Tesco’s operations stategy Essay
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Operations Management plays a key role in achieving the main performance objectives of Tesco. Whether the current operation objective is to improve customer service or to increase profitability, the way in which Tesco utilises its resources will have a significant impact. As a consequence, there have been a number of innovative developments in Operations Management that have sought to make use of Tesco resources in a significantly new manner in order to make a big step change in performance.
Tesco is an successful example of operations management, however, through our investagation they also have some demerit in their opertions management need to be improved.
The Institute for Retail Studies’s research (2003) reports that retail industry in the UK is quite competitive, dynamic, and innovative in recent years. And grocery retailers such as Tesco, Sainsbury’s, Asda etc. are all compete on price, quality, range, and service in order to strive for business success. Within this intense competition of retail industry, Tesco can stand at market-leading position in recent years has mainly come from its strategies of expanding overseas, shifting to ‘higher margin’ non-food market and maintaining a strong core UK business (Corporate Watch UK, 2004).
And its UK success has been built on low prices, cultivating customer loyalty, unbeatable quality, offering a range of different store concepts and expanding into retailing services (Tesco Plc annual review, 2005). Moreover, according to Business Engine, Inc. (2006), it reports that close control of internal resources and diligent monitoring of all expenditures are also the critical aspects for Tesco to maintain its leading position in the market. Therefore, Tesco’s business success indicates that effective operations strategies have played a vital part in supporting and driving its whole business objectives which is “to create value for customers to earn their lifetime loyalty”.
Accordingly, the purpose of this report is to investigate and analysis operations management in Tesco. The report will mainly go through three aspects of Tesco’s operations management: operations management performance objectives, planning and control in use, and measurement and improvement activities. Finally, conclusions and recommendations will be drawn from analysis.
2. Analysis of Operations management
2.1 Operations Strategy
According to Slack et al. (2004), operations strategy is defined as “the total pattern of decisions which shape the long term capabilities of any type of operation and their contribution to overall strategy”. Slack et al. (2004) also states that operations performance objectives relate to the interests of the operation’s stakeholders. Applying to Tesco, customer’s satisfaction is particularly important to its business. Therefore in order to satisfy its customers and contribute to competitiveness, Tesco’s operations performance objectives are mainly reflect on cost, quality, speed, dependability and flexibility five aspects. And they will be analysed in detail as follows:
With regard to pricing, Tesco every week check over 10,000 prices in Asda, Sainsbury’s and Morrisons stores to guarantee its customers have low prices every day (See Appendix 2: Table 1). And it also took steps to reduce cost in order to ensure that the way they work is better, simpler and cheaper. For instance, the reason of Tesco has an effective supply chain is because of implementing an appropriate information technology G.O.L.D. application suite successfully. This software provides Tesco with complete control over warehouse stack. Moreover, the automatic order proposals and warehouse optimisation procedures facilitate a fast and flexible business with minimal logistic costs (Kocevar, 2003).Therefore, by doing things cheaply, it will allow Tesco to reduce its price in order to gain higher volumes or increase their profitability on existing volume levels externally. And internally, cost performance is helped by good performance in the other performance objectives.
As Slack et al. (2004) points out that quality is a particular important objective to all operations, as quality is an important aspect of customer satisfaction or dissatisfaction and quality operations could both reduce costs and increase dependability. For a grocery retailer, quality could mean goods are in good condition, the store is clean and tidy, decor is appropriate and attractive and staffs are courteous, friendly and helpful etc., so according to our research with Tesco store manager, he stated that Tesco has put more staff into stores and distribution centers in order to improve its availability and service. Moreover, Tesco also launched Clubcard that the information provided by it enables Tesco to better understands their customers.
In addition, Tesco delivered new system of hand-held computers for their staff in all of UK stores, which is to provide key information on the sales floor, simplifying their stock and order operation for customers. And they also have tested self-service checkouts in order to help reduce queuing and congestion. All These system has helped to improve speed, quality and flexibility of their staff response to customers’ queries.
In general, according to above analysis, the five operations performance objectives are interacted with each other, Tesco need to take account of all of them when they deliver their operation strategies. More importantly, each of these performance objectives is also influenced by the competitive factors, so according to Slack et al. (2004), ‘order-winning’ and ‘qualifying’ are two factors that could determine the relative importance of competitive factors.
For Tesco, according to our research, cost (low price) and flexibility (innovative products and services) are two order-winning factors that directly and significantly contribute to their success business. Quality, dependability and speed are qualifying factors for Tesco, as all these factors not the major competitive determinants of their winning business, but they are those aspects of competitiveness where Tesco’s operation performance has to be above the particular level that customer perceived.
2.2 Operations Planning and Control
Operation planning and control are an important part of the organisation. Planning is a formalisation of what is intended to happen at some time in the future. And control is the process of coping with changes in these variables (Slack et al., 2004).
Capacity planning and control
Capacity planning and control reconciles the required availability for an operation’s products and services with the operation’s capacity to deliver them (Slack et al., 2004). Capacity concerns with the major facilities, machines, manpower, and supplies of the organisation. These are all the resources which need to be planning and control.
Facilities: Tesco has the temperature regimes which include a +1℃ chamber in addition to ambient, -25℃, 0℃ and +5℃ (Johnston, 2003). And have the space to put the fresh fruit and vegetables and fresh meat and poultry.
Staff: Plymouth Tesco Metro store has two store managers. One is store manager, and another is service manager. And there is enough staff work in the store. Tesco recruit and training there staff. Also Tesco encourage staff to become part owners of the company and share in the success. In addition, Tesco offer a save-as-you-earn scheme to enable staff to buy shares at a discounted price as a medium- or long-term investment (Tesco Plc, 2005).
Suppliers: Tesco does business with nearly 2,000 own-brand primary suppliers in 98 countries. The supply chain is made up of a complex range of relationships – from individual farmers and growers through to processors, manufacturers and distributors (Tesco Plc, 2005).
Supply chain planning and control
Supply chain management is concerned with managing the flow of materials and information between the operations which form the strands of ‘chains’ of a supply network (Slack et al., 2004). Supply chain management needs consider and satisfy end customers.
The current Tesco supply chain network is well documented (IGD, 2003b). The operations performance is now much more rigorously monitored, mainly through the ‘steeling wheel’ approach widespread throughout Tesco. Any distribution centre steering wheel focuses on operations which include safety and efficiency, people which include appointment, development, commitment and values, finance which include stock results and operating costs, and the customer which includes accuracy and delivery on time (Fernie and Sparks, 2004). Also Tesco measure these performance at all levels, quality standards are maintained and enhanced.
Quality planning and control
Quality planning and control seeks to deliver products and services at their required specification or above it (Slack et al., 2004). The operation views quality is consistent conformance to customer’s expectations. Quality is seen as being so important by most operations (Slack et al., 2004).
Tesco ask the suppliers to comply with their Nature’s choice scheme to ensure their fruit, vegetables and salad are grown to high safety, quality and environmental standards. Also Tesco offer customers fresh and safety and quality seafood and organic foods. Tesco is committed to purchasing timer and timber products only from legal, sustainable sources (Tesco Plc, 2005).
2.3 Measurement and Improvement Activities
“Performance measurement is a process of quantification and the operation performance indicate the degree which an operation fulfils the five performance objectives in order to meet the customer’s needs” (Slack et al., 2004). Operation’s performance could also change because of the different market’s needs of each performance objective. The five performance objectives are quality, speed, dependability, flexibility and cost (Slack et al., 2004) (See Table 2). According to Tesco Plc’s 2004 and 2005 annual report, currently Tesco use the “Steering Wheel” as their management tool to measure operations performances. And the management tool is with a set of Key Performance Indicators that can help to check whether the operations targets achieved or not.
As a retailer, cost, quality and time are more important. Tesco makes both continues and breakthrough improvements in its operation. However, breakthrough improvements take more proportion.
There are several areas that new technology should be used to improve Tesco’s operations, which include price integrity and stock processes at the shelf edge. Tesco has deployed Intermec 700s to change in-store prices, logging stock inventory transactions and producing plan grams of product layout and shelf design. Besides, Tesco used it to check store delivery accuracy, using GPRS connectivity to get data feedback; check the accuracy of deliveries against invoices (Austin, 2004). Tesco deployed 700s to make sure product prices are updated and correct.
Because of 700s ensure a track record of price alterations, Tesco are enabled to improve productivity of the price change. Besides, Tesco are enabled to improve productivity at the stock control routines (Austin, 2004). Thus, staff productivity has increased. So, it is not a cost saving activity, but also can make them more effective. In addition, the customer query time has been reduced. The staff in Tesco can determine when the last delivery arrived and when the next is expected by scanning and receiving information from warehouse at once. It is not such hard and inconvenient for staff to deal with customers (Austin, 2004).
With the development of IT solutions and G.O.L.D. implementation, Tesco achieves its cost reduction as well. Tesco consolidates all the orders passed to the external suppliers with accurate control of purchasing procedures (Kocevar, 2003).Thus, delivery data, the capacity of warehouse and the optimal quantities are able to defined. Tesco has new plan and project for the future improvement, such as X-Dock project. It enables supplier to prepare the goods when they are declared on the distribution lists. Time needed for goods preparation can be reduced because of this type of goods distribution. Tesco complete control over warehouse stock with the help of the G.O.L.D. software suite. Besides, Tesco achieves to a faster and more flexible business with minimal logistics costs by using the automatic order proposals and warehouse optimisation procedures (Kocevar, 2003).
In order to improve quality, Tesco worked together with Business Systems UK Ltd. Tesco has chosen Nice Universe quality management software and the NiceLog digital voice recording and screen capture platform to automate and optimise its approach to quality measurement, provided by BSL. BSL worked with Tesco to delivery a consistent approach to customer service and employee development. Before that, Tesco carried out performance management manually.
The development needs analysis (DNA) is carried out in Tesco performance management, which includes detailed research, analysis and recommendations. All of them are presented in bespoke excel evaluation reports to Tesco’s customer service managers, team leaders and senior management. DNA enabled Tesco to reduce the time taken by team leaders to evaluate performance. Before that, team leader need half a year to get enough information to evaluate. However, now, they can receive the automated reports on weekly basis. Therefore, it leads to large productivity and time saving and also increased flexibility (Nice Group, 2006).
Overall, Tesco’s operations strategy is its long-term goal. It is important for Tesco to have an operational strategy because it establishes the types of goods and services the company will offer its target market, and how Tesco are going to get advantages over its competitors. Tesco made good planning and control in its capacity, supply chain and quality. Besides, in order to make improvements in operation, Tesco measures quality, speed, dependability, flexibility and cost. Although they have made some improvements, there are still some disadvantages in its operation.
4. Critical appraisal and Recommendation
Tesco is in a rapidly changing dynamics of the retail industry, there are two order-winning factors that made Tesco win over other supermarkets in U.K.: cost and flexibility.
For an operation such as Tesco, firstly, the cost objective can be seen as the most important objective, because all of the other performance objectives affect cost. According to Tesco PLC Profile (2004), around 60% of Tesco’s costs are the cost of buying materials and services, around 15% are staff costs and 30% are technology and facilities costs. Therefore, Tesco’s costs are dominated by the cost of buying its supplies. Tesco makes use of information technology running an effective supply chain to reduce cost.
Secondly, flexibility is Tesco aims to be better than its competitors at this area. That means Tesco could offer their customers a wide range of goods, Tesco has an own team who works on creating new products and they do market research, decide the most appropriate form of packaging for a product, and test the new product.
Fully employed new technologies are also the advantages of Tesco, which has revolutionized Tesco’s operations management. For example, “Computer controls ordering form the suppliers to distribution and store design. CAD (computer aided design) is used to plan both the stores and how they fit in to their environment and also inside the store, so no space is wasted and products are all placed in the right position”(Infoconomy Ltd, 2005). This makes the customers’ shopping experience easier and less stressful as all of one type of product in the same place.
Although Tesco has two factors superior to other competitors, the rest of performance objectives still need to be improved. The quality inside the operation is important. If someone makes a mistake within the operation, time and money must be spent correcting this makes. For instance, a customer went to Tesco, there was special offer for the plums, the original prices was 77p, that day was 36p, so the customer bought them and check out, but the receipt showed the plums is 98p, so the staff made the mistake and they put plums in the wrong place where sold the oranges. These kinds of mistakes people found a lot in Tesco, which can lead to irritated customers and lower revenue for the operation.
Speed is also important inside the operation. According to the customers, in Tesco metro, some products are often sold out but it is not as quickly as possible to deliver the materials, so made customer disappointed about the service and go to other supermarkets. Tesco’s dependability objective is not satisfactory, in Tesco metro, it is not open 24 hours a day and customers often can not buy the expected food in the evening.
There is some drawbacks of capacity planning and control, for example, “they keep output on one level, which means that the same number of staff would operate all the time, so that they produce the same output period” (Krajewski & Ritzman,2002). For instance, many people are shopping in the store on Friday and weekend, customers are waiting in the long queue and 6 staff serving them, however, Sometimes there are few people in the store, it still have the same number of staff, it would be a waste of resource and influence efficiency of service.
Tesco has a wide of operation and wants every one to buy their products. Tesco’s aim is to get full time loyalty from their customers and to carry on increasing the value of their goods. Therefore, they should perceived and applied the five performance objectives properly, not only pay more attention to cost and speed, but also quality, speed and dependability. To increase the values and improve service, Tesco should improve and train staffs at all levels. This helps them run operations more efficiently as all staff is fully trained and therefore they will do their best to do their jobs.
Tesco should utilise capacity planning and control appropriately, when the operations managers are going to make their inventory decisions, there are three factors they must considerate: 1) how much they order 2) when to order 3) how they are going to control the system (Slack, 2001). The most common model used to figure out when the stock needs replenishment, are the Economic Order Quantity Model (EOQ):
“EOQ= (2CoD/Ch) ^1/2,
Co=ordering costs, D=units per year, Ch=holding costs” (Slack, 2001)
Technology is also another important aspect, as we know technology is developing day by day, so keeping up to date and using new and efficient technology helps Tesco act more efficient on its operation.
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