Tesco Logistics Strategy

...

As of today, circa 2,000 vehicles and twice as many containers serve the company’s transportation needs (with the outsourced share counting up to 40%). With its four trucking stations, thirty depots, fifteen distribution centres and thousands of stores, the UK section of Tesco constitutes a web of constant flow of goods, information, and capital that works in a synergy with the aim of serving the end customer at the any possible time, with the right price, and in the needed amounts.

All in all, the Tesco case is oftentimes regarded to as a successful example of logistics strategy and adoption of a flexibility-based, adaptive philosophy that was able to create a sustainable yet economically efficient network that would prove to be up to the many challenges presented in the years (Fernie and Sparks, 2014). One of the elements that made Tesco successful both in the logistics field and in the market value as a whole, is – we argue – a certain ability, on the part of management, to coordinate, organize and harmonize the multiple different parts of the complex logistic equation.

An ANT Analysis

Following the concepts of the Actor Network Theory (ANT - refer to Callon, 1986, and Law, 1992), it is possible to identify Tesco’s logistics success as the result of an effective and fruitful process of alignment. Tesco’s management was able to involve a number of actors (stakeholders - with special care regarding suppliers, customers and logistic services providers) as to create a network that consolidated and proved to be reliable and profitable in the years. Technology, of course, as a non-human actor, plays a major role. Examples are tied in high degree to big data collection and analysis: the telematics system allowing for fast tracing of all sales, the softwares for elaborating such data and the communication systems upheld by Tesco with the suppliers are the main ones. To these we can add the technology for coordinating the transportation of goods, and others. The daily actions, but even more the interactions in this complex chain of connections solidify the work and synergy of the actors. The success of Tesco’s logistic strategy is then a product, a result of the network (composed by hundreds of interacting human and non-human actors) that the company’s management was able to establish. Tesco’s example would therefore stand as separate case study by the discipline of the Actor Network Theory, providing relevant elements for further research in this direction.

Key Logistics Processes at Tesco

The process that led Tesco to be one of the largest retail companies in the world, and the first in the UK by size, has at its base in continuous improvements in terms of logistics and supply chain. Tesco logistics strategy has gone through four phases of development, namely: a) a strategy peculiar to each store, b) a centralized strategy, c) a composite distribution strategy, d) a vertical collaboration strategy. The centralization of customer service drove these developments and it could have been achieved only through a radical change of strategy.

Until the mid-70s, Tesco did not adopt a centralized strategy, leaving a certain autonomy to the various store managers, who were in direct contact and in close cooperation with suppliers (direct to store delivery (DSD) process).

In the early '80s, Tesco abandoned the DSD in favour of the centralization of strategy and operations. It is no longer the single store manager who decides pricing and stocking options, but the head office that dictates guidelines. Centralization becomes the tool to relocate the power within the supply chain. Then, Tesco began to control and to centralize the physical distribution services, delivering to most of its stores with a lead time of up to 48hrs. This resulted in the extension of its facilities alongside the building of new distribution centres. A computer-operated network connected the distribution centres, stores and the head office.

Later, in order to resolve certain defects of centralization, such as quality and delivery frequency, it was decided to further change the strategy by moving to a composite distribution strategy. Composite distribution allows to distribute the temperature-controlled products through one system of multi-temperature warehouses and vehicles.

It patches weaknesses while maintaining all the benefits of centralization. In fact, the daily deliveries of the new strategic approach allow to reduce stock levels held in stores, thus decreasing the number of storage facilities. Further benefits are: an increase in quality, a reduction in waste, and the minimization of potential losses due to product shortage, also thanks to a better forecasting system. From the financial point of view, this new strategic approach allows to achieve economy of scale benefits and cost efficiencies, which are both critical success factors creating competitive advantage.

However, the composite distribution strategy is not easy to implement, given that it requires strong bonds with distributors and suppliers. The last step of the transformation of Tesco’s strategy over the past thirty years is represented by the adoption of a vertical collaboration within the supply chain. Therefore, fast exchange of information with the various suppliers became essential. For this purpose, Tesco created a Tradanet community, which allows to understand and manage more efficiently orders and replenishments. This data-sharing system also favours suppliers who can now better understand the preferences and needs of the consumers. This is also enabled by the new platform - Tesco Information Exchange (TIE) - for the exchange of business information between Tesco and the suppliers.

Tesco logistics strategy is varied and covers most types - asset productivity, time-based, technology-based and relationship-based -- with the last one being the real strength of a company that has a strong relationship with its suppliers.

As discussed previously, the Tesco logistics strategic model is quite complex and can be analysed by being broken down into its key logistics processes, such as storage facility management, inventory management, transportation management, unitization and packaging, communication.

However, before analysing the key logistics processes we must start from the recent reformulation of its stores in the UK. In fact, Tesco now operates with four store formats that require different types of logistics strategy and operation, namely: Extra, Superstore, Metro and Express. They vary greatly in size, from 5,500 square meters (Extra) to 280 square meters (Express). These differences in the store size involve both different number