TESCO and the JIT Philosophy - Essay Example

? TESCO and the JIT Philosophy Table of Contents I. Introduction …............................................ 4 II. Relevant Operational Theories and Principles …………………. 4 a. Supply Chain Management ……………………………... 4 b. SCM Tools ……………………………… 5 c. Logistics ……………………………… 6 d. Just in Time ……………………………… 7 e. Emerging Issues ……………………………… 9 III. Tesco and JIT ………………………………. 10 IV. TESCO vs. Toyota ………………………………. 11 V. JIT in Retail and Manufacturing ………………………………. 13 VI. Challenges in Tesco’s Internationalization …………………….. 14 VII. Recommendations ………………………………. 15 VII. Conclusion ………………………………. 16 VIII. References ……………………………….. 18 Executive Summary This is a report about Tesco’s supply chain management practices. The focus is to evaluate them according to the just-in-time philosophy. For this purpose, a comparison between Tesco and Toyota’s JIT initiatives are provided in addition to the discussion of the role of JIT in Tesco’s success in the United Kingdom and its expansion objectives to the international market. I. Introduction In an effort to be competitive and maximize financial performance, TESCO has adopted several supply chain management practices starting in the 1990s. Fundamentally, these practices involved the streamlining of the route by which goods travel from Tesco’s suppliers to its store shelves. While it is not clear which supermarket pioneered this revolutionary supply chain model, which is now adopted by many in the industry and is considered as a standard of best practice, many attribute it to Tesco’s reforms set up late in the 1990s. This is a report on Tesco’s supply chain management practices, which is recognized to be designed after Toyota’s “just in time” (JIT) model. Specifically, this report will compare JIT principles to Tesco’s business practices and assess the latter’s efficacy in the navigation of the challenges Tesco faces amidst the internationalization of both suppliers and its market. II. Relevant Operational Theories and Principles Supply Chain Management Fundamentally, supply chain management is the framework by which processes, structures, managements elements in the value chain is integrated and coordinated. It is crucial in the drive for competitive advantage and concerns the alignment of management practices into what the requirements of the customers. Seuring (2003) outlined the basic characteristics of the concept: Supply chain management is primarily an integration-oriented logistics management concept, characterized by the strategic, cooperation-oriented and interorganizational initiatives; The task of the concept is to manage the supplier-buyer relationships, particularly streamlining the complex chain and network involved; The goal is to align all activities to satisfy the requirements and needs of customers and reduce costs and enable the organization to take advantage of opportunities; The focus is to realize efficiencies and the expansion of covered activities beyond logistics, including management components and information flows among the supply chain partners. (p169-168) Lambert was able to depict the framework in the following model: Supply Management Framework (Lambert, 2000, p70) SCM Tools Supply chain management tools are essentially systems and solutions that are designed to enhance it so that the processes produce value for customers either in facilitating, integrating, coordinating, controlling, optimizing and so forth. An excellent example is technology. Through this tool, SCM is able to automate order processing, warehousing, among other stages in the value chain and make centralization possible and more efficient. Tesco’s continuous replenishment system is a specific example. Then, there is also the so-called electronic data interchange (EDI), which is a direct computer-to-computer exchange (an ancestor of e-commerce) between two partners, helping business save time and money by reducing the transaction process. (Khosrowpour, 2002, p348) Accurate and integrate information for logistics and decision making is also achieved through data and information management systems that informs SCM decision-making and the control of logistics. There are so many tools available today for supply chain management and more are being developed to address the ever changing business environment. Logistics Logistics refers to all the operations involved in production the production and movement of goods. It begins in the product materials acquisition and ends in the actual consumer purchase and consumption. According to Altekar (2005), a comprehensive definition says that “logistics is the process of moving and positioning inventory to meet customer requirements at the lowest possible total landed cost.” (p216) The important components in logistics are customer services, order or purchase processing, inventory management and the transport of goods. Lai and Cheng (2009) explained these concepts briefly: Customer services: these are the management of the flow of customer services, operating around the so-called seven rights (7Rs): the ability to deliver the right product to the right customer at the right place, in the right condition, and right quantity at the right time. (p. 4) Order Processing: these are the processes and activities concerning the order cycle. Inventory Management: activities that involve the management of appropriate inventory levels in order to satisfy the requirements and demands in the supply chain. (p4) Many components of logistics form part of the industrial and economic life but it has recently assumed a major function as a distinct management system. According to Rushton, Croucher and Baker (2010), logistics and the supply chain deals with the physical and information flows and storage from raw materials to the final distribution of the finished product. (p4) Today, logistics is particularly crucial in addressing the challenges and opportunities brought about by globalization. Because of it, organizations are able to develop integrated planning systems that are critical in gaining competitive advantage in the area of supply chain management. Just-in-Time The JIT model is an approach that originated in Japan and developed in the 1950s. It is a manufacturing system that opposes the traditional production of producing as many goods as possible. It is also a management philosophy that seeks to remove unnecessary and non-value stages, elements and aspects in the production process resulting in a lean, efficient and more cost-effective operation. Toyota has been credited to have developed this management strategy to its fullest, applying it to its operations with considerable success. According to Lai and Cheng, the philosophy underlying the JIT framework is to continuously innovate and find ways to make processes more efficient by producing goods and services without any waste in every form - materials, resources, time and effort. (p3) The fundamental objective is the production of the right product at the right time and quantity. There are numerous studies that reveal how companies that adopt JIT strategy have outperformed their peers. Specific benefits are depicted in Fig. 2. This is attributed to the fact that the model enables organizations to improve product quality, efficiency and the capability to determine the customer needs and act on them swiftly. The benefits provided by JIT are widely recognized to address specific problems, which include: Deeply fragmented market; Stiff market competition; Fixed or falling prices; The rapid technological development; High cost of capital; Labor force that demands a greater involvement in the process. (Dennis and Shook, 2007, p67) Fig. 2: Benefits of JIT (Altekar, 2005, p120) Emerging Issues One of the most important new issues in SCM is the Internet and e-commerce. The way the world has been networked into one close community wherein communication and information ruled opened up numerous opportunities and challenges for many processes within the supply chain. This is particularly the case in high technology sector. Companies such as IBM and Dell has established Internet-based global supply chain infrastructure that allowed these companies to have lean production, demand collaboration, lower cost and greater responsiveness. (Khosrowpour, p348) Another is internationalization. With the advent of globalization and the expansion of operations of retail companies, the internationalization of supply and purchasing became inevitable. Supply chain management and coordination assumed global proportions. Here, the final products as seen in stores like Tesco involve inputs coming from different parts of the world. This brought about the concept called “global production networks”, which are mostly part of extensive global distribution system and retailing networks that can be coordinated by the same key actors on both the production and the distribution sides. (Rhodes, Warren & Carter, 2006, p14) Key aspects that characterize global supply strategies include critical coordination mechanisms in addition to the expanded buyer-supplier relationships, which, for their part, involve all actors, operations and resources that make up an internationalized firm’s supply network. (Kersten, Blecker and Jahn, 2011, p432) Internationalization and globalization entail other emerging issues such as the increasing requirement for customization in order to achieve competitive advantage. Companies have to diversify their products and services in order to provide customer value. The supply chain plays a major role in this area. Other issues include the need for “green” supply chain management as the general public start to pay more attention to the potential consequences of business practices, which now form part of their purchase decisions. III. Tesco and JIT From its humble beginnings, Tesco underwent a meteoric rise as one of the main retail players in Britain. From its humble beginnings during the 1920s, Tesco became the second largest retailer in the United Kingdom, second only to Sainsbury. Within this period, the market became saturated and the competition was cutthroat. In order to address this dilemma the management wanted a stock replenishment system that are dictated by the needs of the customers, Tesco turned to JIT, the supply chain management model developed by Toyota. A team of experts was assembled to study the situation and design Tesco’s own JIT solution. Several developments emerged out of this initiative, which were pivotal in the ease by which Tesco toppled Sainsbury as the retail market leader in Britain. Some of these are outlined below: the continuous replenishment (CR) system, which allows for products to be replaced according to the point of sale data; the streamlining of the flow and handling of goods; and, the changes implemented on distribution schedules. The solutions developed out of the JIT framework enabled Tesco to drastically increase profitability. The company’s JIT environment demonstrates how the framework operates within specific preconditions. According to Beker (2011), these are: synchronization and continuity, product quality, quality control, flexibility of operations, equal system loads, development of automatisation and adequate degree of development of logistic systems and so forth. (p494) IV. TESCO vs. Toyota Toyota’s JIT operated within the basic principle of production: the company’s production system adopted the traditional approach to production management. Focusing on the fundamental framework meant the elimination of unnecessary intermediate and finished product inventories. Just-in-time for Toyota meant that, in the process of the car parts manufacture, the necessary kind of subassemblies of the preceding processes should arrive at the product line at the time needed and in the necessary quantities. (Altekar, p123) Crucial to Toyota’s JIT model is the Kanban System otherwise known as the Toyota Production System (TPS), an information system that controls the production quantities in every process. The kind of units and the required number are written in cards called kanban, which are sent to the people of the preceding process from the subsequent process. (Altekar, p123) This is not unlike Tesco’s continuous replenishment system. But instead of the kanban, the company uses the Point of Sales data to determine what kinds of product are needed and what quantity, at what time and so forth. Through the kanban system, the Just-in-time benefits are achieved. Many processes in Toyota’s factories are coordinated, ensuring ease in control of the production process. The Kanban is already computerized presently and is also available to its suppliers. The similarity between the Toyota and Tesco’s tools for JIT are more pronounced in this area. The computerization of the Kanban system increased the efficiency of communication from one producer/supplier to the other. According to Mukherjee and Kachwala (2009), it was reported that the Kanban card process took seven to eight hours before the card reach the production point, but with the new system, part suppliers receive ordering instantly through the Internet and orders are delivered within significantly reduced time. (p383) The principle at work can be depicted in the manner by which Tesco replenish supplies in each of its stores. Through the CR system, which is fed by orders originating from checkout counters, suppliers are automatically notified about product orders. Such notification can be several times a day, which means that supplier deliveries could make numerous trips to the local store within a single day. As the Kanban system ensures the 7R for Toyota and its suppliers, the CR system assures Tesco stores that products are replenished effectively, accurately and fast. This is also the case in Tesco’s e-commerce platform, wherein an online store is typified by a database system that do not merely process orders but also stores purchase data for analysis so that customer needs are further satisfied with efficient value added services. V. JIT in Retail and Manufacturing As a retail store, Tesco requires suppliers more than what Toyota needs. The latter only requires car parts and the number of suppliers pales in comparison to the suppliers of products and brands that Tesco sells in its stores. This is the reason why beside the CR system, Tesco has developed numerous other tools to ensure its JIT strategy. For example, there is the Consolidation Centre (CC) solution, wherein smaller loads from local suppliers are consolidated in their nearest centre before being shipped to Britain. The idea is to eliminate the need to store products in a warehouse. The centres are also supported by the manner by which Tesco transformed its distribution centres into cross docking operations, which requires products from different suppliers to be unloaded directly to outbound trucks eliminating the need hold products. This also means that inventory holding and order picking were passed to the manufactures instead of Tesco’s distribution centres. Another example is the Step Change program, an initiative designed to identify processes that needs improvement or transformation. Essentially, it is a systematic model for change intervention, beginning with an investigation of problems to the design of the new process and ends in the evaluation of the desired output and objectives. It is clear that Tesco employs numerous tools because it has far more processes and activities than Toyota, which is primarily concerned with manufacturing. The sheer number of products sold by Tesco entails an expanded logistics and supply chain, which needs a complex and sophisticated set of tools that must be both effective and efficient in their respective areas while also functioning seamlessly with the other elements in a coordinated supply chain. This is magnified further by Tesco’s expansion to other countries, which, at the latest count, span 14 states in Asia, Europe and North America. Clearly, Toyota’s JIT model is only confined to the manufacturing process and distribution whereas Tesco’s operations are more complex and focuses on distribution and logistics. There is really very little difference between the JIT environments of Toyota and Tesco. The former has to ensure that that requests for parts are accurate and according to the 7Rs. It has to operate seamlessly with its own vendors, which Tesco also does with its suppliers. Both are currently undertaken to complex, networked, national and international supply chains. VI. Challenges in Tesco’s Internationalization The internationalization of the supply chain has posed a challenge for Tesco because it involves the replenishment of 2,356 stores with varying store formats. The challenge is also aggravated by the fact that Tesco has to source many products from different global locations. There are two dimensions, hence, to the challenges that Tesco faces in its international expansion: purchasing/sourcing and distribution. International suppliers are important for Tesco’s non-food items such as toys, apparel and electrical products, among others. It has to procure items from different countries like China, Thailand, Mauritius, Bangladesh and Sri Lanka in order to take advantage of lower prices. This initiative requires a sophisticated order replenishment system that should ensure accurate the 7Rs. Tesco was able to accomplish this with its suppliers in the United Kingdom. But for global vendors, the challenge is magnified. While orders can be sent quickly online, the deliveries have to be cleverly scheduled so that storage, inventories and other cost-inducing variables are still eliminated. One can say that Tesco has a dedicated team located in Hong Kong responsible for purchasing in addition to the fact that the company has established several systems such as the CCs in Europe and the trailer to trailer unloading of goods. The fact remains that problems could arise in the delivery of goods: some deliveries could be delayed and some could have problems in terms of quality. The challenge is how to address these incidents. The suppliers are scattered throughout the world and having to troubleshoot problems from UK or from Hong Kong is quite problematic. In the area of distribution, the problem is also the same. A sophisticated counter to supplier ordering system can be set in place but when problems arise with the delivered goods either in the area of turnaround time or the quality, troubleshooting can be difficult. The kind of centralization that has worked so well for Tesco, which is also made possible by information technology, could work adversely for the company in this area. When problems occur such as in product delivery and product quality, the local store is powerless because decisions are made either in Hong Kong or in the UK headquarters or wherever the sourcing team is located. The fundamental problem here is the sheer expanse of the supply chain. VII. Recommendations 1. Tesco needs to be faithful to its JIT philosophy. It has propelled its staggering growth during the past decades. While JIT is considered to be a standard of best practice in the industry, Tesco is recognized as the only retailer that adheres to the JIT model with a high degree of fidelity. This and their experience in penetrating and, finally, emerging victorious in the UK retail market should be able to equip them with necessary knowledge on how to navigate their foray in the international arena. 2. Tesco’s adoption of several measures such as RFID technology, which uses microchips to transmit product codes to scanners so that products are tracked throughout the supply chain is a king of initiative that should be implemented and encouraged. These help to solve numerous challenges in supply chain management. 3. Tesco also still needs to pick its suppliers carefully so that errors are minimized in the delivery and distribution process, preventing errors and the domino effect it could cause in the value chain. 4. Finally, a system for auditing processes according to JIT standards should be set up. Tesco’s expansion entails the design and implementation of numerous SCM initiatives and tools. These have to be assessed continually in order to ensure that the entire system work, is coordinated and always optimized. VIII. Conclusion The Just-in-time strategy borrowed by Tesco from the Toyota manufacturing philosophy has enabled the company to achieve unprecedented profitability, effectively trampling competition. From the time JIT was adopted back in 1990s, Tesco has addressed problems of market saturation. It has streamlined its operations and established effective supply chain management that eventually translated into competitive advantage leading to the staggering growth of its market share in the UK. As the company expands, aiming to take advantage of the opportunities of globalization, Tesco also aims to apply JIT to its international operations. The challenge in this area is slightly different and definitely bigger than Tesco’s local operations. This is driven by the expansion of the supply chain and distribution channels. Nonetheless, the nature of the problem is the same. The JIT environment should be able to address it and all that is needed is to determine the framework that would effectively tackle problems that emerge in the international context. VII. References Altekar, R 2005, Supply Chain Management: Concepts And Cases. New Delhi: PHI Learning Pvt, Ltd. Beker, I 2011, Proceedings of the XV International Scientific Conference on Industrial Systems (IS'11). Novi SAD Dennis, P and Shook, J 2007, Lean production simplified: a plain language guide to the world's most powerful production system. New York: Productivity Press. Kersten, W, Blecker, T, and Jahn, C 2011, International Supply Chain Management and Collaboration Practices. Brandsberg: Josef Eul Verlag GmbH. Khosrowpour, M 2002, Issues & trends of information technology management in contemporary organizations. Idea Group (IGI). Lai, K and Cheng, E 2009, Just-in-time logistics. Surrey: Gower Publishing. Lambert, C 2000, Issues in Supply Chain Management. Industrial Marketing, vol. 29, no. 1, pp. 65-83. Mukherjee, P N and Kachwala, T 2009, Operations Management And Productivity Techniques. New Delhi: PHI Learning Private Limited. Rhodes, E, Warren, J and Carter, R 2006, Supply chains and total product systems: a reader. Malden, MA: Wiley-Blackwell. Rushton, A, Croucher, P and Baker, P 2010, The handbook of logistics & distribution management. Philadelphia, PA: Kogan Page Publishers. Seuring, S 2003, Strategy and organization in supply chains. Berlin: Springer. Read More