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The Integration Of Supply Chain Management

Paper Type: Free Essay Subject: Marketing
Wordcount: 4414 words Published: 2nd May 2017

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The integration of supply chain management acts as an important factor in retail industry, not only decreasing the cost of products, but also improving the value to customer, as a result, enhance the competitive advantage. Tesco is the leading grocery retailer in UK, its success of business refers to the integration of supply chain and collaboration relationship with the suppliers. Also, the powerful database and analysis information benefit Tesco to forecast customers’ needs and supply chain management. Moreover, Tesco aims at providing good services to customers and non-food category such as financial and telecommunication services contribute 20% of annual sales. Furthermore, the economic scale of Tesco enhances the negotiation power and allow Tesco obtain low cost. On the contrary, Aldi which is the discounter provides less customer services and limited product choice; but it still obtains customer satisfaction and has aggressive growth. Although Aldi has small number of suppliers, the wider geographical reach and fast growth on sales equip Aldi negotiation power with suppliers. Both of them are adapt lean supply chain and concentrate on reduce products cost. However, research shows that hybrid supply chain strategy could lead company has better performance. From this report, the analysis and evaluation of Tesco supply chain management will be discussed and the comparison with Aldi will also included.

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Supply chain management is referred to the managing of multiple businesses and relationships across the supply chain (Lambert and Cooper, 2000). That is, supply chain management includes the flow of products from suppliers, manufacturing, and distribution chains to the end users (Lamming, 1996). Also supply chain management is the connected network of organizations that are concerned from upstream to downstream linkages, in the different procedures and activities that create value in the form of services and products in the hands of the end users (Christopher, 2005). To achieve the customers’ demands which are higher quality but lower prices, the international retailers rely on supply chain management to handle the trade-off demands and adopted others approaches to their operation management (Tsinopoulos and Mena, 2010).

Tesco is the leading grocery retailer in UK. From 1983 to 1996, Tesco had a remarkable progress on innovation of its supply chain, such as implemented POS scanning, centralized automated ordering and distribution, automated warehouse controlling, and Electronic Data Interchange (EDI) with the main suppliers (Christopher, 2000). Jones and Clarke (2002) indicate that the success of Tesco supply chain relies on an obsession with procedure improvement which developed by Toyota. Toyota production system (TPS) is the source of lean manufacturing, and it aims at the minimization and elimination of waste (Christopher, 2000). Wastes are all activities that utilize resources without raise value to the customer (Mena, 2010). Lean is one kind of management which is doing more with less and to emphasize a zero inventory and just-in-time approach (Christopher, 2000) that including less stock, effort, space, and production time. According to Logistics and Transport focus (2007), Tesco has developed a widespread operation to fit customers’ needs and enhances the efficiency in rapid circulation of merchandise. In addition, Tesco forecasts demand precisely, and collaborates with suppliers, leading to reduce the level of lead-time and inventory.

When the customer demands are predictable, the need of diversity is low, and the volume is high, it is suitable and makes sense for a company to adopt lean manufacturing (Christopher, 2000). However, Lamming (1996) claims that an entirely lean system would lack the flexibility perform in a real situation. Namely, in the supply chains process, agility is an essential factor. Agility is related to the capacity of a company fast respond the unpredictable changes of demands within variety and quantity. The agile supply chain is the sensitivity of market, that is, the supply chain of an organization is able to respond real demands. Majority organizations have insufficient data and less feed-forward mechanism from the market and customers, forcing them to make the assumption according to the historical sales data (Christopher, 2000). The information technology such as point-of-sale, customers buying data analysis enables organization to capture useful data, to hear customers’ voice in the market, and to respond directly to customers.

Research shows that supply chain management has concentrated on the need of closer relationships between customers, suppliers and relevant third parties (Christopher, 2000). The information technology used to share data between buyers and suppliers is building a virtual supply chain which benefit organization to improve the control of logistics (Lamming, 1996). The virtual supply chains are information-based not inventory-based. To share information with supply chain partners has the leverage by process integration. Process integration indicates that joint working between buyers and suppliers product development and share information. This type of cooperation in the supply chain is becoming popular, as organization could concentrate on handle the main competencies and outsources others activities to partners (Christopher, 2000).

The alliance of organizations which involved in supply chain is link together and composes as a network. The organizations which can structure, control, and coordinate the relationship with partners and suppliers are recognized as a closer, more understanding and more agile relationships with ultimate customers (Christopher, 2000).

the analysis and evaluate of Tesco & Aldi supply chain management

Four dimensions consist of a framework which is the formula of supply chain strategy. These dimensions are sourcing strategy, demand flow strategy, customer service strategy and supply chain integration strategy. Also, without the alignment of four strategies with business strategy, supply chain management will be marginalized from the organization’s vision and eventually disadvantaged its effectiveness. Successful alignment will help organization to enhance the value (Evans and Danks, 1998).

Customer service strategy

Customer service strategy deals with the issues related to the needs and expectation of customers that are the responds of the organization and the forms of maximizing the profit of organization (Evans and Danks, 1998).

The core purpose of Tesco is generating values for customers and to gain the loyalty of customers’ lifetime (Tsinopoulos and Mena, 2010). Clubcard scheme is used to support Tesco to achieve this goal and lead to improve the operation and integrate the whole supply chain (Jones and Clarke, 2002). From 1993, Tesco implement Clubcard scheme which collect transaction data and provides a 1% discount to customers. Through explicit analysis of sales and loyalty card data, it allows Tesco to understand customers better and make more effective product pricing decisions (Tsinopoulos and Mena, 2010), such as Tesco invested in lowering prices on the most important products that the price-sensitive or cost-conscious shoppers needs, taking care the customers through the economic recession period (Tesco annual report, 2009)

The other retailer — Aldi which is a discount supermarket claims its goal is providing customers the daily products which the quality is as highest as possible and the prices is at guaranteed low. Aldi has remained to present its principles of focusing on a limited volume of high-sale, fast-moving products, maintain in-store products exhibition as simple as possible, such as leave products at their original cardboard boxes or even on the palette, and reduce customers service to the least (Michael, 2004). The narrow range of products in Aldi stores are around 700 SKUs while approximate 95% of them contain house brands. That is, Aldi cooperates with suppliers to develop the same products which sold on other supermarkets but changing to different brand name. Although, Aldi saves the cost but they also care about the quality of products. Several of their products have good performance in blind test competition. Aldi offers household products along with customers’ daily needs and insists a different point of view with other retails, providing easy choices to customers which are only one or two brands can be chosen in every product and sell in one or two sizes (Tsinopoulos and Mena, 2010). The high sales turnover and low stores and personnel costs, which enable Aldi has the lower sales margins, associate with the low cost of sourcing which is large-scale purchasing, allow Aldi to provide its products at very low prices. (Michael, 2004)

In the other hand, Tesco conducts four types of grocery stores format and on-line business in the UK. Each format is purposed to different segment of customers which have the different needs. Moreover, it estimates that Tesco has over 75,000 SKUs which about 50% are Tesco own brand products. Tesco divided their products into good, better and best ranges which represents Tesco value, Tesco, and Tesco finest products (Tsinopoulos and Mena, 2010).. In addition, to response the global recession, Tesco has obtained a wider appeal by offering its products at affordable prices. It launched around 500 new products as part of its “Discount Brands at Tesco” initiative (Datamonitor, 2009). The variety product ranges allow each customer can find a product to fit their budget without compromising on quality and choices

All the Aldi stores are designed to reduce unnecessary costs which are related with traditional bigger supermarkets. Aldi eliminates a number of the customer services which are accustomed to in larger supermarkets because these services are not essentially adding value, such as in-store banking, pharmacies, bagging clerks, and photo processing. Furthermore, Aldi stores are opened during peak hours, leading Aldi to save electrical and others operating costs. Even that, Aldi has been repeatedly ranked greatly customer satisfaction.

In contrast, Tesco operates several non-food stores and Tesco is diversifying non-food business by providing financial and telecommunication services to hit more customers. Moreover, Tesco improves the efficient of service at checkout. Many customers do not have to queue and waste time on checkout. As a result, customers rank Tesco has the best for speed of service at the checkouts.

From these two different types of customer service strategy, it shows that both of them could attract different segment of customers. Tesco aims at wider customer segment and variety products choices, and provides better services to customers. It increases the complex of operation and supply chain management. In the other hand, Aldi focuses on middle class shopper who pursues better quality and less price and the limited assortment size lead customers can choose the products easier and faster. Also, the observation at Aldi shop in Germany, the customers of Aldi are less care about the service. There was only one checkout in that store and customers were willing to queue up without complain and unhappy expression on their face.

Demand flow strategy

Demand flow strategy explains the connection between the organization’s customers and the suppliers of the products and services that provided to market by organization (Evans and Danks, 1998).

Tesco aims at different target customers and locations to establish four different formats of stores which are Tesco Extra, Superstore, Metro, and Express. The dissimilarity in location and product range which are provided to each format indicates the challenges of supply chain management and complex operation. For example, to deliver products to Tesco express stores in the city centre, the small vans and high frequent shipping are needed. In the other hand, Tesco Extra stores have wider product ranges, lorry load delivery is required. These different requirements increasing the complexity to Tesco operation process (Tsinopoulos and Mena, 2010).

The four formats of Tesco’s store cover majority customers and areas. Tesco use the other channel which is on-line business to touch the remainders. Tesco.com picks up products of customers’ orders from stores and delivers to customers’ home directly rather to build up a distribution centers. Namely, Tesco does not need to extra invest the distribution on its online business (Tsinopoulos and Mena, 2010). It offers customers an additional new way to shop who want to save time and spend less (Tesco annual report, 2009). However, Tesco provides varieties of non-food services products and services, and non-food items are now composing around 20% of the Tesco’s business. The supply chain system which used to manage food products has different needs as to manage electronic goods. All of them have different requirements of supply chain (Logistics & Transport Focus, 2007). As a result, the supply chain of Tesco is highly challenged (Tsinopoulos and Mena, 2010).

Aldi expands its business to different geographic areas because the sales turnover decreases in Germany market. The location strategy of new stores indicates the future development of Aldi. Since previous Aldi stores were located at areas which are less affluent neighborhoods. New Aldi stores are located in the attractive suburban areas and aims at the middle class customers (Tsinopoulos and Mena, 2010).

Tesco builds five kinds of sales channels to fit customers’ different lifestyles and purchase habits. The variety of product volumes and product lines including food and non-food categories enrich the selection of customers. However, the diversified product strategy increases the difficulty of managing suppliers and fit customers’ demand. On the contrary, Aldi provides the limited choices in each product and the stores are located at the suburban. The simple business operation model decreases the challenge in terms of store operation and suppliers management. Also, the limited choices help customers easier to choose the products.

Sourcing strategy

Sourcing strategy defines that how and where to produce products and services, and along with the major impact on cost structure and linked risks (Evans and Danks, 1998).

To have a success and sustain business, Tesco believes that suppliers act as an important factor. Tesco adopts the partner relationship with numerous suppliers, offering the advice and technique support to suppliers. However, the economic scale of Tesco equips the strong bargain power to negotiate with its suppliers. The penalty of suppliers who delay to deliver is forfeit and de-listing (Tsinopoulos and Mena, 2010).

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In terms of sourcing strategy of Tesco, the product sourcing priorities is the cost of delivery, the quality of products, reliability and responsiveness. Due to the international operation, Tesco uses the local sourcing from each market. The buyers of Tesco have to follow ethical standards, making sure the procurement process is based on this standard and implement this standard to the own brand suppliers. The logistics strategy of Tesco combines in-house and outsourced solutions. That is, third party warehouses contribute about 19% of volume and transported by third party by 41% (Tsinopoulos and Mena, 2010).

To source product at greatest prices and high quality, Aldi has developed a good long-term relationship with suppliers. Due to the lower number of stock units keeping in stores and simply business model, Aldi has a minority of suppliers and has the good reputation to pay suppliers on time. Although Aldi only has few numbers of suppliers, it does not mean Aldi lost the bargain power with suppliers. That is, there are 95% in stores products are Aldi’s own brand products and the products could be produced by some companies. In addition, Aldi’s geographical reach is wider than larger competitive retailers and the intension of growth indicates Aldi is a very attractive customer to suppliers, which gives Aldi’s power to negotiate. Moreover, to consider the local cost structure, the operation scale and the sourcing of products, each region could decide the local pricing. That is, at least 40% of Aldi products from local suppliers. Although Aldi enables to source internationally at lower price, Aldi consistent supports local economic and offers customers fresh quality of products. The everyday low price strategy and across regions sourcing of Aldi contrasts to majority grocery retailers.

Both of Tesco and Aldi provide own brand products to customers, strengthening the cost structure of product but still can maintain the products quality. Also, both of them have their own advantage to bargain with suppliers by different souring strategy. In addition, the local sourcing strategy, cooperate and outsourced with third party such as warehouses and transport compose the important element of decrease the loading and cost of supply chain management.

Supply chain integration strategy

Supply chain integration indicates that the level of synthesis of organization in terms of information, finances, decision making, and operations and with those of the participators such as retailers, suppliers, manufacturers, distributors, and dealers, in the organization’s supply chain.

The logistics and distribution of Tesco has been acknowledged as an important success factor for this company. To operate logistics effectively leads Tesco decrease the cost and enhance the availability of products. In addition, factory gate pricing innovations decrease the transport fee and improve the efficiency. Tesco implemented POS system and used the data to develop retail ready packaging and merchandisable units, in order to enhance the speed of operation flow (Tsinopoulos and Mena, 2010). The integration of IT system helps Tesco to forecast and allows the supply chain of Tesco to react and fit customer demand (Tesco website, 2010).

In the other hand, Aldi sells fewer numbers of different products and has small numbers of suppliers, the IT and logistic systems are simpler and less expensive than other large retailers. As a result, store managers are capable to operate system manually.

Tesco have more than 1,900 stores in UK and 30 depots. To keep the supply chain running smoothly by a synchronized and collaborative, the integration of planning system is designed to forecast customer demand, as a result, stores shelves are always stocked. Accurate demand forecasting and close collaboration with suppliers help maintain the lead time and the level of inventory to a minimum (Logistics & Transport Focus, 2007).

recommendation and conclusion

Ellram (1991) indicates that to maintain customers in increasingly competitive marketplaces, organization has concentrated on improving customer service as an essential denotes of competitive differentiation. Tesco pursues to improve the satisfaction of customers and add values among customers’ shopping process. The attitude of continuing to be the lowest cost provider and offer higher level services to customers are the reasons to achieve success in the competitive markets (Tesco, 2010). However, to underpin the approach of Tesco, the supply chain and logistic management act as the essential factors. Also, the supply chain partners who provide numerous main elements of customer satisfied from sales, delivery, to post sales support (Ellram, 1991) are recognized as the key participators in Tesco supply chain.

To create a customer-driven supply chain, the ability to respond customers’ needs and rapid changing market is required to Tesco. The important factors to react the market rely on upstream integration of the organization and the good relationship with suppliers, and supplement by agile supply chain which is market sensitive and the ability to respond real demand (Christopher, 2000). Tesco adapts the lean supply chain and its powerful Clubcard scheme which collect customers buying behaviours benefits Tesco to predict customers’ needs preciously. The analysis of customers’ needs helps Tesco to product more products that meet each segment of customers. However, the claims from Christopher (2000) shows that it is not necessarily of a supply chain to been either lean or agile. Namely, the supply chain of Tesco may need to be lean for partial of the time and agile for the rest (Christopher, 2000). Also Blome (2010) supports this argument and suggests that lean supply chain succeeded in the past but have seen less growth than companies who employ hybrid strategy. That is, Tesco should adapt cost efficient supply chain for the stable and predictable section of customers demand and responsive supply chain for the volatile portion achieves the better performance rather than only employ lean supply chain.

Christopher (2000) implies that the agile supply chain have to seek some strategic suppliers which could work as partners by linking systems and operation processes and cooperate with Tesco to fast respond to market. Also, the closer relationship with key suppliers composes the competitive advantage of Tesco. However, Lambert et al (1996).imply that a partnership is not necessarily a requirement for business success, and it takes time and effort to develop and maintain. The majority companies manage the relationship with suppliers based on arms-length approach, namely, short-term operational relationship. For example, Tesco has over 75,000 SKUs, although there is about 50% which are Tesco own brand products, it is impossible to make close relationship through integrated operation process with multiple suppliers. Even though partnerships can be benefited to Tesco, it still takes lots of time and effort. It shows that Tesco cannot partner with every supplier and third-party provider (Lambert et al, 1996). It is important to assure that limited resources are allocated to the relationships that will really bring the advantages to Tesco. Also, Tesco should base on the customer demand and products types to deploy its suppliers to different level of relationship. For example, Tesco’s lean supply chain build up a closer relationship with key suppliers, customers, and third-party providers, as a result, Tesco can maintain product quality stable and meet customers’ basic demands (Tesco, 2010). In the other hand, Tesco provides opportunities and store shelf spaces to new suppliers testing their products. Numerous suppliers provide more innovation product choices to customers and Tesco could obtain the feedback and modify the products strategy.

Anderson and Narus (1991) define this relationship with retailer and supplier as a transactional relationship which is the retailers and the supplier interchange the products for highly competitive prices. The arm-length relationship can meet the demands of both parties and provide benefits to each other to achieve customer satisfaction (Mena, 2010). This relationship was not a partnership, but it is a short-term contract with volume guarantees (Lambert et al., 1996). In the other hand, the deeper relationship is collaboration or partnerships, which is integration of supply chain and joint planning and share the technology with suppliers (Mena, 2010). The purpose is to have the lower total costs, increase value, and achieve the mutual benefit. For example, Tesco provides technique support and advice to part of its suppliers to enhance the product quality and increase the sales turnover. Moreover, in non-food category, Tesco partners with established businesses such as telecoms or financial services, to quickly access the new fields. Also, by partnership, it save more time and decrease the risk on investment to new business models (Tesco annual report, 2010).

It is well-known that profit improvement, process enhancement, and increased competitive advantage are the possible outcomes of effective partnerships relationship (Lambert et al., 1996). Tesco compete with other competitors in products cost and create value to customers to enlarge the competitive advantage with other players. However, the economic scale enriches Tesco the powerful bargain power and act as a tough negotiator. Also, Tesco use the penalty and re-list regulation to manage the suppliers. That is to assure all the suppliers follow the process of supply chain. However, recently two products recalled in Tesco shows the problems in supply chain and suppliers management. Recall of these products demonstrates the lapse of products quality and may hinder consumers to buy products from Tesco stores. These problems on controlling product quality and monitoring suppliers in operation process, Tesco should review the all process of supply chain to find out the question of this recalls. Otherwise, this will not only damage Tesco’s brand image but also lead to financial loss to Tesco (Datamonitor, 2009).

To sum up, Tesco should employ the hybrid supply chain which combines the benefits of lean and agile. To adapts the lean supply chain in basic needs of customers which are stable and predicable and employs agile to respond fast changing demand of market that will help Tesco maintain the competitive advantage in the market. Moreover, Tesco have numerous suppliers, it is difficult to have deeply relationship with all the suppliers. Tesco could depend on the product types to decide the different level of relationship. Although, the economic of scale of Tesco is strong enough to dominate the negotiation with suppliers, Tesco should treat their suppliers like partners and have longer relationship which help suppliers to improve rather change suppliers often and use penalty and re-list regulation to punish. Finally, Tesco acts as a leading retailer, customers will have more expectation and stricter to review Tesco. Namely, pursuing the cost down as the first priority, Tesco also need to focus on product quality and keep the good image to its customers.


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