Case Study: Tesco
Tesco is the UK’s largest food retailer, with a sales turnover of more than 67.5 billion. While it has some 638 stores in central Europe, and some 636 in the Far East, most are in the United Kingdom and Northern Ireland, where it has nearly 1,800. This number has increased rapidly as Tesco entered the convenience store market with deals such as the Tesco Express alliance with Esso to run grocery shops at petrol stations. The product range held by the stores has grown rapidly in recent years, and currently stands at 65,000 stock-keeping units (skus) depending on the size of the store as Tesco broadens its presence in the ‘non-food’ market for electrical goods, stationery, clothing and the like. This massive range is supported by 3,000 suppliers, who are expected to provide service levels (correct time and quantities) of at least 98.5 per cent by delivering to Tesco within half-hour time ‘windows’. Volumes are equally impressive. In a year, some 2.5 billion cases of product are shipped from suppliers to the stores.
Tesco states that its core purpose is ‘to create value for customers to earn their lifetime loyalty’. Wide product range and high on-shelf availability across that range are key enablers of that core purpose. So how do you maintain high availability of so many skus in so many stores? This question goes to the heart of logistics management for such a vast organisation. Logistics is about material flow, and about information flow. Let us look at how Tesco deals with each of these in turn.
An early reform for supermarket operation was to have suppliers deliver to a distribution centre rather than to every store. During the 1980s, distribution to retail stores was handled by 26 depots. These operated on a single-temperature basis, and were small and relatively inefficient. Delivery volumes to each store were also relatively low, and it was not economic to deliver to all stores each day. Goods that required temperature-controlled environments had to be carried on separate vehicles. Each product group had different ordering systems. The network of depots simply could not handle the growth in volume and the increasingly high standards of temperature control. A new distribution strategy was needed.
Under the ‘composite’ distribution system, many small depots with limited temperature control facilities were replaced by composite distribution centres (called regional distribution centres, RDCs), which can handle many products at several temperature ranges. The opportunity is to provide a cost-effective daily delivery service to all stores. Typically, a composite distribution centre can handle over 60 million cases per year on a 15-acre site. The warehouse building comprises 25,000 square metres divided into three temperature zones: frozen (-25°C), +2°C (chilled) and +12°C (semi-ambient). Each distribution centre (DC)