Main Handout with Cases, Exercises - GSCM

Program
Subject
Location
Duration
Hours
Lecturer/email

1.1

: MBA Program (Int.6) of MSM - Maastricht and SU-CBA in Sanaa

: Global Supply Chain Management
: Maastricht, Netherlands
: Tuesday May 13 Friday May 16, 2014
: 4 ECTS, 32 net lecture hours, distributed over 8 sessions of 4 hours.
: Joris Stadhouders, stadhouders@msm.nl, +31-43-3870836

Tesco develops buy-side system for SC Management

(adapted from Chaffey, see course outline)

Retailers have long sought greater collaboration in their supply chains, but few have
managed to achieve it. One that has is Tesco, the UKs largest grocery retailer, which has
built a reputation as one of Europes most innovative retailers in its use of information
technology.
As with many retailers, Tesco has long used electronic data interchange (EDI) to order
goods from suppliers and the network links almost all of Tescos 2500 suppliers.
The EDI system started operating in the 1980s and its use was initially limited to
streamlining store replenishment. In the 1990s, Tesco took its first steps on the road to
collaboration and began using its EDI network to help its suppliers better forecast
demand.
About 1200 suppliers receive EDI messages with details of actual store demand, depot
stockholdings and Tescos weekly sales forecasts.
According to Barry Knichel, Tescos supply chain director, this forecasting project has
been successful as average lead times have fallen from seven to three days.
Nevertheless, the information flow is strictly one way, he says. We still do not know
the true value of this sales data because we never get any feedback.
In the end of the 1990s, Tesco thus started its Tesco Information Exchange (TIE) project
in an attempt to achieve much more sophisticated two-way collaboration in its supply
chain. This really was a big development for us, he says. The guiding principle was to
combine our retailing knowledge with the product knowledge of our suppliers.
A large Tesco store may carry 50,000 products while a supplier will have at most 200. An
important aim of the TIE project was thus to shift responsibility for managing products
down to the relevant supplier.
Suppliers clearly have a better understanding of their specific product lines, so if you can
engage the supplier to manage the supply chain you are going to get much better product
availability and reduce your inventory, says Jorge Castillo, head of retail business for GE
Information Services, which developed the extranet technology behind TIE.
Suppliers pay from E 500 to E 500,000 to join TIE, depending on their size. This then
allows them to access the TIE web site and view daily electronic point-of-sale data from
Tesco stores. According to Mr Castillo, TIE lets suppliers monitor changes in demand
almost in real time and so gives them more time to react. Besides this the lead times have
fallen down further from three to less than two days. Before, Tescos suppliers would not
have seen a problem until Tesco got on the phone to them, he says. Now, it is the
suppliers who get on the phone to Tesco and they can see much earlier on if a product is
not selling well.
The data can be analyzed in a number of ways to allow suppliers to see how sales
perform by distribution center, by individual store or even by TV region - important for
promotions.

The management of promotions is a complex process requiring close cooperation

between supplier and retailer. However, it has traditionally been difficult to do well
because of the lack of shared data to support collaborative decisions. Promotions can be
a nightmare, says Mr Knichel. The present promotions module allows retailers and
suppliers to collaborate in all stages of the promotion: initial commercial planning,
supply chain planning, execution and final evaluation.
According to St Ivel, one of Tescos bigger food suppliers, TIE has saved 30 per cent of
its annual promotional costs.
About 2400 suppliers, representing about 95 per cent of Tescos business, are using TIE
today. A collaborative data module aims to allow seamless planning in which the
planning data on the screen is jointly filled in by both retailer and supplier. Mr Knichel
sees this as radical change for the retail industry as suppliers and retailers have
traditionally worked to separate agendas. He feels TIE has much potential to streamline
Tescos supply chain and to help suppliers improve their service levels and promotions.
But retailing is a traditional industry and many suppliers are set in their ways.
Only four suppliers have fundamentally changed the way they work as a result of TIE.
Nevertheless, they can bring products to market much faster than any of their
competitors, he says.
Questions
1.
What benefits does the Tescos information exchange offer to the retailer?
To its suppliers?
2.
What may be the disadvantages of TIE for Tesco and/or the suppliers?
3.
Discuss reasons why only four of Tescos suppliers have fundamentally altered
the way they work as a result of TIE.

Answers o Tesco Case:

1.

What benefits does the Tescos information exchange offer to the retailer?
To its suppliers?

1+2.

What advantages and disadvantages does the Tescos information exchange offer to
Tesco and its suppliers ?

Advantages for Tesco (Retailers)

One advantage is an income for Tesco, since the suppliers have to pay for the
subscription, for the service. It is not clear whether it is a yearly fee or not and
whether it covers the costs, but with amounts ranging from 500 to 500,000 Euro
per supplier, and a number of 2,400 participating suppliers, this is probably the
case. It should be stated that, contradictory to the case text, powerful suppliers
with high bargaining power such as Unilever, P&G and Nestle actually do not pay
such large amounts for the service as suggested.
The VMI system (the TIE is a so-called Vendor Managed Inventory system) also implies a
cost savings for Tesco, first of all due to the fact that the system has simplified the process, so
making some of the work redundant: placing orders is not necessary, for instance. Secondly
this is the case because some of the tasks have been shifted to the supplier, usually
manufacturers. Additionally ownership of the inventory in the Tesco stores may have been
shifted to the suppliers, increasing Tescos working capital and reducing Tescos risks.
The system provides suppliers with detailed real time information of specific sales, this
reduces information lead time and increases level of detail (including options for better
demand forecasting, lowering the deviations between expected demand and realized demand)
and allows them to better plan and manage (the manufacturing and distribution of products).
Matching supply and demand reduces the bullwhip effect, leading to a better usage of
resources (also for suppliers Tesco)
The reduced information lead times and increased level of detail in turn will lead to:
- reduced safety stock levels, hence more room on the shelves, allowing for diversification
in product offering: so more revenues, or savings in warehouse/storage/shelf/inventory
costs, more working capital (note: this is also a benefit for the suppliers when they are
forced to own the stocks),
- improved product availability and replenishment, so a higher service level, which implies
higher revenues and higher customer satisfaction (which can in turn re-enforce higher
revenues as it may well influence customer loyalty).
Much of the former can be summarized under higher sales per square meter.
Associated with the lower stock level (the higher number of inventory turns) is the reduction
of the risk of product obsolescence: many grocery items have expiry dates, we have
perishable products. This now results in a cost saving for Tesco (or for the supplier in case the
supplier is forced to own the stock until it is sold in the outlet).
The technology with its ease of use may exercise a lock-in, giving Tescos power over
suppliers, as it also enforces the suppliers to plan and handle supplies using Tesco set
standards. Additionally, the supplier will already be paying a high access fee to Tesco and
may not be willing to pay high fees again to other retailers who propose adoption of similar
VMI approaches and technologies. A supplier might end up with Tesco as the only customer.

Evaluation and monitoring of suppliers by Tesco is possible, it is a two-way system now, so

the management control remains with Tesco. Finally also decisions on suppliers can be made.
Whereas decisions on suppliers in the past merely related to product quality and product
price, an additional new criterion can be used to judge suppliers: timely, appropriate supply
levels in retailers stores. So Tesco can even more concentrate (reduce the number) on best
suppliers, and with the ones that remain: negotiate bulk discounts.
Associated with this: a recent 2013 German acquisition by Dutch retailer Albert Heijn has
driven down the margins paid to suppliers by Albert Heijn: the argument used was that
suppliers will be able to sell more no words about the original suppliers of that German
retailer.
The system provides an opportunity for backward integration. Tesco, with the overall
knowledge on all markets may use it to deal with preferred suppliers in which Tesco has a
stake. These preferred suppliers may be allowed to produce the home brand of the retailer and
may obtain interesting supply chain information from Tesco.
The TIE forced Tesco to develop a competency in ICT. This is also an opportunity as the technology
might become a standard for B2B interchange, in which other retailers may be interested. On the
other hand it may give Tesco a format to incorporate acquisitions.
The advantages for suppliers are:
Promotion campaigns of suppliers products can be planned and executed much better, hence
lower risks of obsolescence on one hand (due to lower demands) and less risks of not
being able to satisfy (higher than expected) demands.
Real-time information, with a high level of detail of sales data, per store and area: so better
planning is possible: more time to react and more effective, more targeted, replenishment.
The need for buffering (half) products is reduced, resulting in having, on average, less items
in the pipeline (including manufacturing, intermediate storage, transportation) and having
reduced inventory levels. This all lowers the inventory costs and the costs due to product
obsolescence, while still meeting required service levels (product availability).
Matching supply and demand by sharing information reduces the bullwhip effect, this leads to
a more efficient usage of resources (also for Tesco).
The system can be a catalyst to change or at least rethink processes. It can lead to a better
relation with Tesco, but may also lead to higher competition between suppliers, apart from the
lock-in due to technology and the costs for the technology. If you are good enough as a
supplier you can sell more: but perhaps have to sell bulk with discounts only.

2.

What may be the disadvantages of TIE for Tesco and/or the suppliers?

Disadvantages for Tesco (Retailers):

See directly above: the challenge for Tesco is that it has to develop and maintain the system, it
has to develop the IT capability (realizing that retailing for mass markets is also a number
crunching business), but as indicated above, at the same time this new capability can provide
new opportunities.

Proving the suppliers with continuously more detailed real time information on the sales of
their products can poses the risk that a large supplier:
-could go into retailing (forward integration)
-might use the information on sales/markets of their products in such a way
that also other retailers benefit from this knowledge (small risk for
Tesco).
Possible disadvantages for the suppliers:
- stiffer competition with other suppliers:
- saved shelf space can be given to other suppliers,
- selection of suppliers based on how well one can handle SCM,
- lock-in exercised by Tesco,
- fees and costs of technology,
- extra costs for distribution
- extra inventory holding costs as ownership of goods may remain with supplier until items
are sold at the retailers.
Notes
It is to be added that, on a global scale, retailers are more concentrated than manufacturers.
The global players in retailing are Walmart, Carrefour, Tesco, Ahold, etc. The power of
suppliers is therefore relatively weak, although a number of strong ones exist such as
Unilever, Nestle, P&G, etc.
The case assumes that the suppliers are manufacturers. The case is about the UK. In some
countries retailers are smaller, manufacturers are far away, so the retailers may only be
supplied by distributors.
Retail chains are not yet strong in all countries. In many emerging economies bargaining
power of local retailers over distributors or foreign manufacturers e.g. Unilever may be
low. This is still opposite to the case described here.

3.

Discuss reasons why only four of Tescos suppliers have fundamentally

altered the way they work as a result of TIE.

The case shows that 50,000 suppliers for 2,500 products, that means only 20 products on
average from a supplier: so information handling is not that much of a difficulty. The
suppliers sales process may be simple, with only a small range of products for a few retailers,
not worth the backward integration from the Tesco system - which may require substantial IT
investment for just a little number crunching! Those suppliers (manufacturers) in turn will
have only very few suppliers themselves, typically providers of product ingredients and
packaging material, for a few types of products (but at large quantities).
For the large suppliers it is of course a different story, but they will actually already have their
own ERP systems, and besides that may wish to keep the flexibility to be able to serve
different retailers.
It may be true as the case (approved by Tesco) suggests that suppliers are conservative or set
in their ways; the suppliers may have a core competency/interest in manufacturing, for
instance on processing food products, not in distribution or IT.

Possible fear for lock-in by Tesco, perhaps suppliers are delivering to other retailers, retailers
that would suggest other changes of business processes. So the issue of flexibility may play a
role.
Finally the relative demand variability (the coefficient of variation) at the manufacturer, the
supplier, is much lower than the demand variability of a product in a specific Tesco store. The
supplier has the advantage of risk pooling. First of all in his final products which he can send
to different locations at different locations and also - for non-perishables - over longer period
of time (location, time). Additionally in his own supplies which he may use for different end
products (product RP).
Hence the manufacturers planning problems are limited: they face more stable (overall)
demands than the retail outlets (unless they come up with promotion campaigns and drastic
price changes).
Hence the production level for the supplier is fairly stable and the production planning
process relatively simple. So quantities will be stable, known, except when uncertainty exists
with respect to prices and supply of their ingredients or packaging materials.
Having raw materials and end product inventories at the premises/warehouse will be
relatively less of a problem for the suppliers (manufacturers) as compared to having those in
the retail outlets.
The issue for suppliers is more the manufacturing process itself and the quality and timely
deliveries of their own supplies.