Leading multinational retailer Tesco has 6,809 shops across the world and services 79 million shopping trips per week - across both stores and online. Add in the 460,000 employees, and to say that it’s important that they maintain high levels of operational efficiency would be somewhat of an understatement.
The supply chain for any retailer of this size is a significant operation. So how do they manage it?
It all began in 1995 when Tesco set their sights on becoming the Toyota of the grocery business. Seeing Toyota's dramatic rise with the help of Lean thinking sparked a journey that led Tesco to become one of the first adopters of Lean in the service industry.
The supply chain challenge
In most businesses, the supply chain is where customer needs and requests are actually fulfilled. It makes sense then that it’s often described as the ‘value chain’ - it’s where value is delivered to the customer.
Given their scale, Tesco is a major supply chain operator. And how their supply chain is managed and organised is of huge significance. A small improvement in each operation can contribute to a significant bottom line gain.
“Tesco in Britain is a pioneer in lean provision”, according to James Womack, co-author with Daniel Jones of Lean Solutions: How Companies and Customers Can Create Value and Wealth Together.
And it was Womack and Jones who helped cement Tesco as Lean pioneers. They had begun looking into how Lean thinking could be applied to other sectors outside of manufacturing, and along with Tesco’s Supply Chain Director at the time, Graham Booth, they began experimenting with bringing Lean thinking to Tesco.
Lean thinking simply means working smartly to enhance efficiency. It’s about creating more value for customers with fewer resources, and is nicely aligned with Tesco’s core purpose - ’to create value for customers in order to earn their lifetime loyalty’.
The strategy became that if each function within the business achieves maximum operational performance then the performance of the entire organisation will be optimised.
Creating Lean operations
Lean seeks to achieve small, incremental changes in processes to impact speed, efficiency and quality. It focuses on eliminating ‘waste’ - tasks that absorb time and resources but add no value to the customer or business. And this is what Tesco sought to do.
The first principle of Lean thinking is to specify 'value' in the eyes of the customer. And it's true that Tesco have invested heavily in better understanding customer needs and wants, from Clubcard data to customer panels and market research. This customer-centric approach has led to many improvements, like investing in self-service checkouts and enabling customers to store their Clubcard on their phone.
In 2000, Tesco began a major overhaul of their distribution function. They introduced a system of continuous stock replenishment into stores to reduce availability problems. This allowed them to achieve on-shelf availability of 99% throughout the day, while also enabling them to improve product freshness due to the elimination of excessive storage of fresh goods in store rooms or on shelves.
According to a press release from the Lean Enterprise Institute, “The British retailer's lean provision system allows it to respond rapidly to the wealth of data collected from its 12 million Clubcard users that give discounts to frequent shoppers. Tesco’s lean provision system combines point-of-sale data, cross-dock distribution centers, and frequent deliveries to many stores along ‘milk-runs’ to stock the right items in a range of retail formats”.
James Womack said that this strategy has permitted Tesco, “to establish the lowest cost position among British retailers (including Wal-Mart's Asda chain) while posting progressively higher margins and steadily increasing its share in every format.”
Lean thinking is also part of Tesco's approach to sustainability. They've applied Lean to the challenge of reducing their environmental waste, which has led them to relocate distribution centres closer to the group of stores they serve and use more aerodynamic lorries to reduce fuel consumption. And in 2010 they opened the world’s first zero-carbon store.
Tesco's Lean transformation contributed significantly to their ability to grow into what they are today. And as they face more competition, increasing customer demands and considerable technology advances, there's no doubt that a continued focus on Lean operations will be imperative if they want to maintain their top spot as the UK’s biggest grocery retailer by market share.