606-015-1

ICMR Center for M anagement Research

Tescos Supply Chain Management Practices

This case was written by Indu P, under the direction of Gupta V, ICMR Center for Management
Research (ICMR). It was compiled from published sources, and is intended to be used as a basis
for class discussion rather than to illustrate either effective or ineffective handling of a
management situation.
2006, ICMR Center for Management Research
ICMR, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India
Email: info@icmrindia.org.
www.icmrindia.org

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606-015-1

Tescos Supply Chain Management Practices

Customer focus and commitment to value has propelled Tesco into a leadership position
developing a dynamic virtuous circle comprising scale, efficiency and innovation within the
supply chain.1
- Stuart Ross, Director, Supply Chain & Distribution, Tesco, 2005.
Tesco, the UK-based grocer, is an example of a success story. They have learned how to go
beyond Wal-Mart. They came to Dan Jones ten years ago and asked, How would Toyota run a
grocery business? And theyve been working hard to become the Toyota of the grocery business
ever since.2
-

James Womack, Co-Author, The Machine that Changed the World, and Lean
Thinking, 2005.

INTRODUCTION
In December 2005, AMR Research (AMR) 3 announced the Second Annua l Supply Chain Top 25
- a list of leading companies that had employed demand driven supply chain practices and
technologies successfully. UK based retailing giant Tesco was ranked 9th in the list, preceded by
Dell, P&G, IBM, Nokia, Toyota Motors, Johnson & Johnson, Samsung Electronics and Wal-Mart.
AMRs report ranked the companies based on past performance and future potential on the basis of
their supply chain management (SCM) capabilities. The return on assets and inventory turns were
given weightage of 25% each and 10% was for growth in sales in the previous 12 months. The
remaining weightage of 40% was given to the opinion of AMR Research, based on a structured
voting methodology across AMRs team of analysts. Commenting on Tescos achievements,
analysts at AMR commented, The UK based grocer was the first to really succeed with direct to
consumer sales, while maintaining killer inventory turns and growth. 4 (Refer Exhibit I for details
of top ten companies in Supply Chain Top 25).
Tesco is renowned for its best practices in SCM, which included lean management and using RFID
technology. The company has gained and maintained advantage over its competitors by
incorporating innovations in its supply chain like point of sale data, continuous replenishment
system triggered by customer demand, primary distribution, cross dock 5 Distribution Centers and
1

Competitive Logistics Collaboration the Manufacturers Response, Cranfield Management

Development Centre, November 03, 2005.
Quinn, Francis J, The Lion of Lean: An Interview with James Womack, Supply Chain Management
Review July 1, 2005
Boston (USA)-based AMR Research provides research and advice to enhance business process
performance and cost savings, using the latest technology. It provides research and advice on several
important business initiatives including supply chain transformation, new product introduction, customer
profitability, compliance and governance.
Friscia, Tony, Marah, Kevin O and Souza, Joe, The AMR Research Supply Chain Top 25 and the New
Trillion Dollar Opportunity, AMR Research Report, November 2004.
Cross-docking is a practice in the logistics industry. Materials are unloaded from an incoming truck
trailer or rail car and loaded in outbound trailers or rail cars, eliminating the need for storage in between.
This can be done when changing the vehicle or to sort material intended for different destinations or to
combine material from different origins.
2

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use of a single vehicle to serve several stores. In 2001, the Sigma Project 6 commended Tescos
SCM efforts, Only in the most integrated supply chain organizations, such as Dell Computer,
Wal-Mart, Tesco and Volkswagen, does SCM appear to mean the integrated management of
materials, information and financial flows from raw material extraction to end-user.7

BACKGROUND NOTE
Tesco was founded in 1919 by Jack Cohen (Cohen), who invested his servicemans gratuity of 30
in a grocery stall. The first private label product introduced by Cohen was Tesco Tea. The name
Tesco was a combination of the initials of the tea supplier TE Stockwell and the first two letters
of Cohens name. Tesco opened its first store in 1929. Cohen was influenced by the supermarket
culture in America and tried to introduce the concept in the UK. The companys driving force was
the idea: Pile it high and sell it cheap. In 1947, Tesco went public and a year later, Tesco selfservice stores were started. In 1956, the first Tesco self-service supermarket was opened.
In the 1960s, Tesco went on an expansion spree and acquired several store chains. The Retail Price
Maintenance (RPM) Act 8 in Britain prohibited large retailers from pricing goods below a price
agreed upon by the suppliers. To overcome this obstacle to price reduction, Tesco introduced
trading stamps which were given to customers when they purchased products; they could be traded
for cash or other gifts. RPM was abolished in 1964, and from then on, Tesco was able to offer
competitively priced products to its customers. The first Tesco superstore, with an area of 90,000
square feet, was opened in 1967.
By the 1970s, Tescos P ile it high, sell it cheap philosophy no longer appealed to shoppers. As
people got richer, they started demanding expensive and luxury items. The poor performance of
Tesco even led to the saying doing a Tesco, which meant snatching defeat from victory. Tescos
image took a further beating when Imperial Tobacco Company which had considered acquiring
Tesco as a part of its diversification strategy, did not go ahead with the deal as it felt that Tesco
might damage its corporate image.
To arrest the downslide in its fortunes, Tescos management went in for an overhaul of its stores
during the decade. Several stores were closed down to concentrate on the superstores. The smaller
stores that still remained were refurbished to make them more customer-friendly. Tesco diversified
into operating petrol pumps in 1974. In 1975, Tesco offered price discounts through a scheme
called Checkout at Tesco. By 1979, the companys turnover had reached 1 billion.
In 1985, Ian MacLaurin (MacLaurin) became the first CEO of Tesco from outside the Cohen
family. MacLaurin realized the need to streamline Tescos operations. He closed down most of the
smaller stores and was instrumental in opening several large 30,000 square foot stores in the
suburbs. Tesco also introduced a centralized distribution system, added fresh foods and its own
label for food products. All these moves proved quite successful.
In the 1990s, Tesco introduced several customer-centric products and services such as One in
Front, 9 loyalty card 10, grocery home shopping and Tesco personal finance. As the supermarket
industry in the UK faced saturation and due to low population growth, the industry was not
6

10

Project SIGMA aims to provide clear, practical advice to organizations to help them make a meaningful
contribution to sustainable development.
Charter, Martin, Kielkiewicz-Young, Aleksandra, Young, Alex and Hughes, Andrew, Supply Chain
Strategy and Evaluation, The Sigma Project R&D Report, January 2001.
The act allowed suppliers to fix the prices of goods and retailers were not allowed to sell the goods at
lower prices.
Under the One in front scheme, Tesco store personnel ensured that if there was more than one person at
any counter, another counter would be opened for the person second in line. This way, no customer
would have to wait at check-out counters.
Loyalty cards are a part of loyalty programs, which aim to retain customers. These c ards reward
customers when they make purchases from the company in the form of points that accumulate over time.
These points can later be redeemed for cash/gifts/discounts. Thus, they provide incentives to customers
for returning to the stores of a particular company.
3

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expected to grow well in 1992. At this time, Tesco was the second largest supermarket chain in the
UK with a market share of 16.7% behind Sainsburys (19%). Tescos other competitors were Asda
and Safeway. In early 1990s, several warehouse stores like Costco 11 and assortment stores like
Aldi12 (1990), Lidl13 (1994) and Netto 14 (1990) also entered the retailing sector in the UK.
In 1997, Terry Leahy (Leahy) became the CEO of Tesco. Leahy had introduced new pricing
policies in Tesco in 1993, when he was marketing director. Leahy had suggested lowering Tesco's
prices to match those of Asdas, and this resulted in prices which were 4-5% lower than those at
Sainsburys and Safeway. Leahy also introduced the Clubcard 15 in 1995.

TESCOS SCM INITIATIVES

Tescos SCM relied heavily on the concept of Process Improvement and was guided by its core
purpose of creating value for customers so as to earn their lifetime loyalty. The key period for
Tescos supply chain initiatives was between 1983 and 1996; during this time, the company
introduced several systems including point of sale scanning, centralized ordering, centralized
distribution, automated warehouse control and electronic data interchange (EDI).
Graham Booth (Booth) was Director, Supply Chain, Tesco between 1985 and 2002. He felt that it
was necessary to have replenishment triggered by customers, for which, using the same set of
suppliers along with cross dock distribution centers (DC) and vehicles supplying to all store
formats would be ideal. The items for all the stores could be procured from the same set of
suppliers and bulk supplies could result in higher discounts. The replenishment system could use
milk runs 16 to larger stores for supplying the smaller stores also. This way operating smaller stores
would also be profitable.
In 1995, Booth approached Daniel T. Jones (Jones) in Cardiff Business School, for improvements
that could be made to Tescos supply chain. Jones, James P Womack (Womack) and Daniel Roos
were the authors of The Machine that Changed the World (published in 1991), a book explaining
the concept of Lean Production. 17 As Jones suggested, Booth invited cross functional experts
from Tesco and from Britvic 18 - a company that supplied cola to Tesco. The team started mapping
the prevailing supply chain system for cola in Tesco.
11

12

13

14
15

16

17

18

Costco Wholesale Corporation is the largest membership warehouse club chain in the world, and
headquartered in Issaquah, Washington, USA. As of July 2005, Costco operated through 356 locations
across the world.
Aldi is an international hard discount supermarket chain based in Germany. Aldi is Germany's first real
discount supermarket. Aldi is known for spartan stores with low prices on a limited range of goods. As of
2005 Aldi was operating in more than 12 countries.
Lidl was founded in Germany in 1930s, is a European discount supermarket chain of German origin that
operates 5,000 stores. As of 2004, Lidl was the fifth largest supermarket chain in Germany.
Netto is a chain of discount supermarkets based in Denmark with presence ac ross six European countries.
Under the Clubcard scheme, customers become members by paying a joining fee and providing personal
details such as name, address, date of birth, e-mail, family members, dietary requirements and product
preferences.
The term milk-run is used to refer to a single truck which cycles around multiple suppliers collecting
freight. The name is derived from the milk runs of farmers collecting milk from their dairy cows
throughout the pasture.
The essence of lean, which Toyota pioneered, is to eliminate waste and progressively remove all the
activities within the company that do not contribute to the value of the product supplied to the customer.
Britvic is a British producer of soft drinks. It was founded as the British Vitamin Products Company in
the mid nineteenth century in Chelmsford, changing its name to Britvic in 1971. It has undertaken a
series of mergers and owns the UK franchises of Pepsi and 7 Up. It also produces popular soft drink
Tango.
4

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The group traced the backward journey of cola can / bottle from a checkout cou nter at Tesco stores
to Tescos regional DC, to the DC of Britvic, the warehouse at Britvics bottling plant, filling lines
of the cola and ultimately to the can / bottle supplier. Jones and his research team which
accompanied the team asked questions at every step of the process. The questions ranged from the
necessity to keep excessive stock at stores, warehouses and bottling plants, to missing products in
the shelves, to the reasons why sales associates had to re-sort the delivered products.
Tesco and Britvic realized that at each point of supply chain there were several opportunities for
making improvements and reduce costs. Tesco realized that its supply chain system could be
considerably improved. There was a lot of unnecessary handling while the stock moved from the
supplier, to the DC and then to the store. Tesco discovered that soft drinks had 170 touch points
and spent 20-40 days in transit at seven different stocking points. The machines were utilizing only
30 to 50% of the time effectively and the remaining time was spent unproductively, either waiting
for the next batch to arrive or undergoing repair. Similarly, the trucks were used effectively only
for 30 to 50% of the time and the remaining time they were queued up or were plying empty.
In order processing, it was found that orders were processed not individually but in batches once a
day or once a week, depending on the product and the location of the stores. The processing passed
through eight different systems. The projections and the demand that was forecasted by the sales
team was amplified, mainly due to long lead times, poor product availability, waiting to obtain full
truck loads and different ordering cycles.
The supply chain review process was an eye opener for Tesco. Based on these findings Jones and
Womack, who till then concentrated on codifying and adapting Toyotas manufacturing and
production, started studying the ways in which 'muda' (in Toyota it meant excess interruption,
misalignment, unnecessary work or ingrained redundancies that add no value for customers) could
be removed from companies like Tesco.
Booth felt that a major overhaul was required in the way goods traveled from the suppliers place
to Tescos store shelves. During the late 1990s, Tescos loyalty card was gaining popularity and
home shopping was being developed. To create value for customers, Tesco concluded that it was
necessary to introduce a continuous replenishment (CR) system where products were replaced
immediately, triggered by the point of sale data. Multiple replenishments were soon introduced
and Tescos trucks started leaving the DCs every few hours, carrying stocks of items that were
close to being sold out.
Within the stores, Tesco worked towards reducing the handling of goods and streamlining the ir
flow. For example, for some goods like soft drinks which needed quick replenishments, shelves
were replaced with wheeled dollies 19. The dollies were rolled from suppliers into the delivery
trucks and then to the stores. Once in the stores, the dollies were rolled to the point of sale to take
the place of the usual sales racks. This process did away with handling problems and reduced the
number of touches 20, when employees moved products from large pallets 21 to roll cages 22 and then
to the stores shelves.
For these products, Tesco achieved availability of 99.8%. The use of dollies reduced the need for
handling, as they were loaded at the end of production line and wheeled through till they reached
the supermarket. Tesco then extended this facility to severa l ambient grocery 23 products. After the
19
20
21

22

23

Low mobile platforms that roll on casters, used for transporting heavy loads.
Touches referred to human effort made in transporting the product.
A pallet is a flat transport structure made of wood or plastic which can support a variety of goods in a
stable fashion while being lifted by any mobile forklift device. The goods are placed on top of the pallet,
and can be secured to it by straps or stretch-wrapped plastic film.
Roll cages (also known as roll containers or roll pallets) are half-pallet-sized platforms, with four running
castors beneath and with a wire cage mounted on the platform to contain goods during transport. Roll cages are
used to transport goods within the factory, by lorry to a warehouse or retail store and within the store.
Ambient grocery includes pre-prepared food products that can be kept at room temperature and require
heating/cooking before eating. These include dry instant hot snacks and dehydrated main meals.
5

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supply chain was revamped by applying lean solutions, Tesco was able to reduce the touch points
for soft drinks from 170 to 20, and the transit time was reduced to 1-3 days. The time between
filling the cola bottle and customer buying it, fell to five days from 20 days. For fast moving
products, Tesco replaced warehouses with a cross-dock and to meet a sudden increase in demand a
small buffer was maintained (Refer Exhibit II for Tescos operations before and after
implementing Lean Solutions).
Tescos trucks collected dollies from the DCs to deliver them at different stores under the DC. In
each of the stores, the trucks collected empty dollies and returned them to the suppliers, while
collecting full dollies and taking them to the DCs. While multiple trips did result in higher carrying
costs as the number of miles traveled went up, the increase in the cost of transportation was
compensated for by a greater decrease in inventory costs.
In the late 1990s and early 2000s, Tesco entered into agreements with several suppliers including
P&G, Unilever and Coca Cola to change the distribution schedules. Weekly deliveries were
replaced by daily deliveries, and the suppliers also agreed to place the cans and bottles on wheeled
pallets, which could be placed directly into shelf fixtures. The use of lean solutions in managing
the supply chain was one of the factors that helped Tesco double its net profits between 1999 and
2005 (Refer Table I for Tescos financial performance between 1998 and 2005).
Table I

Tescos Revenue and Profit (1998-2005)

Year Ended

Group Revenues
( million)

Profit Before
Tax ( million)

26 February 2005

37,070

1,962

1,366

17.72

28 February 2004

33,557

1,600

1,100

15.05

22 February 2003

25,280

1,361

946

13.54

23 February 2002

25,401

1,201

830

12.05

24 February 2001

22,585

1,054

767

11.29

26 February 2000

18,796

933

674

10.07

27 February 1999

17,158

842

606

9.14

28 February 1998

16,452

760

532

8.12

Net Profit
( million)

Earnings Per
Share (pence)

Source: www.tesco.com.

According to Booth, We experimented first with retail systems linked to distribution processes,
and then moved on to inventory management, key performance measures, store design, product
mix, supplier relationships, and ultimately our supply chain strategy. 24 After the implementation
of lean solution, lead times came down from 14 days to two days. The suppliers lead times
reduced from a maximum of 18 days to three days. Due to these efforts, Tescos stock holding
reduced from 4.4 weeks to 2.5 weeks. The food range stock keeping units (SKUs) increased from
5,000 to 40,000 and the service levels improved to 98.5% from 92%.

MANAGING THE SUPPLY CHAIN

As of 2005, Tesco had 2,365 stores across the world, 1,780 of which were in the UK opera ting on
24.2 million square feet of retail area. In the UK, Tesco operated primarily through four types of
stores (Refer Exhibit III for Tescos store format). The companys international operations were
24

Leaning Toward, www.strategy-business.com, Summer 2005.

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spread in 12 countries across the world. The sheer s ize of Tescos operations called for high
efficiency in supply chain. Even if the service level was at 99.9%, it still meant six million service
failures.
Through effective supply chain and step change program, Tesco was able to achieve cost savings
to the tune of 270 million in 2004-05. The step change program involved identifying the
processes in the supply chain that needed transformation. Then the activities were mapped,
feasibility was assessed and the new process was implemented. After the process wa s
implemented, it was measured against the desired output. One of the programs under the step
change program was continuous replenishment a system to provide the customers the right
product at the right time. Other step change programs were: implementation of RFID, through
which any object could be tracked; use of replaceable shelves which reduced the time used by staff
in arranging the items on shelves; and self service checkouts which were used by around 60,000
customers every week as of 2005. The changes made by Tesco through Step Change program have
made routine operations simpler for the staff and they had more time to attend to customers.
Customers have also benefited because of improved product availability.
In charge of the program was the Step change program manager based in its head office, and
under him/her, there were 11 project managers, who continuously monitored and assessed how
new technology and processes can simplify day to day activities in Tesco. The team worked with
other functions and brought out new plans to control costs and implement step changes.
The step change program has eliminated several unnecessary processes, and has helped Tesco
achieve sizeable cost savings. These savings were used to reduce prices further. According to
Boston Consulting Group, Since Wal-Marts entry in the UK, Tesco has doubled its efforts
and actually raised its market share. It did this by installing a Step Change team to lower costs
and increase responsiveness to customers. It invested the savings in lower prices and reinforced a
good-better-best pricing architecture with a range of products under its own label. 25 (Refer
Exhibit IV for some of the Step Change programs in Tesco).
Tesco focused on every step of its supply chain to ensure that cust omers can find the products they
need in Tesco, and at the lowest possible prices. In order to minimize costs, Tesco sourced
materials from all across the world. It picked up products from its domestic suppliers through
Tescos owns trucks.
SOURCING

Tesco sourced raw materials locally from several parts in the UK and in 2002, the company
established regional buying offices in Scotland, Wales and Northern Ireland. The national buying
team took care of sourcing from suppliers in England while regional buying teams did so for
Scotland, Wales and Northern Ireland. The buying team helped Tesco assess local market
conditions and develop closer relationships with suppliers. As of 2004, Tesco had more than 180
suppliers in Scotland. Tesco sourced 1.4 billion worth of products from Ireland in 2004 (Refer
Table II for highlights of sourcing from Scotland and Britain).
The international sourcing team of Tesco was based in the UK and sourced from different parts of
the world. Sourcing hubs play an important role in procuring non-food items. They chose the
locations for sourcing, negotiated prices, placed orders and checked the quality of the products.
Tesco's buying offices in the UK worked directly with the sourcing hubs in the UK, while the hubs
in other locations in Europe and Asia were managed by a support team.
Tesco established an international sourcing hub in Hong Kong during the 1970s and worked
directly with the manufacturers to provide competitive prices. It had several smaller hubs across
Asia and Africa. In 1999, Tesco started procuring products like apparel, toys, electrical, household
products, homeware, outdoor furniture and sports equipment from Southern China. In 2001, a
global buying and sourcing super hub was established in Hong Kong, mainly to take advantage of
lower costs in Asian countries like China, Thailand, India, Mauritius, Bangladesh and Sri Lanka.
25

Dancing with the 800-Pound Gorilla, The Boston Consulting Group, September 2002.
7

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Tesco regularly sourced clothes from India and in 2004 more than four million T-shirts sold in its
stores across the world were procured from South I ndia. It was estimated that Tescos sourcing
from India would cross 95 million by 2006. Tesco also sourced fabric from China, Bangladesh,
Sri Lanka; these were then consolidated in Taiwan and were sent on to the UK. Tesco started
sourcing products for its Central European markets, which were highly cost conscious, from India.
Table II

Tesco and Local Suppliers

Tesco was the largest customer for British agricultural products.
- 97% of Tescos fresh beef is British;
- 90% of fresh lamb and chicken is British;
- 95% of fresh pork is British;
- All fresh, UHT and organic milk comes from British farms, as do all of the fresh eggs.
Tesco was the largest customer for Scottish agriculture. More than 1,000 Scottish products were
sold in Tescos stores in Scotland and the labels included the county and farm from which the
supplies were obtained.
- 181 Scottish companies supply product lines to Tesco, with 676 million of product
purchased:
- Over 1,200 Scottish farmers supply fresh quality beef and lamb to Tesco
- More than 8,500 tonnes per annum of Scottish cheese was sold in Tesco stores in 2002;
- 2.4 million pints of fresh Scottish milk are sold each week;
- All UK Tesco stores sell Scottish caught fish.
Source: Tesco Corporate Responsibility Review, 2005.
PRIMARY DISTRIBUTION

Tesco served its network of stores through its logistics and warehousing arm Tesco Distribution.
As of 2004, Tesco had 26 DCs and 18 Consolidation centers (CCs) in the UK. Five CCs were
located overseas, three in Spain, one each in Italy and the Netherlands. Through the CCs, smaller
loads from suppliers in that region were consolidated, before being shipped to the UK. (Refer
Exhibit V for the details of DCs of Tesco in the UK).
Tesco has changed its DCs into cross docking operations, where products from different suppliers,
heading for the same store were consolidated. Activities like inventory holding and order picking,
which were carried out at DCs, were shifted to the location of the manufacturers, due to which
Tesco was able to decrease its inventory holding by one third.
Tesco pioneered the primary distribution process, where it took on the responsibility of delivering
goods from the manufacturers factory into its own distribution network and then to DCs. Tesco
started off with primary distribution in 2001, to help it gain more control over its supply chain.
Primary distribution helped Tesco use its distribution fleet to the optimum level through
backhauling. As of 2005, more than 65% of the goods from suppliers to Tescos DCs were carried
by the companys own or a contracted fleet. The suppliers sold Tesco goods at factory gate
prices 26 excluding the distribution costs.
26

Factory Gate Pricing involves identifying the component costs of a product and then separating the
transport element. These costs include raw materials; labeling and packaging; marketing; labor; transport
etc. It is the comparison between the transport component, current cost and the retailer's potential costing
which will then decide how the goods will be moved in the future.
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Primary distribution has helped Tesco manage inbound goods efficiently, leading to cost savings.
The process was highly effective especially with small suppliers who had limited distribution
capabilities. By using primary distribution, Tesco improved the movement of goods from the
factories of suppliers to its own DCs and to its stores. The smaller suppliers too have reaped many
benefits, as they could concentrate on production and also supply the products at a better price.
Before setting up its primary distribution system, Tesco held meetings with groups of 30 to 40
suppliers in similar categories, briefing them as to the processes and benefits. Then the suppliers
were asked to provide details regarding their supply chain facilities, schedules, and locations and
the costs involved in supplying the products to Tesco. Integrating the data obtained from all
suppliers, Tesco designed a new supply chain. Then, Tesco reached agreements with the suppliers
on the frequency and timings of deliveries and pick up schedules. Tesco addressed the issues that
were brought up while planning its supply chain initiatives.
Tesco started off primary distribution with 120 suppliers of frozen foods for a period of six
months. By 2002, 20% of all products in the UK were delivered through primary distribution and
80% of the frozen foods were collected and delivered to Tesco by a third party fleet. In 2003,
about 30% of all inbound freight into the DCs, equivalent to 10,000 deliveries a week from 500
suppliers was through primary distribution. By March 2004, primary distribution was extended to
include fresh produce, ambient grocery and frozen products. Through primary distribution efforts,
by 2004, delivery on time improved by 14% and the stock holding was minimized.
Tesco and its suppliers went in for Collaborative P lanning, Forecasting and Replenishment
(CPFR) 27 to analyze demand patterns. The system was used to decide on the offline stocking
point 28, and to adjust production volumes and the stock to be held. After initial hiccups, mainly due
to suppliers reluctance to agree to CPFR, as they were used to forecasts that were carried out in
batches and through central DCs, Tesco implemented CPFR. For primary distribution, Tesco
decided to pick up products from the suppliers as against the earlier practice, where suppliers used
to deliver stocks at Tescos delivery centers.
CONTI NUOUS REPLENISHMENT SYSTEM

In the traditional replenishment system, a store decided on the products that were needed. The
order was centralized and given to the suppliers, who delivered the goods to regional DCs. After
all the suppliers have delivered their goods at the DC, They were delivered to each store. In the
traditional method, the sales data for the day was posted at the end of the day and orders were
made for the next day and delivered the following day (Refer Figure I for Tescos traditional
supply chain).
Tesco introduced the CR system in 1999. The CR system of Tesco was based on the orders
obtained from the checkout counters at different stores. The orders were placed several times a day
and the suppliers made several deliveries to the DC. As and when the items arrived, they were
assembled and dispatched to the stores. The same system was followed for both food and non-food
products. The main aim of using CR was to cut costs, reduce lead times, improve product
availability and maintain accuracy of orders.
In 2000, CR was provided for ambient grocery and was extended to fresh foods by 2001. By 2002,
CR encompassed clothing, bread and morning goods 29 and was then extended to all other
categories. CR proved to be one of the key factors in Tescos plans to improve the availability of
products.
27

28

29

CPFR is defined as a business practice for business partners to share forecast and results data through the
Internet, in order to reduce inventory costs while at the same time, enhancing product availability across
the supply chain.
Any stock that was excess of full truck load was known as offline stock. These stocks were used as a
buffer against peaks and troughs in demand and were also used as safety stocks against delivery failures.
Morning goods were the products used for breakfast. These included pastries, sandwiches, croissants,
bread rolls, muffins, etc.
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Figure I

Tescos Traditional Supply Chain

Store Order
Calculation

Central
Order
Processing

Production
Scheduling

Transport to
Depot,
Awaiting
Delivery

Batched
Delivery to
Stores once
a Day

Note: The replenishment required arrival of all the suppliers vehicles at the depot, after which final delivery
to the stores was carried out.
Adapted from www.tesco.com.

Continuous replenishment received the required support from Point of Sale (POS) data. Tesco had
real time data infrastructure in place, and this provided data about the sales as and when they
happen, helping to improve stock availability. Sales data from the individual stores was routed to
the head office, which was able to gain access to data from over 1,200 stores, during peak times. A
total of about 1,500 sales transactions (each transaction having 50 to 100 items) were recorded per
second.
Tesco also use d point of sale (POS) data to understand consumer behavior, project sales and
manage stocks at individual stores. According to Simon Alcock, Technical Specialist at Tesco,
Managing the supply chain is critical for Tesco in maintaining its leadership in the industry. If
customers cant find the product they like on the supermarket shelves, then they cant buy it. The
media has highlighted out of stocks as an issue for some of our competitors, this solution (POS)
will help us tackle the problem. 30
In the CR system, there was a continuous flow of data between head office, depots and stores to
replenish stocks through an automated order process. Tesco posted data every hour on each of the
40,000 product lines. Multiple deliveries improved the availability, quality and variety of products.
To the extent possible, products were cross docked to the trucks, thus reducing handling and stock
holding. Through this system, Tesco was able to improve availability, maintain optimum stock and
offer wider range of products. The average replenishment time (time between order being placed
and order arriving at the distribution) which was earlier between 48 to 72 hours was reduced to 24
to 36 hours and the goods reached the stores from DC within 24 hours.
In the UK, sales density was higher than in other markets. Shelves needed to be replenished more
often as the sales were higher; stores that were fully stocked in the morning needed to be refilled
by noon. In such a scenario, the availability of goods was of prime importance. Tesco developed
an e-procurement program, called The Tesco Information Exchange program 31 (TIE). TIE linked
all Tesco stores to their suppliers including farmers; any surge in demand for farm products was
directly conveyed to the farmers. Using CR based on TIE, Tesco launched its 'Full and Fresh'
program in 2003; here, fresh food deliveries were made twice a day. Every week Tesco collected
freshly harvested items from farms as per prior agreements. For this, the orders were fed directly to
the picking units in the fields, where the required items were packed and dispatched so as to be
available on the shelves the next day.
30

31

Tesco Real-Time, Point-of-Sales Data Infrastructure Handles 1500 Transactions a Second, Microsoft
Customer Solution Retail Industry Case Study, December 2004.
TIE linked with its suppliers using Electronic Data Interchange. By 1995, 1,300 suppliers were a part of the
system. By 1999, TIE received 130,000 hits per month. Using TIE, Tesco could share all the sales and stock
information with the suppliers. The suppliers were able to deal with orders and invoices online. They had
access to the Point of Sale data, which detailed how their products fared across Tescos retailing network. The
suppliers could respond to the changes in demand quickly and ensure optimum supply.
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Another factor that helped CR was the introduction of handheld computers for staff in the stores. All
Tesco stores in the UK were provided with handheld computers to provide key information to the
sales people. These devices have helped in simplifying stock and order operations as the staff could
communicate with the central replenishment system to access real time data about the levels of stock
and delivery schedules (Refer Figure II for Tescos Continuous Replenishment Supply Chain).
Figure II

Tesco Continuous Replenishment Supply Chain

Suppliers

Primary Distribution

Receive Orders
More than Once
a Day

Smoothed Goods
in Profile
Eliminates Traffic
Logjam

Depots

Delivery

Store Orders
Assembled as
Stock Arrived

Multiple Deliveries
Efficient Fleet
Utilization,
Faster
Replenishment

Adapted from www.tesco.com.

Tescos customer service desks had access to the company's intranet and all the key processes
were automated. Tesco introduced self service checkouts, on a trial basis at 21 stores. These have
helped in reducing queuing and congestion and the cus tomers were given a wider choice (Refer
Table III for details of products delivered per week in different Tesco stores).
ADOPTING RFID TECHNOLOGY

Tesco started using RFID technology, which it called radio bar codes, on a trial basis from January
2003. The company started by tagging Gillette product lines, mainly to understand the technology
and how it would help in reducing shoplifting and pilferage. The trial ended by August 2003.
Before adopting RFID, Tesco posed three questions Does RFID improves the c ustomer's
experience? Does it simplify the employees processes? Does it reduce costs?
In June 2003, Tesco extended the use of RFID to managing the sale of DVDs at its Sandhurst
hypermarket. Tescos DVD supplier Entertainment UK was also actively involved in the project.
The RFID tag was embedded into the packaging and as customers took DVDs off the shelf, the
message was sent to a central system that could be accessed by both Tesco and Entertainment UK.
By accessing the system, Entertainment UK was able to replenish the DVDs quickly. The trial
continued till January 2004.
Table III

Tesco Deliveries Per Week

Tesco Extra

Tesco Superstore

Tesco Metro

Tesco Express

Fast Moving Goods

> 21

12

14

Slow Moving Goods

Frozen Food

Beer, Wine & Spirits

>21

14

Produce & Chilled

Non-Food

Source: Tesco Account Watch, IGD Research, 2004.

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To use RFID technology in its supply chain, Tesco started tagging cases from DC in Milton
Keynes to two stores in Peterborough and St.Neots. In September 2003, when the trials began, the
tagging was carried out at the DCs. In December 2003, tags were placed at the point of production.
The tags were used to monitor the route of the product from supplier to the DC and then to the
stores. In 2004, Tesco carried out another trial by tracking the movements of packaged goods from
six suppliers, and then non-food items began to be tagged in a phased manner.
After successful completion of the pilot program in January 2005, Tesco announced incorporation of
more than 4,000 bar code readers and 16,000 antennae across 1,300 Tesco stores and 35 DCs in the
UK. By December 2005, RFID was extended to toiletries, batteries and mobile phones which were
tracked from the central DC of Tesco to 98 superstores located across the UK. Tesco set a deadline of
September 2006, for its suppliers to adopt RFID tags (Refer Table IV for use of RFID in Tesco).
The main advantage of RFID over bar codes was that it used microchips to transmit product codes
to scanners without human intervention and the products could be tracked throughout the supply
chain. RFID provided more information compared to bar codes. RFID was touted as a system that
provided unique identification and security for each package right from the time it is manufactured
to the time it is sold (Refer Exhibit VI for details of RFID enabled supply chain).
Tesco used RFID technology because it helped in measuring and controlling every aspect of the
supply chain. It enabled faster processing of goods, lowering costs and higher employee efficiency
through improved availability of goods. Other benefits that RFID presented were the option to
trace the products from source to consumer, the option to automatically scan the entire shopping
trolley resulting in quicker checkout, and reduction in thefts as the scanners at the exit could
identify the products that were not paid for.

LOOKING AHEAD
In the East European Markets, Tescos logistics and supply chain were not well developed and
relied heavily on deliveries from suppliers. This was a viable proportion for the large stores but not
for the smaller ones. As Tesco planned to expand smaller stores in Eastern Europe, developments
in the supply chain became necessary. In Thailand and Korea automated DCs have been
operational. For Tesco to gain an edge over other multinational retailers entering these markets, it
was necessary to build viable supply chain solutions.
Tesco was in the process of developing an international supply chain. In Hungary, Tesco opened
Fresh Produce DC and Ambient grocery DC in 2002 and in 2004; a composite DC and a fresh food
DC were opened. In March 2003, Tesco opened 1.5 million sq ft DC in Korea. In 2003, the first
DC in Poland was opened in Warsaw. In the same year a 260,000 sq ft DC with a capa city of
29,000 pallets was opened in the Czech Republic. In 2004, Tesco opened a 209,000 sq ft
composite DC in Dublin, to supply products to all the Tesco stores in Ireland.
Table IV

Radio Barcodes in Tesco

Better, Simpler, Cheaper are Guiding Principles of Tesco
Better (for customers)
Improved Availability
Know what we have got and where it is
Improved service for the customer
Reduced prices
Simpler (for Staff)
Contd

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606-015-1
Contd

One touch replenishment

Improved accuracy in all areas
Many tasks will become much simpler / redundant
Cheaper (for Tesco)
Reduced costs
Reduced shrink
Reduced waste
Reduced stock holding
Reduced Prices
Source: EPC Global US Conference, 2004.

Consumer demand had become the main driver in store deliveries. Tesco has been able eliminate
touch points for products like colas by using bottles on cages which were directly rolled onto
delivery trucks and then to the retail floor. On an average total touches were reduced from 150 to
50. Inventory stocking points were reduced from five to two. Tesco was able to provide more
products based on the demand patterns in different stores. According to analysts, Tesco was
successful in implementing its supply chain strategy, as its stores were located close to one another
in the UK and the strategy might not be successful in countries like USA where the stores of
retailers are widely dispersed.
After the implementation of Lean Strategy, inventory holding and order picking which was
earlier carried out at the DCs was done by the manufacturers themselves. This has helped Tesco to
reduce the supply chain cost by 20%. The effective use of SCM has helped Tesco to become the
lowest cost retailer in Britain. Tesco has also been able to achieve higher margins and profits.
Depot space utilization was at 90% in 2003 as against 85% in the year 2002. The lower space
utilization served to provide higher capacity during peak seasons like Christmas and Easter.
It isnt Tesco alone that has benefited from lean solutions; some of its suppliers like Br itvic have
benefited too. Britvic improved the flexibility of the filling lines and started producing in small
batches according to the customers' orders. Lean solution has reduced the need for it to stock a
large inventory of finished goods. Suppliers to Tesco were not required to maintain DCs as the
goods were picked up immediately. Every year Tesco held suppliers conferences around the
world, where suppliers met the board members to get an insight into Tescos business needs and
emerging customer trends.
Industry analysts felt that full-scale implementation of RFID would not be easy. The RFID tag was
quite expensive at 50p each and was suitable for high value products like electronic goods and
CDs. For low cost products like soft drinks, they turned out to be expensive relative to the price of
the product. Several suppliers might not be able use them on each product individually. Another
challenge with the use of RFID was that the scanner could not read the tags correctly when they
were close to metals or liquid.
Tescos Primary Distribution too had many loopholes and often, the suppliers were ready with the
goods, while Tesco was not equipped to collect them. The timeliness and reliability of pick ups by
trucks nominated by Tesco, was not always better than those of the suppliers. According to
Richard Brasher, Commercial Director, Tesco, The primary distribution network (between
suppliers and distribution centers) isnt optimised yet. Im basically not in a position to say that
Tesco is offering the most competitive rate and always turns up at factories or depots on time. 32

32

Watson, Elanie, Tesco Admits Failures, www.foodmanufacture.co.uk, December 05, 2005.

13

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Exhibit I

Supply Chain Top 10

Company

Rank
2005

Rank
2004

Dell

AMR
(40%)

ROA
(25%)

Inventory
(25%)

12 Months
Growth

Composite
Score

346

13.1

86.8

18.7

19.37

Procter & Gamble

289

11.4

5.7

18.5

13.23

IBM

278

13.2

16.7

8.0

12.89

Nokia

234

14.1

12.7

7.0

11.54

Toyota Motor

231

4.8

11.1

34.0

11.24

Johnson & Johnson

191

16.0

3.0

13.1

10.91

Samsung

110

15.7

9.2

31.5

10.67

Wal-Mart

241

8.5

7.1

10.3

10.41

Tesco

207

6.7

24.3

8.5

9.66

10

Johnson Controls

172

5.4

24.2

17.3

9.21

Source: www.amrresearch.com.
AMR Research Opinion based on panel of experts forced rank order
ROA: 2004 Net Profit/2004 Total Assets
Sales/Inv.: 2004 Sales/2004 Year-End Inventory
Composite Score = [(AMROpinion/10)*40%] + [(ROA*100)*20%] + [(Sales/Inv.)/5)*20%] + [(Twelve
months growth*100)*20%]

Exhibit II

Tesco Before and After Lean Solution (Example of Cola)

Before Lean Solution :
- Five storage locations between bottler and consumer
- Six order-entry points
- 20 day throughput time
- 98.5% service level (Grocer Industry Average 92%)
After Lean Solution :
- Two storage locations
- One order entry point
- 5 day throughput time (75% reduction in total inventory)
- 99.5% service level.
Source: Lean Enterprise Institute.

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606-015-1

Exhibit III

Tescos Store Format

Tesco Express, in convenience stores format, typically occupies an area of 3000 square feet.
Initially, Express stores were opened as petrol forecourt shops and the first Tesco Store was
opened in 1994 and as of 2005 there were around 546 Tesco Express Stores. The stores sold
7000 Lines of products fresh produce, wines and spirits. The stores also had an in-store Bakery.
Tesco Metro occupied an area of around 7000 15000 square feet and was opened in 1992.
The stores were located in city centers and offer a wide range of products including fresh foods,
takeaways and lunchtime items. There were 160 such stores as of 2005.
Tesco Superstore was opened during 1970s, and several stores were added during 1980s and
1990s, as of 2005 there were 446 Superstores occupying area of 13.9 million square feet. Over
the years, several non-food ranges became a part of the Tesco Superstore.
Tesco Extra operated in area of around 50,000 to 100,000 square feet. In 1997, Many
superstores were converted into Extra stores. Tesco Extra provided a wide range of food and
non food items including homeware, clothing, health equipment, beauty products apart from
seasonal furniture.
Source: www.tesco.com.

Exhibit IV

Tescos Step Change Program

Through Step Change productivity program, Tesco identified savings from its own operations.
Some of the Step Change programs are:
-

Increasing the volume of products going through primary distribution channel to 50%, by
collecting more products from suppliers on the way back from stores to distribution centers
thereby reducing the number of miles trucks drive empty.

Using hand held scanners in all stores, allowing staff to access product and stock
information at the shelf edge.

Establishing a dedicated clothing distribution centre handling all clothing going into the UK
stores, so that suppliers have the option of delivering to just one distribution centre rather
than several or to hundreds of stores.

Productivity gains lead to cost savings, which can be invested in reducing prices.

Adapted from www.tesco.com.

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606-015-1

Exhibit V

Tescos Distribution Centers (2003)

No. of Stores Served
National Distribution Center
Fenny Lock

780

Daventry

780

Brackmills

780

Klin Farm

780

Composite Distribution Center

Magor

129

Temperature Controlled
Chepstow

94

Middleton 2

74

Hinckley

86

Snodland

87

Doncaster

91

Harlow

104

Didcot

88

Southampton

56

Livingston

78

Unity

420

Belfast

33

Regional Distribution Centers

Welham Green

90

Middlewich

130

Thurrock

129

Crick

92

Weybridge

96

Middleton 1

370

Strood

281

Dundee

77

Antrim

37

Source: Tesco Account Watch, IGD Research, 2004.

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606-015-1

Exhibit VI

RFID Enabled Supply Chain

Supplier
RFID Tag is attached to the label or is embedded into packaging. Each product has a unique
number enabling it to be tracked within the suppliers own supply chain. Once the retailer places
an order, the supplier picks the order and verifies the correct quantities that have been filled by
using readers at the loading bay doors.
Retailer Warehouse
As the order is unloaded, the readers at the unloading bay verify the delivery against what was
ordered. Access to information will be in real time and allows increased flexibility in the
operation. For example, the retailer may decide to immediately direct part of the unloaded
product to a vehicle being loaded for delivery straight to the store.
Retailer Store
Upon delivery, readers at the backdoor check what the store has ordered against what the RDC
has delivered, automatically updating the book stock. As a customer buys a product off the
shelf, it allows staff to replenish the item with what is in stock. If there is no stock available in
store, the system will alert staff as soon as the next delivery is unloaded.
Adapted from www.tesco.com.

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Additional Readings & References:

1. Food Stores Create Global Marketplace , BBC News, March 31, 2000.
2. Labi, Aisha, The Virtual Grocer, Time Europe, October 30, 2000.
3. Charter, Martin, Kielkiewicz-Young, Aleksandra, Young, Alex, Hughes, Andrew, Supply
Chain Strategy and Evaluation, The Sigma Project R&D Report, January 2001.
4. What Webvan Could Have Le arned from Tesco, Strategic Management, Wharton,
October 10, 2001.
5. Seybold, Patricia, Shopping Online at Tesco, The Hindu Business Line, March 07, 2002.
6. Dancing With the 800-Pound Gorilla, The Boston Consulting Group, September 2002.
7. Braithwaite, Alan, Achieving World Class Supply Chain and Logistics in the Chemical
Industry, EPCA Logistics Meeting, Monaco, November 12, 2002.
8. Jones, Daniel T., Clarke Philip, Creating a Customer Driven Supply Chain, ECR Journal,
Winter, 2002.
9. Ross, Stuart, Supply Chain Management Supporting New Products Implementation in
Tesco, www.eltrun.aueb.gr, September 2003.
10. Jones, Daniel T., How Lean is the Grocery Supply Chain, IGD Supply Chains of the
Future Conference, March 23, 2004.
11. Donoghue, Andrew, Proceed With Caution, www.zdnet.com.au, May 11, 2004.
12. Clarke, John, Clear Vision: Confirming Performance Tesco, EPC Global US Conference,
September 30, 2004.
13. Account Watch Tesco, Institute of Grocery Distribution, October, 2004.
14. Friscia, Tony, OMarah Kevin, Souza Joe, The AMR Research Supply Chain Top 25 and
The New Trillion Dollar Opportunity, AMR Research Report, November 2004.
15. Watson, Kathy, Tesco Rolls out Secure Supply, www.foodmanufacture.co.uk, December
13, 2004.
16. Tesco Real-Time, Point-of-Sales Data Infrastructure Handles 1500 Transactions a
Second, Microsoft Customer Solution Retail Industry Case Study, December 2004.
17. ADT Announces Tesco to Purchase RFID Readers , www.adt.com, January 11, 2005.
18. UK : Tesco / Sainsbury: Food for Thought , Datamonitor, January 12, 2005.
19. Underhill, William, Another Giant On the Rise , Newsweek International, April 25, 2005.
20. Knights, Miya, Schedule System Shortens Tesco Checkout Queues , VNUNet.com, June
09, 2005.
21. Off the Peg: Tesco and the Garment Industry in Asia, www.corporatewatch.org.uk, June 2005.
22. Kleiner, Art, Leaning Toward Utopia, www.strategy-business.com, Summer 2005.
23. Quinn, Francis J., The Lion of Lean: An Interview with James Womack , Supply Chain
Management Review July 01, 2005.
24. Tesco This Sceptered Aisle , The Economist, August 04, 2005.
25. Time for Supply Chain Quid Pro Quo, www.foodmanufacture.co.uk, September 06, 2005.

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26. Womack, James P., How Lean Consumption Transforms Manufacturing & Supply
Chains, Industry Week Smart Manufacturing Conference Bloomingdale, Illinois, September
20, 2005.
27. What Toyota Knows about Supply Chains , Supply Chain Digest, November 04, 2005.
28. Tesco Store Managers Use Handhelds for More Time on the Sales Floor,
www.editricetemi.com, November 26, 2005.
29. Watson, Elanie, Tesco Admits Failures, www.foodmanufacture.co.uk, December 05, 2005.
30. www.tesco.com.
31. www.tescocorporate.com.
32. www.tescofarming.com.
33. http://retailindustry.about.com.

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