The retail sector comprises almost 8 per cent of the Gross Domestic Product (GDP) of the UK.In 2007, the retail sales were approximately ?265 billion in UK, which is larger than the combined economies of Denmark and Portugal. Over 3 million people were employed by the retail industry. It equates to 11 per cent of the total UK workforce. A verdict research center predicted that the UK retail market in size will rise by 15 per cent over the next five year, taking its value to just over ?312 billion.
It had achieved an about ?110.4 billion of grocery sales by nearly 100,000 grocery stores in the UK in 2007.UK grocery retail sector is divided 4 parts: food and drink, tobacco, non-food grocery and non-grocery. In particular, food and drink part hold the key post in the grocery retail sector. It accounts for 65 per cent of the total. It is very important to take fresh food for keeping our body in good condition. Therefore, consumers always try to buy the best items in the grocery stores and they are very sensitive and changeable. In addition, the grocery retail market is extremely competitive and unpredictable. Moreover, a wide variety of products gradually have increased over the years as customers’ demand. While even common products could be bought in a seller’s market. However, the retailer ought to be careful to display their commodities inventively on the shelves in order to catch the attention of customers. This fact has increasingly compelled retailers to think about how they structure, control and amend supply chains to ensure they are effective and efficient (Sparks, 2006).
The purpose of this research is to identify the reason why it happen the product shortage of fresh food sector in a supply chain perspective at the two major supermarkets, Tesco and Sainsbury’s, in the UK. The paper examines the supply chain availability of Tesco and Sainsbury’s through reviews of academic journals, books, institute reports and web pages. Finally, two supermarkets in this respect will be compared their availability in supply chain management through case studies.
The paper is structured so that the next section on the products shortage in a supply chain perspective is followed by a section discussing a supply chain strategy and policy of two major retailers, namely the supply chain availability. The final section of the main part is trying to find the competitive advantage and disadvantage by studying a pair of case studies. The concluding section considers different perspectives such as cost, consumer service and efficiency in a supply chain management.
?. Products shortage in a supply chain perspective
An effective management of inventory flows is one of the most important dimensions in supply chains for success the business. The balance of supply and demand is one of the goals in managing inventory. A company always tries to keep enough inventories to satisfy its customer demand. However, if a company holds too much inventory, it would be happened in inventory carrying cost. In other words, it is a key factor to hold enough but not too much.
The market trend already has changed seller’s market to buyer’s market. "In a seller’s market, whatever had been stocked was eventually sold. However, in the dawn of a buyer’s market, only the right inventory would produce growing sales. Moreover, only when demand was accurately read and forecasted could ‘right’ inventory be stocked at all." (Lal & Han, 2005)
To manage the flow of inventory effectively, several fragmentations in supply chain management such as information system, demand forecasting, procurement, production planning, warehousing, logistics and customer services should be considered. The section focuses on the concepts and the characteristics of the key factors for successful inventory management above mentioned. The study will find the correlation between the reasons of products shortage and these key factors.
Coyle et al. (2003) defined the concept of procurement as:
Depending on the circumstances, procurement can defied in a narrow sense and in a broader perspective.
In a narrow sense, procurement can be defined as the act of buying goods and services for a firm.
In a broader perspective, it can be described as the process of obtaining goods and services for the firm.
Porter (1985) confirmed the importance of strategic procurement in his value chain, since it includes such activities as qualifying new suppliers, procuring different types of inputs, and monitoring supplier performance (Coyle & Bardi & Langley, 2003). Well-organized procurement provides an effective performance in supply chain context. The quality of raw material by procurement affects final product quality, profits and customer satisfaction. In addition, an under-estimated quantity of raw materials leads to the shortage of stocks in the store. Procurement and inventory management belong to materials management and if there are problems of the planning and control of procurement, the store could run out of supplies and have nothing to sell.
According to Blackwell and Blackwell (1999), demand management may be thought of as “focused efforts to estimate and manage customer’ demand, with the intention of using this information to shape operating decisions.” To understand the relationship between customer demand and inventory correctly, it is essential to review a viewpoint of how supply-demand misalignment impacts whole effectiveness of supply chain. Figure 2-1 provides overall supply-demand misalignment.
Figure 2-1 Supply-Demand Misalignment
2 Real
Shortage
4 Returns/
Cancellation
6
Unit per period
Launch
date
End of
life
Production
Channel
orders
1 True end-customer
demand
3 Channel fill and
Phantom demand
Over-supply
Source: Accenture, Stanford University, and Northwestern University, Customer-Driven Demand Networks: Unlocking Hidden Value in the Personal Computer Supply Chain(Accenture, 1997), 15.
1. True end-customer demand.
2. Production cannot meet initial projected demand, resulting in real shortages.
3. Channel partners over-order in an attempt to meet demand and stock their shelves.
4. As supply catches up with demand, orders are canceled or returned.
5. Financial and production planning are not aligned with real demand; therefore, production continues.
6. As demanded declines, all parties attempt to drain inventory to prevent write-down.
Examining more closely at Figure 2-1, the first stage is a new product launch, true end-customer demand is peak and profit margins are highest at the moment. Unfortunately, PC companies cannot supply sufficient product quantities against demand and retailer and distributors often order than need be. In the next phase, as production increase gradually, producers ship product to meet increased demand and they take priority of price. As stock is filled with over-ordered products at their shelves, price competition begins to be installed, orders are cancelled or returned in the end. In the last stage, as end-user demand begins to decline, all related parties attempt to get rid of their inventory to prevent write-down. “This is largely due to the industry’s planning processes and systems, which are primarily designed to use previous demand as a gauge. Since much of the previous period’s demand was represented by the phantom demand, forecasts are distorted.” (Coyle & Bardi & Langley, 2003)
Information system has become extremely important factor for success in supply chain management. The information in supply chain is mainly comprised of sales data or demand, it is a useful criterion of replenishment and the basis of forecasting. A significant degree of supply chain information exchange or share on a real-time basis leads to less uncertainty and, therefore, less safety stock. Efficient IT can reduce transaction costs and risk to enable firms to engage in more collaborative activities (Sodhi & Son, 2009). High quality and well-organized information about demand can remove inventory. If point-of-sale (POS) data were available from the retail level on a real-time basis, it would help eliminate the bullwhip effect associated with supply chain inventories and would significantly reduce cost.
Retail practice at Seven-Eleven Japan’s case studies performed by Stanford University and Harvard University is very helpful to understand the availability of information system in supply chain management.
“In response to the customer demographic, SEJ’s retail strategy emphasized freshness. The information system was designed to support freshness - meaning not only the quality of perishable products, but also the provision of a fresh set of merchandise to keep up with the changing preference of customers. SEJ’s freshness focus was extended to incorporate the timely accommodation of the changing needs and tastes of customers. To make sure customers did not tire of the same offering, old items were constantly retired, giving shelf space to new items. Of 3,000 SKUs carried by each store, about half of them were replaced every year. SEJ tended to retire items as soon as they noticed a decline in sales, which was generally earlier than other stores. SEJ’s freshness strategy was supported by the company’s information systems.” (Stanford University, 2006)
Logistics has been called by several ways, including the following:
Business logistics
Distribution
Logistical management
Physical distribution
Supply Chain Management
Materials management
What these terms have in common is that they deal with the management of the flow of goods or materials from point of origin to point of consumption, and in some cases even to the point of disposal (Grant et al., 2006). The Council of Supply Chain Management Professionals (CSCMP), one of the leading professional organizations for logistics personnel, defines logistics management as:
“the part of Supply Chain Management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements.”
Three key activities of logistics in supply chain management are transportation, inventory maintenance and order processing. These activities are important to implement the efficient logistics management, since they most directly affect the total cost of logistics or they are critical to the effective completion and performance of the logistics mission. Commonly, it is impossible or impractical to produce products on the moment or distribute to retailers (customers) instantly. In order to achieve a reasonable degree of product availability, inventories need to be maintained as buffers between supply and demand. Whereas transportation adds “place” value to a product, inventories add “time” value (Ballou, 1987). If unexpected problems happen in process of transportation, it could cause more or less inventory in warehouse and even store.
?. Supply Chain Availability (Cost, Efficiency, Customer Service)
It has long been recognized by some that the key to major cost reduction lies not so much in the internal activities of the firm but in the wider supply chain (Christopher & Gattorna, 2008).
Reducing cost or efficiency is an important objective of supply chain management. The aim of the enterprise management should be reduce the total cost of logistics activities, often called the landed cost at the end of the pipeline, rather than focusing on each activity in separation. Lowering cost in one area, like transportation, can raise inventory carrying cost according to more inventory is needed to cover longer transit time, or to balance against greater uncertainty in transit time.
There are six major cost categories which cover the key logistics activities in Figure 3-1. It indicates how the logistics activities affect the six major logistics cost categories.
Figure 3-1 how logistics activities drive total logistics costs
? Customer service
? Parts and service support
? Return goods handling
? Traffic and transportation
? Inventory management
? Packaging
? Reverse logistics
? Warehousing and storage
? Plant and warehouse site selection
? Material handling
? Procurement
? Order processing
? Logistics communication
? Demand forecasting/planning
Source: adapted from Douglas M. Lambert, The Development of an Inventory Costing Methodology: A Study of the Cost Associated with Holding Inventory. Chicago: National Council of Physical Distribution Management, 1976, p. 7.
Japan was a seller’s market until the 1970s, but as profits stagnated and declined in the late 1980s, a buyer’s market began, necessitating reform in the retail industry. The reason for this shift was that ownership of objects was very high among Japanese consumers.
- Toshifumi Suzuki, Chairman and CEO of Seven & I Holdings Co.
“Beyond newness, building and sustaining store loyalty is a factor important to retailers in a buyer’s market. If customers consistently have positive experiences at a store – as measured by image, trustworthiness, reliability, friendliness and fulfillment of a saying shopping experience – they are more likely to purchase the same product at one store, rather than another.” (HBR, 2005) Managing customer service and demand forecasting is a key factor for both efficiency and effectiveness in a buyer’s market.
Table 3-1 characteristics of a seller’s market versus a buyer’s market
Product functionality
Buyer preference
(Moderated by marketing)
Product is made, at manufacturer level, upstream in product flow
Buyer selects product from
Pool, at retailer level
Distribution and retail costs are minimized
Demand is satisfied
Cost center
Profit center
Source: Created by casewriter based on: Tomoyuki Ogata (Ed. Daniel Costello). Grasping Customer Demand with Tanpin Kanri. Tokyo: Office 2020 Publishing, 2002. 15.
While customer service has no single widely used definition, customer service is often viewed in three principal ways. These are customer service as an activity, customer service as performance measures, customer service as a philosophy (Lalonde, 1985). However, the definition of customer service that is used in this paper is as follows:
“Customer service is a process for providing competitive advantage and adding benefit to the supply chain in order to maximize the total value to the ultimate customer.” (Coyle & Bardi & Langley, 2003)
We have to consider that information is a key factor to improve customer service. In other words, there is a synergy between information and customer service. High quality and on time information affects positive influence and also reduce cost. Finally, reducing cost brings them satisfaction and happiness.
In case of customer service, there are three identified levels in a supply chain and logistics perspective. The lowest level is reliable, on time and right quantity delivery. In order to maintain customers, this minimum lever is basic in these days. Moreover, to create large customer, it is essential to meet the customers’ unique needs and special demand. The next level may involve, for instance, advanced shipment notices, tail-made pallet packing, scheduled deliveries and so on. In order to continue and increase market share, the highest and maximum level of customer service is needed, that is, adding value for regular customer. Examples of previously mentioned concept may entail supply chain visibility of inventory, VMI (vendor-managed inventory), forecasting and so on.
?. Case studies (Tesco and Sainsbury’s)
In 2008, there were roughly 49,530 convenience stores in the UK, this figure stands for decrease of 2.4% every year. Whilst the number of co-operative convenience store remain unchanged, the number of multiple convenience store and symbol groups stores have increased (See figure 4-1). The UK grocery market was worth ?134.8 billion in the 12 months to May 2008, representing an increase of 4.1% over the previous year. In view of market structure, top brand list and market share in the UK are core indication to recognize supermarkets’ position.
Figure 4-1 the Consolidation of the UK Grocery Market, by Value Market Share
Source: Economic Note on UK Grocery Retailing 2006. 2010 is IGD estimate. The ‘multiples’ category appears to include symbol-group convenience stores.
Table 4-1 shows the top 10 most valuable retail brands in the UK in 2008. In 2008, Tesco had been named the most valuable brand in UK retailers, the value was ?8.6 billion, whilst Sainsbury’s value was ?4.9 billion, beat other “big four” supermarkets ASDA and Morrisons into fourth and fifth places, respectively.
Table 4-1 the top 10 most valuable retail brands in the UK
1
Tesco
8.6
2
Sainsbury’s
4.9
3
Marks & Spencer
3.9
4
ASDA
3.6
5
Morrisons
2.6
6
Boots
1.9
7
Argos
1.4
8
Co-operative
1.4
9
Waitrose
1.2
10
John Lewis
1.1
Source: http://news.sky.com/skynews/Home/Business/
Figure 4-2 market shares within the non-convenience grocery market
Source: TNS Worldpanel, march 2006.
Tesco was top position in 2006, market share was about 30.6 percent of the non-convenience UK grocery market (See figure 4-2). During the 1990s, Tesco and Sainsbury's enjoyed similar market shares ( of 20 to 25 percent). However, Sainsbury’s has since lost ground.
“Most of the multiples’ growth has been organic, with the exception of Morrison’s acquisition of Safeway in 2003. ASDA was acquired in 1999 by Wal-Mart, the world’s largest retailer. The other market leaders are all UK companies.” (defra, 2006)
Based on above mentioned statistical factors, Tesco, 1st place in UK, and Sainsbury’s, 2nd position, are selected to study their supply chain performance. The key factor in supply chain perspective will be performed through some case studies, and then their supply chain availability might be analyzed by different perspectives such as cost, customer service and efficiency.
One of the powerful grocery retailers all over the world, Tesco, now has expanded from Eastern Europe to Asia. The supply chain management is one of key factors as succeeding off-line and on-line business. Tesco stores tend to be better stocked that those of its competitors, while costs are still kept down (Datamonitor, 2005).
First case study is a specific product, for example, strawberry. It is very difficult to meet demand during the peak season or some special event such as the Wimbledon Tennis Championships. To solve the problem, the head office of Tesco approached the concept of collaborating with the other partners in supply channel. First of all, the company made a small team and tried to find several problems. They found a technical problem which is relative to the preparation of package material, called mould. The suppliers had to order the mould several days in advance to be provided in time and if package suppliers don’t have enough time or enough materials at the agreed moment, they would inform their situation and discuss about some alternative sources. Moreover, the head office had changed last order amendments time at 17:00 as requested by other channel partners. All action points consisted of agreed and implemented.
The second case study is about logistics, especially, sustainable distribution through integrated transport. The department of transport had a plan to make a policy of sustainable distribution for freight in 1998. The new programme should base on the energy saving at the corporate level. For instance, vehicles which are Tesco owned and 3PL companies picked its pallets on the way of inbound movement after deliver to their retail stores. This practical policy was very useful to reduce vehicle miles. As results, it gave positive effects in the environmental policy of the company.
The Third one is connected with information technology. Tesco had developed the Oracle Retail Planning to cut more maintenance costs and risk in spite of a traditional IT solution. The new Oracle system had provided various functions. IT department could change options very easily, it had fine turning function to meet special needs. It is possible to predict by using the programme in the system. The company also used it to recognize seasonal demand. Therefore, they could provide customers’ demand with generally accuracy.
Sainsbury’s has been a leader in retail innovation since 1869 (Hall, 2006). In order to overcome a severe market and provide good quality products to their customers, Sainsbury’s made a “Partnership in produce” agreement with ENFRU Ltd in 1995. The agreement was included under seven key provisions. “Not only can the immediate needs of the marketplace be met, often when seasonal factors require an imaginative response to specific availabilities, but also, new directions and opportunities can be mapped out for the future.” (Hughes & Merton, 1996)
The next case is related to the change of transportation system in connection with between Sainsbury’s and Nestle. Their transportation route was very complex because of via various points and multimodal transports. They solved the problem through 3rd party logistics and Driver shift. Two companies saved total 64,200 km per year.
The last case is Sainsbury’s RFID trial. They had set up the vision to enrich information and cope with their major problems. In the first trial, they chose chilled goods and tracked it. The trial was mainly concentrated in one ready-meal supplier, a single depot and a retail store. “The most notable benefit for the supplier is the potential to reduce the out-of-stock rate of suppliers’ products. The reduction of the rate of stock-outs often benefits suppliers more than the retailer, as the consumer almost invariably picks a substituting product.” (Kärkkäinen, 2003)
?. Conclusion
Factors such as population trend, life style (eating out), relationship with customers are driven for grocery retailers to very severe situation. In consequence, supermarkets always try to establish competitive strategies. They should check competitors’ price every day, do their best for customers’ satisfaction, develop new premium goods to preoccupy niche market and new formation of store (e.g. convenience store). According to IGD research, low prices are still a key motivation for customers’ royalty. It is very important to perform their supply chain management because it is not easy to accomplish their goal without the harmonized collaboration.
In price policy, Tesco and Sainsbury’s have pushed different slogan. Tesco is “Helping you spend less every day”. They provide price information that is based on their competitors’ price which is on competitors’ homepages. Sainsbury’s is “Great food at fair prices”. In order to supply high-quality products at reasonable price, they carry out “Great offer” instead of indiscriminate low price policy.
The basic of customer satisfaction is to conduct an effective inventory management, that is, right, enough goods on the shelves and at the right time. Tesco maximize customer satisfaction by running Oracle retail system. Marcel Borlin, the manager of Tesco customer service, said “If we can improve product availability by just 1%, then we will have a great many more satisfied customers.” Meanwhile, Sainsbury’s have centralized their business ability to the rationalization of logistics.
Can you differentiate between the two? In my opinion, the main point is just supply chain availability. It’s not marketing or brand positioning. “Tesco’ supply chain works, Sainsbury’s doesn’t, and the smaller firm appears unable to fix its long-running logistics problem.” (Datamonitor, 2005) Finally, grocery retailers in the UK try to establish the programmme for satisfying customer needs which is to understand well how certain changes affect demand on each product basis. POS system will be an effective solution to build for managing inventory programme. Furthermore, they have to execute logistics system on demand. Joint delivery programme from supply distribution center, delivery operations management, diversified mode of transportation are good examples.
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