all the countries are summed up together and decisions taken to procure the products in the most cost effective way

Local Team
Global Sourcing Team

The interaction between the Global Sourcing Team and the Local Country Teams in Tesco:

 

 

 

 

 

 

 

Fig 10: Interaction between the Global Sourcing Team and the Local Country Teams

Source: Hakansson, H. and Ford, D. (2007)

An area wise distribution of the cost of goods sourced (Goods like produce, grocery, and protein):

Fig 10: Cost of goods sourced across Central Europe

Source: Lamming, R. (2009)

As the graph indicates Tesco started sourcing proteins only from the year 2010 to 2011 whereas the grocery items and products were outsourced from the year 2006 onwards till now

 

 

bought in bulk also helps to reach economy of scale since huge amounts help in running the distribution centre, the depots, and composite stores and retail stores at full (Naylor et al. 2008).

 

 

A comparison of how cost of goods sourced compare across each of the 3 regions Central Europe, Asia, and UK:

 

 Fig 11: Cost of goods sourced across Central Europe, United Kingdom, and ASIA.

Source: Sabri, E. H. and Shaikh, S. N. (2009)

Products started getting sourced only at beginning of 2011 from Asia. Until then Central Europe and United Kingdom were the main base from where the products got sourced.  The financial fiasco got Central Europe in tizzy affecting the sourcing for Tesco.

 

 

ago, so percentage of contribution from Asia is comparatively low. Although there are plans to scale up the distribution system from Asia in a huge way.

Sourcing from Central Europe:

According  to the latest data available total sourcing cost for Tesco Group is £35m per week, out of which £ 15 m accounts for Central Europe on a year to year basis.

A brief view about things sourced from Central Europe:

  • 70% of fruits, 51% of salads, 16% of vegetables
  • 95% of meat
  • 21% of frozen foods, 30% of pet food, 10% of total grocery
  • There are about 1400 regional grocery lines belonging to Tesco’s own label
  • More than 2000 lines spread across whole of CE.

Source: Available from:  http://www.tescoplc.com/index.asp?pageid=153 [Accessed 29th December 2012]

Generation of value through sourcing from central Europe:

  • The margin growth of the products sourced through CE became significant, at 2.3% annually on an average basis.
  • The use of a common trade plan without making any kind of major strategic change help increasing regional trade.
  • The Tesco product called Value Product improvised on quality
  • Helped to set up the Tesco Standard brand.
  • The brand called Regional Discount brand equipped with a strong foothold to compete with discounters.

Source: Balakrishnan, J. and Cheng, C. H. (2009)

Sourcing non-food items:

The ways in which sourcing of non-food items adds value for Tesco are more or less the same as explained in case of sourcing food items. The goal setting programme in case of non food sourcing is more or less same as in food sourcing with minor changes. Unlike in non food item sourcing, one of the goals in non food sourcing is development of the products and range. This is due to the reason that unlike food items, non food items are still in the nascent stage of development.

 

 

 

 

Local Team: Managers at Country category level
·         Customer data gathered through various process help to get an insight into what customers want and which products of the competitors are preferred by the customers.

·         Local products like newspapers, books and dvds etc are bought.

Central European Regional Team

(This team works in collaboration with UK and local country teams by helping them deliver common ranges of products and at same time providing specialist support to implement the best practice.)

Product

Development

Product

Ranging

Pricing
Promotion
Space &

Merchandising

Stock management
 

Marketing

The interaction between Local Team and the Central European Regional Team:

 

                                                                                  

 

 

 

 

 

Fig 12: Interaction between Local Team and the Central European Regional Team

 

 

Source: Calza, F. and Passaro, R. (2007)

Close collaboration of Central Buyers with UK teams
The close collaboration between the above 2 help in achieving rationalisation of ranges
Common Central European & UK ranges of products and suppliers
Common Central European

Ranges

Making the supplier range for both Central Europe and UK common
Value addition through

Fewer products

+

Fewer strategic suppliers

+

Higher volumes

Addition of value transpiring to

Price Reduction

Diagram showing how increased commonality, rationalization of ranges and suppliers are leading to addition of values:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fig 13: Value generation through increased commonality, rationalization of ranges and suppliers

Source: Girod, S. J. G. and Rugman, A. M. (2009)

A graph to show how decrease in non food product price through lead to increased sales:

Product chosen to show the progress is Clothing:

Fig 14: Clothing sales revenue in Central Europe

Source: Gunasekarana, A. and Ngai E. W. T. (2008)

As can be seen the increase in sale of clothing went on increasing steadily from 2007 upto 2012, and the rate of increase being highest during the year 2011.

Role played by Technology in value addition:

Different types of technology
Information technology Retailing technology Operations systems technology
1. Improved customer service operations by using Tesco Clubcard 1. The introduction of website www.tesco.com saw a huge hit in a couple of a weeks and as of now there are almost 3 million active users in UK alone. 1. using electronic shelf labelling mechanism
2. Improved database helped to fix the errors in understanding customer wants and demands. 2. Tesco Telecoms 2. Using electronic point of sale (EPOS)
Example

During the winter season, the sale of wine increased significantly. Although the customers chose to select only those wines which were normal brand and not the premium brands. Efficient customer database helped Tesco to find that this was due to the reason that the wine product range did not include any kind of premium brand.

Value addition through:

1. Improvement in customer service

2. Perceived value of product increases for a customer due to reduction in time spent to drive down to the shop

3.  Improved warehoused management

3. Tesco Clubcard 3. Using Electronic Funds Transfer Systems (EFTPOS)
4. Self check out machines Example

The use of the above mentioned operations systems technology helped Tesco to keep real time check on the inventory level. This helps to replenish the stocks efficiently without chances of incurring huge costs.

Example

The website and club cards acted as an interface to capture what customer visited or browsed or checked. Artificial intelligence was applied to map customer wants and needs. This culminated the ushering of “drive-thru” supermarkets very recently in United Kingdom.

 

Table 3: Incorporation of value through information technology

 

 

Fig 15: Role played by IT in value addition

Source: Hakansson, H. and Ford, D. (2007)

 

 

HRM and its role in generation of value:

Tesco has a huge workforce comprising of 380,000 across world and about 260,000 in UK alone (Hult et al. 2007). The huge work force spread across the globe is tuned to the geocentric policy of the corporation specific to that particular

 

 

 

 

injects value are “store management, site location analysis, personnel in marketing and finance, sustaining and supporting international operations”

Conclusion:

Among the 6 business areas starting from research and development to customer service, Tesco gives added importance across 3 areas which are marketing and sales, distribution and customer service. Since it is not into a hardcore manufacturing sector, research and development receives the least importance among all.

Innovation in its supply chain management has transformed the company from a local sourcing company into a company that sources internationally. The incorporation of centrally controlled and locally operated systems has resulted in reduced expenses and reduction in the occurrence of bottlenecks in its system. This move transpired into better understanding and relationships with suppliers. From the customers’ point of view, cost of a product got reduced significantly, which reduced the need to pass a significant part of the cost to the buyer. In other words consumers found products that were priced cheap, but had high quality. The perceived value of the products got a significant uplift in the eyes of the customer, improving the brand image of the company automatically.

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