Tesco US Expansion: Supply Chain Strategy Recommendations

Introduction: Tesco's US Expansion Challenge

In defining how Tesco can be as efficient and profitable as possible in their expansion throughout the United States (Economist, 2007), the company must make a series of strategic decisions that will in turn lead to stronger logistics execution throughout their supply chains for years to come. The Economist article "Fresh, but Far From Easy" (Economist, 2007) provides a thorough overview of the expansion of Tesco beyond its operations in Europe to the western United States. It further illustrates the many supply chain strategic-level challenges the company will face when operating in a country where quantity, volume, and make-to-stock products dominate over a larger number but smaller quantity of products — specifically ready-to-eat meals — which is characteristic of the United Kingdom market.

What Tesco must do is concentrate on the efficiencies learned from operating in Europe and translate those efficiencies into the much broader and more diverse supply chains they will have to create, maintain, and optimize over time in the western United States. It is the intent of this analysis to provide guidance to Tesco in their transition from supply chains that have shorter timeframes of execution and many more suppliers to much more complex supply chains with potentially longer order, fulfillment, and service cycles.

Building a Demand-Driven Supply Network

Strategically, Tesco needs to first create a demand-driven supply network (Barrett, 2007) that is more aligned to forecasts, order histories, and customer demands than to internal efficiency measures such as inventory turns or merely the reduction of order costs. As the Tesco business model concentrates on perishable goods being replenished at a rapid pace to ensure less spoilage and higher levels of inventory turns on produce and made-to-cook meals, creating a more demand-driven supply network is critical (Maruyama & Hirogaki, 2007). The essence of a demand-driven supply network is one that aligns all processes, systems, and logistics functions to ensure the highest levels of accuracy, reliability, and scalability of transactions needed to fulfill customer orders.

The need for a demand-driven supply network is accentuated by the fact that the customer — not the supplier or the internal performance measures of the supplier network — must be at the center of supply chain planning and execution efforts (Jones & Clarke, 2002). To create a demand-driven supply chain is to create one that is truly customer-driven. Once this is achieved, specific metrics such as the perfect order (Columbus, 2008) can be used to measure how effectively the supply chain meets customer demand over time. The perfect order is a useful metric in this regard because it measures whether the requested product was delivered on the requested date to the customer who ordered or purchased it.

Given that Tesco is one of the global leaders in grocery retailing (Child, 2002), the company is already familiar with metrics that measure efficiency in supply chain coordination and optimization, as well as the role of supply chain process improvement in meeting and exceeding customer expectations. This is a critically important set of metrics for the company as it moves into new global markets, as it capitalizes on the company's strength and expertise in analytics dashboards (Todd, 2008) while also translating global supply chain expertise into the specific, unique, and highly differentiated conditions of the local western US market.

Fine-Tuning and Automating Demand Planning

As shown in "Fresh, but Far From Easy" (Economist, 2007), Tesco is thorough in its demand planning and forecasting of products to be included in its supplier mix. Through the use of ethnographics and the study of 60 families throughout Phoenix, Tesco seeks to optimize the mix of products sourced from suppliers. This is a fairly common practice for Tesco regardless of the geography they are attempting to enter (Desjardins, 2007). This practice also demonstrates how seriously the company takes the concept of creating an accurate sourcing forecast, and given the smaller sizes of their stores, the need for much greater forecasting accuracy and inventory management becomes even more pronounced.

Contrasting this approach with their larger, more volume-centric US competitors — including Albertsons, Kroger, Safeway, and Walmart in its evolving role in food retailing — Tesco's smaller, more market-focused approach will eventually deliver deeper insights into creating a more efficient supply chain. The Walmart focus on pricing and availability failed in Germany specifically because it ignored the more important granular details of the local market. Tesco has taken a much more detailed and thorough approach to analyzing specific market characteristics. These include highly specific details about which products, their brands, the relative quantities purchased during each shopping visit, pricing, and correlations with other purchases — insights gained both by visiting consumers in their homes (Economist, 2007) and by analyzing purchase data through Clubcard records over time (Child, 2002).

None of Tesco's larger competitors invest this level of analysis into understanding their supply chains, although Walmart does conduct psychographic analysis to segment customers by purchasing behavior. Taken together, these analytics and ethnographically-based data provide Tesco with valuable insights into how to optimally balance inbound supplier orders of unique products, enabling it to optimize stores averaging 10,000 square feet.

References

Barrett, J. (2007, November). Demand-driven is an operational strategy. Industrial Management, 49(6), 14–19.

Child, P. N. (2002). Taking Tesco global. The McKinsey Quarterly, (3), 134–144.

Columbus, L. (2008, June). The perfect order meets customer expectations. Supply & Demand Chain Executive, 9(4), 37–38.

Desjardins, D. (2007, November). In U.S. debut, Tesco makes easy work of 'Fresh' openings. Retailing Today, 46(17), 3, 57.

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Maruyama, M., & Hirogaki, M. (2007). The evolution of fresh produce supply chains: From spot markets to contracts. The International Review of Retail, Distribution and Consumer Research, 17(4), 359.

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