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Project : Development of UK Food Retail Supply Chain
Name : Yuanyi Fan
CHAPTER 1. INTRODUCTION
1.1 Literature Review of Supply Chain Management
In today's business environment, technologies and competitive forces are changing at an
ever-increasing rate. The viability of a company now largely depends on how well it is capable of
featuring more customised products and services on its cost-efficient production. Also, the
tendency towards economic integration and the advent of all kinds of management technologies
largely prompts business competition, as well as providing the opportunities to succeed. In order to
survive in the fiercely competitive market and sustain a long-term advantage, more and more
enterprises, especially those national and international medium and big companies, are moving
their attention from individual operations to their supply chain operations. Those companies usually
play a leading role in the supply chain development of their industries. They realised that the whole
supply chain's performance will directly and greatly impact on their own business.
1.1.1 Supply Chain Operations
Generally speaking, a supply chain is a network of facilities that procure raw materials, transform
them into intermediate goods and then final products, and deliver the products to customers through
a distribution system.
1
It is regarded as a continuous process from the total market supply and
demand for products to customer payment. It encompasses all the information, financial, and
physical flows from the supplier's supplier to the customer's customer.
Christopher (1992) defined the supply chain as a network of organisations that are involved through
upstream and downstream linkages in the different processes and activities that produce value in
the form of products and services in the hands of the ultimate consumer. Thus, a supply chain
consists of a number of businesses through which information concerning demand flows upstream
from the marketplace and ultimately to the raw material supplier. Material flows downstream,
ending up as the particular physical product satisfying end-customer needs.2
Cox (1999) argues strongly that the supply chain concept has both a strategic as well as an
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Project : Development of UK Food Retail Supply Chain
Name : Yuanyi Fan
operational importance, which could be regarded as dimensions, the operational supply chain and
the entrepreneurial (or strategic) supply chain.
3
The operational supply chain refers to the series of
primary and support supply chains that have to be constructed to provide the inputs and outputs that
deliver products and services to the customers of any company. However, all the operational supply
chains are normally unique to the company creating them, when they position strategically to
provide a particular product and service within a specific primary supply chain. Thus, a company
should also understands how to limit its dependency on suppliers and how to continuously monitor
any threats to its own supply chain position from suppliers--the company will be able to maximise
its ability to appropriate value for itself.
Above arguments interpreted the supply chain operations from different aspects. Basically, a supply
chain encompasses all the activities associated with the flow and transformation of goods from the
very initial raw material stage through to the final end-customer; as well as the associated
information flows through each of echelons in the whole chain. It includes a variety of functions
throughout the whole supply chain: sourcing, procurement, production scheduling, manufacturing,
order processing, inventory management, warehousing, logistics and customer service. A
framework of a supply chain may be shown as Figure 1.
Figure 1 . A Framework of a Supply Chain
( From web resource "Global Supply Chain Forum" )
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Project : Development of UK Food Retail Supply Chain
Name : Yuanyi Fan
More and more companies have realised that the cooperation and coordination in sharing the
common goal and strategy of improving product quality and customer service level throughout the
supply chain is a basic requirement for them to succeed. "The real competition is not company
against company, but rather supply chain against supply chain" (Christopher, 1992). Supply Chain
Management (SCM), as an approach that has evolved out of the integration of these considerations,
now has gained a tremendous amount of attention from both academic and practitioner
communities.
1.1.2 Supply Chain Management (SCM)
Supply Chain Management is a recent movement in business operations that has been defined in
various ways. Cavinato, J (1991) defined SCM as a special form of strategic partnership between
retailers and suppliers, with positive effects on the overall performance of the channel.4 The key
element of SCM is activity integration. Lambert and Pagh, Kotzab presents a schematic of an SCM
model in Figure 2.5
Flow of products
Flow of information
tier supplier
manufacturer
retailer
SUPPLY CHAIN
MANAGEMENT
FIGURE 2.
Basic supply chain management model
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Project : Development of UK Food Retail Supply Chain
Name : Yuanyi Fan
It is important to note that the basic SCM model in Figure 2 suggests the cooperation of activities at
the inter-organizational level as well as the departmental level. Instead of focusing on the
management of inter-firm inventory and transportation capacities, SCM aims to integrate the
activities of an entire set of organizations from procurement of material and product components to
deliver completed products to the final customer.
These activities refer to marketing-dominated areas such as new product development, customer
relationship management and/or customer service management. Meanwhile, new technologies and
management tools, such as Effective Customer Response (ECR), Just-In-Time (JIT) and Lean
Production, are widely adopted by the collaboration of the participants throughout the supply chain,
also continuously create a trend of cost reduction and inventory level decreasing along the value
chain. Consequently, SCM leads to improvements in channel performance among all channel
members and not solely within the focal firm. Successful examples of these positive effects include
a lot of companies in different industries, such as the supply chains I will use as examples in the
following chapters, namely, Tesco in food retail industry and Toyota in automotive industry. Both
of these examples report cost reductions with simultaneous improvements in customer service.
1.2 Background of SCM in UK Food Retail Industry
After discussed the literature review of supply chain and supply chain management, it is necessary
to introduce the basic background of UK food retail industry, in particular, the major operation
form of retailer - supermarket.
1.2.1 Emergence of Supermarket
Since the latter half of 20th Century, supermarket has emerged as the dominant food retail form in
both Europe and North America.6 Some changes led supermarkets to dominate food retailing:
• Consumers shopping behaviour: The search for convenience in food shopping coupled to car
ownership, led to the birth of the supermarket. As incomes rose and shoppers sought both
convenience and new tastes and stimulation, supermarkets were able to expand the products offered.
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Project : Development of UK Food Retail Supply Chain
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• Technology improvement: The invention of the bar code allowed a store to manage thousands of
items and their prices and led to "just-in-time" store replenishment and the ability to carry tens of
thousands of individual items. Computer-operated depots and logistical systems integrated store
replenishment with consumer demand in a single electronic system.
Retail formats are very easy to copy (reducing the cost of entry for competitors), thus supermarket
rapidly has become the world wide dominated food retailing form since self-service grocery stores
emerged. Nevertheless, the organization structures are not the same. Fearne A., Hughes D. and
Duffy R. revealed three typical supermarket strategy models.7
.
The principal merchandising model that emerged and was adopted by major supermarket chains
can, for short hand, be labeled the "American model". The model can be characterised as having a
wide range of branded goods, a narrower range of much cheaper own label/store brand products,
with the promotional focus on price discounts, "specials" etc., and the stores leased, not owned, by
the supermarket chain.
However, in Europe, two significant branches emerged as alternates. First, German hard discount
chains - small stores, very limited product offer (700 or so SKU's [stock-keeping units], rather than
the 30,000+ that were more typical of USA supermarkets), with store/own label/secondary brands,
and the focus almost exclusively on low price, with the very minimum of in-store service.
Interestingly, this retailing form developed as a result of government regulation controlling the
maximum size of retail stores within or proximate to population centres. The intent of this
regulation was to protect the small, independent retailer, but, the result was to encourage the
expansion of chains of small format stores, such as Aldi and Lidl, who had difficulty in competing
with the traditional trade on service and, therefore, elected to build a business on a low price offer.
Hard discounters have a grocery market share in excess of 30 per cent in Germany and the
competitive tone is completely low price-low service.
The other major branch is the U.K. retailing model - out of town, company-owned super stores,
20-25,000 SKU's, of which as much as half may be own label/store brand items, positioned to
compete with national brands on an equal quality and slight price discount basis. There is a strong
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Project : Development of UK Food Retail Supply Chain
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emphasis on premium quality, chilled, almost exclusively own label value added food products.
Company staff work closely with manufacturers of the own label products and new product
development is prolific, e.g. J Sainsbury and Tesco, each launch around 1,500 new own label
products per annum ( adopted from their Annual Report). The overall offer to the customer is value
driven. Arguably, the U.K. model is, merely, a variant of the "American" model, with particular
emphasis placed on premium own label and fresh foods.
1.2.2 Supply Chain in UK Food Retail Industry
The food industry underwent significant structural changes during last few decades. Across the
food producer and retailer sector, the feverish pace of mergers and acquisitions, along with the
construction of bigger retailer and plants, has resulted in fewer and larger firms.
In retailing , supermarkets are changing as chains construct larger stores in a variety of formats.
Mergers among supermarket chains have led to increased concentration nationally and globally.
The emergence of the supermarket has become the dominant food retail form. At the same time,
nontraditional food retailers, such as Wal-Mart, has expanded their presence. The reasons why
supermarkets have come to dominate food retailing are not hard to find.
Firstly, the change in the way consumers' shopping led the retailers to alter their strategy. The
search for convenience in food shopping and consumption, coupled to car ownership, led to the
birth of the supermarket. As incomes rose and shoppers sought both convenience and new tastes
and various choices, supermarkets were able to expand the products offered.
Secondly , the development of e-technologies has also boosted this trend. The invention of the bar
code allowed a store to manage thousands of items and their prices and led to 'just-in-time' store
replenishment and the ability to carry tens of thousands of individual items. Computer-operated
depots and logistical systems integrated store replenishment with consumer demand in a single
electronic system.
In food processing , concentration has increased sharply in major commodity producers such as
meatpacking and grain milling firms. In addition, a series of large mergers in the late 1980's led to
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Project : Development of UK Food Retail Supply Chain
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the formation of a few very large companies with a presence in a wide variety of branded product
categories. Many branded food product categories have become highly concentrated over a long
period.
1.2.3 The Situation in the UK
In the UK, the food retailing industry is dominated by few major multiple retailers. The growth of
the UK multiple retailers means that purchasing power in the retail marketing channel is
concentrated in the hands of a relatively small number of retail buyers.
These sharp structural shifts have given rise to new ways of conducting business with more
contracts, alliances, and preferential agreements in supply chain management. Some evidence
suggests that retailer has been expanding their power among the food retailing supply chain. For
example, the wide-use of slotting allowances (fees charged to processors for the right to offer a
product in a store) and retailers' own label brands are expanding. However, the widespread
implementation of ECR has led the change in manufacturer-retailer relationship in the UK food
supply chain, with adversarial trading relationships being replaced by co-operation and
co-ordination, facilitated by a willingness to exchange information of both strategic and operational
importance. As a result, the world's leading food manufacturers are shaving days off of production
lead times, weeks off of inventory levels and months off of New Product Development (NPD)
cycles, delivering a more effectively managed range of carefully targeted products and services to
increasingly diverse groups of consumers, at substantially lower costs. The food retailing sector has
still a long way to go, but it is evident that the continuous development among the food supply
chain management is here to stay and likely to remain a key point of focus for the leading players in
the future.
This dissertation aims to examine the development of supply chain in UK food retail industry by
theoretical analyses and typical case studies. In chapter 1, I firstly review the previous literatures
about supply chain and also supply chain management; and then briefly introduce the background
of UK food supply chain including the emergence of supermarket, the industry supply chain
process and the situation nowadays. Chapter 2 outlines an overall picture of the development of UK
food supply chain by discussing the concentration trends of the industry, the emergence of retailer
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Project : Development of UK Food Retail Supply Chain
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own label products, implementation of new technological innovations and management innovations,
and the power shift from manufactures to retailers. Chapter 3 illustrates the implementation of the
new technological innovations, in particular, the ECR practiced in food supply chain. Chapter 4
examines today's power structure of UK food supply chain, and concludes the types of
relationships that exist between retailers and suppliers within the supply chain. The issue of power
balance in the supply chain is also discussed; and the impacts of ECR on retailer-manufacturer
relationship are further interpreted. In order to illustrate that the success experience of automotive
supply chain could and has been used in food retail supply chain, chapter 5 and chapter 6 describe
the background and evidently successful practices in automotive industry, and then, a typical case
of how Tesco leant from Toyota is explained.
The major methodology adopted in this dissertation is surveying the literatures about supply chain
operations in UK food retail industry and also in automotive supply chain, from the business press,
academic publications and Internet resources. Meanwhile, to get the first-hand practical information,
interviews with retail staff were also conducted.
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CHAPTER 2. OUTLINE OF UK FOOD RETAIL SUPPLY CHAIN
The food industry comprises a wide range of agricultural activities that are linked to consumers via
farms, processing companies, distribution and storage companies, food manufacturers and, most
importantly, food retailers. In the UK, the food industry, including its supply chain, has seen
significant developments during last few decades. UK food retailers are among the most
sophisticated in the world.8 They have always acted as a pioneer in a lot of technological
innovations and management revolutions.
Fundamental changes can be identified in the UK food retail sector when reviewing the last few
decades. The implications of these changes on organization structure and behaviours in both food
manufacturer and retailer are significant. Firstly, retailers have been playing the leading role in the
development of the food retail supply chain. Retailer concentration and the emergence of own label
products increased the capacity of a relatively small number of retail giants to exert power over
their suppliers. On the other hand, implementation of technological innovations (new information
systems in processing, storage, packaging and logistics, such as ECR) combined with management
revolutions (such as Lean concept and JIT principle), significantly improved the efficiency
throughout the whole supply chain and led the industry to a new era. This chapter provides an
overall picture of the development of UK food retail supply chain during last few decades,
including changes in the organisation structure and the impact of new technologies and
management tools, in addition, to considering the power shift which has resulted from these
developments.
2.1 Industry Trends: Concentration
Although the individual trends differ, it is clear that all the elements of the food industry are
consolidating, from retailer, to manufacturers/processors and even farmers.
With the social and economic changes in the UK, characterized by a higher standard of living on
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Project : Development of UK Food Retail Supply Chain
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the part of a more mobile and more geographically concentrated population, retailer concentration
has been massive, and had continued into the 1990s. Retailer concentration since last century is
unambiguous and striking, as the figures in Table 1 demonstrate.
Table 1: Grocery market shares by types of outlet (% of sales). 1982-1992
(Multiples: retailer who has 10 or more branches)
Year
Multiples
Co-operatives
Independents
1982
64.7
13.1
22.2
1984
8.7
11.9
19.4
1986
71.8
11.1
17.1
1988
73.9
10.9
15.2
1990
75.8
10.3
13.9
1992
78.0
10.4
11.6
Source: Adapted from Trends in Grocery Retailing -The market review IGD, 1993
Howe (1998), on conducting a study of vertical market relations in the UK food industry, reveals
statistical evidence of a much higher level of retailer concentration.9 For example, he concludes
that approximately 50 per cent of all grocery purchases in the UK are serviced through only 75
distribution centres. As Howe reveals, the UK has "a small group of food/grocery retailers who
dominate or at the very least have the opportunity to dominate their trade suppliers".
Meanwhile, supermarkets are changing as chains construct larger stores in a variety of formats.
Mergers among supermarket chains have led to increased concentrations nationally and globally.
ASDA has merged with Wal-Mart, and the recent Safeway bidding war is the latest hot issue hitting
the industry. The emergence of the supermarket has become the dominant food retailing form. With
the growth in the market share of the multiples in the UK , a few major multiple retailers now
dominate the food retailing industry, with the top four (Tesco, J Sainsbury, Asda and Safeway),
accounting for almost two thirds of the total grocery market. The growth of the UK multiple
retailers means that purchasing power in the retail marketing channel is concentrated in the hands
of a relatively small number of retail buyers (Figure 3: Shares of food retailing market).10
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Project : Development of UK Food Retail Supply Chain
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Tesco
Sainsbury
ASDA
Safeway
Morris on
Other
Figure 3: UK Retailing Market Share (1999)
On the other hand, consolidation among the food manufacturers/processors has a much longer
history. The extent of consolidation can vary markedly across different sectors, but is typically high.
By 1998, just seven companies accounted for almost half the total turnover of food manufacturing.
Within specific sectors the degree of concentration is even more marked. For instance, at the turn of
decade Associated British Foods account for about 35% of the UK bakery market, and United
Biscuits holds 47% of biscuit market and 38% of snack food market (Keynote Market Review,
1991).11
In addition, compared with the tendency of continuous consolidation in the retail and
manufacturing sectors, the individual farm businesse seems to work in comparatively isolation.
However, it is a fact that the number of farms all over the world, including the UK, have
diminished sharply, and this has resulted in more and more farmers organising marketing groups,
associations, cooperatives in order to maintain viability while competing with more powerful
manufacturers and retailers.
There are certain drivers which have forced these changes. Retailing stores have been organized in
multiple chains since the late nineteenth century, and their growth at the expense of single stores
has continued ever since.
12
These chains found that larger stores benefited from economies of
scale, and this began a trend that has continued until the present day: the number of outlets has
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Project : Development of UK Food Retail Supply Chain
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declined but their size has increased. They have been overtaken by the emergence of a relatively
small number of companies operating hundreds of stores, some growing from old-established
family businesses, others newly established. In addition, wider car ownership led to the
development of supermarkets with car parks and from the mid-1970s to the increasing success of
superstores, with a selling area of more than 2,300 sq metres, often located on edge-of-town or
out-of-town sites, with large car parks.
Nevertheless, rising incomes, easy mobile excess, and change of consumers' behaviours are not
driving this tendency of concentration alone. Infrastructure development, new channels of
distribution and the emergence of professional retailing are also the key drivers to allowing more
products to be within the reach of consumers. In the late 1980s the larger multiples changed their
distribution systems. Suppliers ceased making deliveries to individual stores and instead delivered
to new regional distribution centres (RDCs), from which the companies forwarded goods to their
stores, thus greatly reducing the number of individual deliveries. This development also reduced the
space required for holding stocks in the stores, many of which were able to expand their selling
space within a building unchanged in size. Greater use of EPOS (electronic point of sale) systems
as an excellent part of ECR in practice, with direct links to RDCs and head offices led to greater
efficiencies in store replenishment, while Electronic Data Interchange (EDI) and other
developments improved the reordering process.
2.2 Emergence of Own Label Product
The other major trend is the strong growth in private labels and in particular the emergence of the
store as a brand. Since taking its first trembling steps in the UK in the 70's (Howe, 1992), private
label product has now become a rather common activity of retailers and continues to see gains in
market share on almost all developed markets. Due to cheaper price than branded products, today,
private label is more controlled and marketed by the retailer as opposed to the brand manufacturers.
In addition, the greater size of retail chains has given them more leverage to obtain favorable deals
on their own label ranges, and they have become a relatively quick and easy means of bolstering
margins and profits. It perhaps most directly threatens the branded major manufacturers, and has
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Project : Development of UK Food Retail Supply Chain
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caused considerable consternation.
So it is worthwhile to define what is a private label product. Take corn flakes for instance. A private
label pack is a pack of cornflakes where instead of Kelloggs name on the front, there is the
retailer's brand name written on the package with almost certainly a cheaper price. Meanwhile, to
target diverse groups of consumer, retail chains also provide different private labeled products with
different price level to suit different shoppers. Generally, there are three basic types of retailer own
label product ranges.13
æ Generic or No-name Brands
At the bottom of the range is the Generic or No-name brand. This approach is widely adopted in the
fresh fruit, vegetables, meat and cooked food areas. Generic brand products are usually used by the
stores to differentiate themselves from others.
æ Economy Brands
Economy Brand are those where the label explicitly tells the consumer that this is a brand from a
certain retail chain. On the surface, they usually seem very simple with a common logo, for
instance Tesco Value in Tesco and SmartPrice in ASDA, and same style plain packages are used
different products. The prices of economy brand products are always half or even less than half
those of manufacturer branded products.
These economyl brands serve one or both of the following purposes:
1. They act as the cheap/best-buy alternative to manufacturer brands, and sometimes also store
brands.
2. They also provide a competitive edge towards hard-discounters. ("You can find cheapest
products in our store as well")
Having said that, some retailers, notably in England, have been very successful in moving their
store brands up the value ladder.
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Project : Development of UK Food Retail Supply Chain
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æ Store Brand
One step up there is the Store Brand. These products are priced higher than the economy ones - but
often still sell at a discount (10-20 per cent) compared to the major manufacturer brands.
Store brands are a marketed brand with an attractive design and bright packaging created by the
retailer. The Store brand in fact competes head to head against manufacturer brands, trying to create
its own value positioning. The interest for the retailer in having these value brands is that by
creating separate labels, each label can be given a separate positioning, depending on category,
pricing, width of offer etc. Retail chains recognise that they are selling a package and focusing on
image, quality and consistency. This kind of retail own label product in the UK is not aimed at price
sensitive, quality insensitive consumers. Generally, the products are seen as competing
head-to-head with the major manufacturers' brands in the same quality market.
While driving innovation and attempting to capture more market share from the manufacturer,
retailer own label products have experienced strong growth. In 1965 only 10% of total packaged
grocery sales were retailer own brands, but by 1979 the figure had risen to 22% and to over 27% by
1984. In 1990, more than half of Tesco's sales were own label.(Retailing World, 1990 No.19).
Meanwhile, by developing new products with their own label, retailers have eroded the profit based
of the manufacturer. Some industry analysts believe that the encroachment of own label goods is
the main factor behind the relatively poor performance of food manufacturers. This philosophy has
been adopted in the food category, where own label dominates, to the extent that own label has
become a key factor in the major supermarkets' attempts to differentiate themselves from the
competition.
Besides, data revealed that the ambition of all the major retailers to extend own label market share
still further is confirmed by massive increases in advertising expenditure focused specifically on
own label (as distinct from general retail promotion) in the late 1980s and early 1990s. In 1996,
four of the top 10 highest advertised food grocery brands were retailer brands.14
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2.3 Implementation of new technologies and management tools
As incomes rose and shoppers sought both convenience and new tastes and stimulation, retailers
have been able to expand the products offered. During the last two decades, the development of
new technologies and management tools in food supply chain has been significant. The invention
of the bar code allowed a store to manage thousands of items and their prices and led to
'just-in-time' store replenishment and the ability to carry tens of thousands of individual items.
Computer-operated depots and logistical systems integrated store replenishment with consumer
demand in a single electronic system. In particular, the degree of usage of Internet-based
information exchanges and the sharing of information between supply chain partners is a key factor
that will ensure that the players of UK food industry will survive. Cost savings can be achieved and
supply chain efficiency can be enhanced through greater collaboration between supply chain
partners in implementing of new technologies and management concepts. The e-technologies are a
basic tool for most of technology innovations and has enabled more efficient management activities
to be implemented. The important supply chain innovations are summarised below.
æ e-Technologies
The "e" technologies, in particular, the Internet and its attendant techniques, have fundamentally
changed the traditional supply chain operations in UK food industry. E-technologies have the
potential to drive all the participants of the supply chain forward faster and more effectively than
any other medium. Because it has the power to distribute information and new ideas across the
channels instantaneously, the technology can bring companies of the food supply chain together to
work toward common goals, and enable them to improve their performance.
The retailers, especially, leading retail chains are the main driver of implementing e-technology
into food retailing practice. For the retailer itself, the Internet usage in supply chains is mainly
utilised in internal supply chain processes such as ordering, processing of customer, and tracking of
shipments, which contribute to cost reductions. The primary benefits that can be derived from
e-technology-based type of supply chain services concentrate on the automation of processing
orders, payments and deliveries, reverse auctions, inventory clearance, scheduling, online
catalogues, negotiations, and 24-h availability. Meanwhile, the usage of electronic information
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Project : Development of UK Food Retail Supply Chain
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technology to control costs in every part of its system, allows retailers to sell at every day low
prices (EDLP) which could draw in an ever-expanding pool of customers.
More importantly, e-technology provides a possibility for retail leaders to integrate the resources
over the supply chain. The application of the Internet to supply chain activities enables firms to
exploit opportunities beyond traditional ownership of supply chains and maintains a constant flow
of corporate and customer information. In this respect, the implementation of e-technologies can
facilitate the collaboration with external firms to reach same goals of synchronised product
planning and promotional activities. The launch of the ECR initiatives, initially in the US food
industry in the mid 1990s and later throughout the UK, provided a paradigm shift that can be seen
in the management of the food supply chain (ECR will be further discussed, in detail, in next
chapter). As a result, the world's leading food manufacturers are reducing lead times, inventory
levels and New Product Development (NPD) cycle times, delivering a more effectively managed
range of carefully targeted products and services to increasingly diverse groups of consumers, at
substantially lower costs.
æ Development of Logistics and Management Tools
The continuous process of supply chain innovations and further development in logistics and
management tools has assumed a much greater importance in today's competitive environment of
food retail industry. A major piece of restructuring of the UK food industry can be seen in the
large-scale investment in the distribution infrastructure.
Historically, the retailers logistics teams have been responsible for managing the flow of
information along the Supply Chain. Distribution has been responsible for the physical storage and
delivery of goods. Now in multiple retailers, these two areas are working as a single division to
achieve shared objectives and make the Supply Chain a truly seamless flow of products and
information. Logistics have become critical in ensuring the expansion of food ranges, but more
generally the centralisation of distribution in regional logistical facilities by all the major retailers
has brought about a continuing acceleration of stock flows. There has been a rapid technological
and organisational innovation process of a major scale in the process of bringing food to the
consumer. The major retailers either have constructed their own large-scale, high-tech facilities, or
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Project : Development of UK Food Retail Supply Chain
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engage the major logistics companies (Wincanton, Excel, etc.) with equivalent facilities.
In addition, the new management tools are also being implemented in UK food retail supply chain.
The most important JIT concept and Lean principles, which originated from Toyota in Japanese
automotive industry, have also been adopted to some extent by UK's leading retailers. Lean
management is an intellectual approach consisting of a system of measures and methods which
when taken all together have the potential to bring about a lean and therefore particularly
competitive management in a company. The main fields of activity concerned are product
development, the supply chain, and shop floor management. (The last chapter will illustrate a case
study of how lean management has been implemented in Tesco.)
To sum up, Infrastructure development, new channels of distribution and the implementation of
new management tools by retailers are the key drivers to allowing more products to be within the
reach of consumers.
2.4 Power Shift
With the horizontal concentration of retail chain and the emergence of retailer own label product,
there is a clear shift in power to the retailer. On the other hand, the development of logistics and
implementation of e-technologies also contribute a physical capacity for retailer to capture more
power over the UK food supply chain.
Manufacturer used to be the solo source of almost all new product development and innovations,
they controlled retail sales prices, physical distribution and even furthermore, retailers' margins.
They were also responsible for almost all advertising, and they powerfully influenced retailers'
stocking and displays. However, during the last two decades, manufacturers have come under
increasing commercial pressure from major retail chains who, now, are expanding their sizes
aggressively. The soar of multiple-retailers' sales, which are caused by the growth of retailer chains
and retailer own label product, led to a shift in the balance of power from manufacturers to retailers,
in particular, the leading multiple retailer chains.
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Project : Development of UK Food Retail Supply Chain
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Many food manufacturers now increasingly depend on a small number of major retailers. Many
suppliers do business with only one large-volume buyer. The buyer potentially can dictate terms
with many suppliers because any one is replaceable. However, it is difficult for a supplier to find
another buyer of comparable size. Meanwhile, there are many ways retailer can exercise their
market power, such as requiring bids on large volume orders, expecting prompt payment discounts,
demanding more in terms of product specification. Therefore, bargaining power has been shifting to
buyers. The forces behind this power-shift process are from many aspects, which I will discuss in
Chapter 4.
In addition, the move of the mergers and acquisitions of retailers, is leading to a change in the
power structure of food supply chain. The increasing power of retailers, inevitably bring the
vertical integration in the supply chain leading by the retail giants.
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Chapter 3. Management Innovation in Food Supply Chain
---- The Implementation of ECR
As I have discussed earlier there has been a number of fundamental changes in the UK food retail
sector over the last two decades. Retailers, in particular, the leading retail chains, have been a
catalyst for many changes relating to technological innovation and management revolutions.
Concentration in retailer size has increased not only the power but also the capacity of the leading
retailer to integrate the overall supply chain by firstly examining and then widely implementing the
new technologies. On the other hand, the significant improvement achieved by the adoption of
these new technologies, has also consolidated the leading role of multiple chains in the food retail
industry. Most researchers (Wood, P.K. 1996; Hoban, T. 1993; Sansolo, M. 1993)
15
agreed that the
most important innovation, which has not only significantly improved the efficiency and
effectiveness, but also deeply impacted the buyer-supplier relationship within food supply chain,
was efficient consumer response (ECR). This chapter briefly introduces the concept of ECR in the
first part. And then, the essential initiatives as well as business activities of ECR are further
discussed.
3.1 ECR Introduction
Efficient Consumer Response is a supply chain management strategy which attempts to address the
inefficiencies that have led to excessive inventory and unnecessary costs at all levels within the
food retail industry supply chain. ECR originated in the USA in 1992 as a direct result of threats
from alternative store "formats" (or types) and their supply chains which highlighted major
inefficiencies within the supermarket and its supply chain. In order to survive, the US food industry
leaders took an initiative to study how to improve the performance of the supermarket supply
chains in 1992. As a result of their study, the ECR initiative was established, and the term ECR was
first introduced at the US Food Marketing Institute Conference in January 1993 (Robins, 1994). 16
This ECR initiative is concerned with transforming the food supply chain from a "push system" to
a "pull system" - where trading partners form new alliance relationships and the replenishment of
store products is initiated by the point of sale (PoS) data.
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A lot of published papers (Cooke, 1994; Fiorito et al ., 1995)17 mentioned that, the concept on
which ECR is based actually originated from the quick response (QR) strategy, already existing in
the textile and apparel industries. QR, in turn, is based on the manufacturing just-in-time (JIT)
concept -- to deliver raw material to production areas in the exact required amount at the precise
time it was needed. The use of raw material pulls new raw material into the production process.
Quick response required the retailer to share point-of-sale scanned data with manufacturers to
improve the flow of product through the supply chain.
The food industry noted the success of the quick response approach to managing supply chain data
and proposed a similar stock replenishment system called ECR (Cooke, 1994; Fiorito et al.,1995).
Although ECR originated in the USA, the concept has attracted many European countries including
UK. The importance and applicability of ECR to the European food industry became more
noticeable in 1994 with the establishment of the ECR Europe Executive Board, which promotes
and advances the ECR initiative in Europe (Penman, 1997).18
As a management strategy particularly in food retail industry, ECR makes all the participants of
supply chain, eg. retailers, distributors and suppliers to jointly commit to work closely together to
bring greater value to the grocery consumer. Figure 4 presents the basic ECR model of food retail
industry.
Supplier
Warehouse
Distributor
Warehouse
Retail
Store
Consumer
Household
Product Flow
Demand Flow
A Single ECR Food Supply Chain Without Buffers
FIGURE 4.
A Typical ECR model
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3.2 ECR Initiatives
The goal of ECR is to take out of the supply chain costs which do not add consumer value (Robins,
1994). Kurt Salmon Associates (1993)19 argued ECR is about producing efficiencies in the food
supply chain to meet the goal of better fulfilment of consumer needs via the implementation of a
four-part business process:
· Efficient Store Assortment (ESA) ;
· Efficient Product Replenishment (EPR) ;
· Efficient Promotion (EP) ;
· Efficient Product Introduction(EPI).
(Table 2 provides more detail).
ECR Process
Scope
Efficient Store Assortment (ESA)
Provide a complete, easy-to-shop,
assortment of products wanted by the
consumers
Efficient Product Replenishment (EPR)
Maintaining high in-stock levels of the
required assortment
Efficient Promotion (EP)
Harmonising the promotion activities
between manufacturer and retailer by
communicating benefits and value
Efficient Product Introduction (EPI)
Developing and introducing new
products the consumers really want
by meeting their ultimate needs
TABLE 2: The four pillars of ECR
(Source : Adapted from Christopher, M. 1998. Logistics and Supply Chain Management . Pitman Publishing, U.K)
æ Efficient store assortment (ESA)
The objective of this initiative is to optimise the productivity of inventory and shelf management at
the consumer interface - the store level. Optimal allocation of goods on supermarket shelves
(known as "store assortment") maximises consumer satisfaction by providing the best products and
services while, at the same time, ensuring the most efficient use of available space to increase
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manufacturer, distributor and retailer profitability. The relationship between manufacturers,
distributors and retailers is crucial in achieving efficient store assortment. To streamline business
practices in the area of store assortment, manufacturers, distributors and retailers need to adopt a
"category management" strategy.
æ Efficient Product Replenishment (EPR)
The efficient product replenishment initiative is the fundamental platform which supports the
overall ECR strategy. In the US grocery industry, EPR has even represented more than half the
total savings projected from ECR implementation (Kurt Salmon Associates, 1993). The objective
of this initiative is to optimise time and cost in the replenishment system by the provision of the
right product to the right place at the right time in the right quantity and in the most efficient
manner possible. In order to remove inefficiencies in product replenishment (for example, high
inventory levels and carrying costs and sporadic manufacturing schedules), a "continuous
replenishment program (CRP)" approach is required.
æ Efficient promotion (EP)
The efficient promotion initiative aims at maximising the total system efficiency of trade and
consumer promotions. Efficient promotion attempts to eliminate inefficient trade promotions
(forward buying and diverting) by introducing better alternative trade promotions such as "pay for
performance" and "forward commit":
• pay for performance is concerned with rewarding retailers on the basis of how many products they
sell to consumers, rather than how many products they buy from manufacturers;
• forward commit relates to spreading the actual shipment of one order over several physical
deliveries. This allows retailers to take the pricing benefits offered by manufacturers at a particular
period in time (just as in the case of forward buying), without having to carry the inventory. In
essence, this technique operates on "virtual inventory" which will be transformed into "real
inventory" when required.
The use of paper-based coupons as a consumer promotion technique can be replaced with
electronic coupons, frequent shopper systems, every day low price ( EDLP ) policies and other
efficient incentive programmes. Thus, the efficient promotion initiative endeavours to remove
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excessive costs by reengineering promotion practices, and is also supported by the "category
management" strategy.
æ Efficient product introduction (EPI)
The objective of the new product introduction initiative is to maximise the effectiveness of new
product development and introduction activities in order to reduce costs and failure rates in
introducing new products (Kurt Salmon Associates, 1993). This is achieved by the involvement of
wholesalers/distributors, retailers and consumers at an early stage of the new product development
process.
Manufacturers, distributors and retailers must work together as allies to reduce the costs of product
development and to produce only products anticipated and demanded by the consumer marketplace.
Once again, the "category management" strategy plays a crucial role in achieving this initiative,
because of its contribution to an understanding of successful existing products.
3.3 ECR Business Activities
To achieve above four efficiencies, ECR requires the following major business activities or
initiatives (De Roulet, 1993):20
• Category Management (CM);
• Continuous Replenishment Programme (CRP);
• Computer Assisted Ordering (CAO);
• Flow-Through Distribution (cross-docking);
• Integrated Electronic Data Interchange (EDI);
• Activity-Based Costing (ABC).
Adopted from the study of Harris, J.K. et al., 21 above ECR business activities could be described
as following.
æ Category Management (CM)
The term category management first appeared in 1987 when certain organisations, such as Procter
& Gamble, began moving from "brand" management to management "by category". Category
Management (CM) has evolved to mean a process that involves managing product categories as
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business units and customising them on a store-by-store basis to satisfy consumer demands. A
category is a group of products having a common consumer end use and includes such things as
household cleaners, dairy and frozen foods, paper products, health and beauty care products, soft
drinks, etc. Category Management allows the category manager to operate a category like a
business so as to identify optimal product mix; and to stock each store with specific products that
demographic and point-of-sale (PoS) information indicates customers wish to purchase. Category
Management enables retailers to assess the sales, costs and profitability of each stock-keeping unit
(SKU) in a category. Retailers could also use information from Category Management to make
decisions about the addition or subtraction of SKUs, promotion choices, quality maintenance, and
reduce shrink. Category management is supported by EDI and barcode applications.
æ Continuous Replenishment Programme (CRP)
Continuous replenishment Programme (CRP), usually managed by the manufacturer, is a
programme used to control and monitor the movement of goods from the manufacturer to the
warehouse/ distributor. CRP involves the manufacturer (rather than the retailer's warehouse) taking
responsibility for replenishing the warehouse inventory, with the buyer supplying actual warehouse
inventory withdrawal data and data on "stock-keeping units"(SKUs) to the manufacturer. CRP
programmes reduce costs in distributors' inventory, but can increase some costs, such as
transportation costs, if the manufacturer ships smaller truck loads more frequently. Successful CRP
implementation is dependent on effective trade relations, requiring shared business practices and
information systems which rely heavily on EDI.
æ Computer-Assisted Ordering (CAO)
Computer-assisted ordering (CAO) covers the second half of the overall inventory supply chain -
the movement of goods from the warehouse/distribution centre to the retail store. The aim of CAO
is to generate store replenishment orders automatically, with minimal management intervention,
based on such things as current and historical PoS scan data, delivery data and sales forecasts. The
benefits of CAO have been identified as labour savings and dependability, warehouse and shipping
improvements, and inventory reduction. Traditionally, stores have based their orders on the re-order
staff manually inspecting the store shelves and scanning the shelf-tag barcodes for those items with
limited stock on the shelf. The re-order amount entered by the staff is based on the actual shelf
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amount and the ideal shelf quantity. The re-order staff is not in a position to take into account PoS
data, inventory which has already been scheduled for delivery, or likely future trends based on
forecasting. Integrated CAO systems are designed to minimise (and even eliminate) these
problems.
æ Flow-Through Distribution (cross-docking)
The purpose of flow-through distribution is to hasten the flow of products from the supplier to the
retail store by reducing storage and handling of products at the distribution centre or warehouse. It
involves the breaking down of pallets at the distribution centre, reassembling them for store
delivery and then shipping them to the retail store without ever storing the product in the warehouse.
This requires significant investment in technologies such as EDI, barcoding and scanning of pallets
and cases; and warehouse design changes such as lower ceilings and less racking. The key EDI
transaction required for cross-docking is the Advanced Shipping Notice (ASN), to inform the
distributor of the merchandise that is about to arrive. The automation of the warehouse inventory
management system using barcodes means that inaccuracies can be eliminated.
æ Integrated Electronic Data Interchange (EDI)
EDI is the computer-application to computer- application communication of structured, formatted
messages based on international standards, using electronic transmission media with no manual
intervention. EDI is a technology which allows structured information to be shared among
organisations in the supply chain resulting in significant reductions in transaction costs and
enabling the organizations to adopt new and more effective and efficient business strategies, such
as ECR. The EDI systems have been used in the exchange of purchase orders and invoices
electronically for better inventory management and demand forecasting. EDI is viewed as the
essential effective enabler of the ECR management strategy because it focuses on achieving
integration across organizational functions and between organizations in the food supply chain.
æ Activity-Based Costing (ABC)
Activity-Based Costing (ABC) provides the cost and operating information necessary to support
innovative management improvement initiatives such as ECR. The focus of ABC is on accurate
information about the true cost of products, services, processes, activities, distribution channels,
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customer segments, contracts and projects. ABC supplies information about profits (where the
money is being made) rather than about costs.
Traditional accounting systems use gross margin calculations that spread operating costs across all
products based on unit purchase price regardless of the actual value chain through which the
product passes. ABC focuses management's attention on controlling the source of costs, decisions
that create activities, rather than squeezing budgets. Therefore ABC as part of ECR can increase the
profitability of the supply chain by removing or reducing those cost activities that do not add value.
This cannot be done with traditional systems because they do not reflect costs accurately.
3.4 The Impacts on Buyer-Supplier Relationship
For decades, food retailers (buyers) and manufacturers (suppliers) have acted more as adversaries
than as partners. However, effective supply chain management requires trading partners to share
long-term strategic objectives, develop mutual trust and work together to identify the most efficient
and effective way of reaching their objectives. The emergence of ECR significantly boosted the
process of developing effective supply chain partnerships.
The fundamental principle of ECR is that through partnership within the food supply chain,
significant cost reduction (efficiencies) and improved performance (effectiveness) can be achieved
through a better allocation of shelf space in the retail store, fewer wasteful promotions and new
product introductions and more efficient physical replenishment. The key to the achievement of
these goals is shared information, in particular, information on sales gathered at the checkout and
transferred directly to suppliers through EDI. Using this shared information, manufacturers and
retailers can create more consumer value through the supply chain.
Whilst ECR brings many potential benefits to both suppliers and retailers, in terms of
improvements in efficiency and effectiveness, the biggest opportunity it presents is to enable real
supply chain collaboration. By sharing information it enables supply chains to effectively become
demand chains, and in so doing to deliver enhanced customer value. Even though commercial
realities will prevail so that individual entities in the supply chain will still seek competitive
advantage, there now exists a framework in which they can co-operate not only to "grow the cake"
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but to decide how it will be divided.
Although forging successful partnership between historic adversaries - retailers and manufacturers
- is a challenge, the implementation of ECR and its business activities over the last decade has
resulted in a fundamental change that co-operation between trading partners is more effective than
confrontation. This process not only enabled retailers to identify those suppliers best equipped to
implement ECR, it also enabled them to identify the level of commitment from their food suppliers,
which in turn assisted them in their rationalisation of the supply base and the search for technical
excellence and competitive edge in the food supply chain.
All in all, the implementation of the new management innovations, such as ECR, would have
inevitably impacted the power structure of food retail supply chain and the buyer-supplier
relationships in the food industry, which I will discuss in the next chapter.
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Chapter 4. Power Relations in UK Food Retail Supply Chain
The concept of power evokes different sentiments from different researchers (march, 1966),22 in
part because researchers have approached the concept from different disciplines. However, most
researchers agree on the notion that power resides in the ability of one party to make another do
what it would not have otherwise done.23 Here power means the availability of alternatives and the
cost of switching to such alternatives. Applying this theory to the UK food supply chain, power is
the force which drives the development trends of the industry; Also, the holders of power are the
players who lead the implementation of the innovations into practice and dominate the negotiations
with other participants of the supply chain.
Chapter 2 considered that the organisation structure of UK food retail supply chain had
dramatically altered during the last two decades with the trends of concentration and wide use of
new technologies, which brings a power shift from manufacturers to retailers. In chapter 3, I also
mentioned that both manufacturers and retailer seemed to want a more co-operation relationship
rather than confrontation between them through the use of ECR. In this chapter, I will discuss the
power relations among the participants of UK food retail supply chain, by interpreting the
power-shift trends and analysing various relationships among the industry players.
4.1 Power Structure within UK Food Supply Chain
In the UK food industry, manufacturers used to be the source of almost all product innovations and
new product developments, they controlled retail sale prices (and therefore retailers' margins) and
physical distribution, they were responsible for almost all advertising, and they powerfully
influenced retailers' stocking and displays. The growth of major retail chains, however, led to a
shift in the balance of power and gave the large retailer the prerogative in the negotiation with
manufacturer. Researchers have focused on the changing relationship between retailers and their
suppliers and the widespread consensus is that the balance of power has shifted from food
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manufacturers to retail chains (Burt and Sparks, 1994).24
The heightened dependence of food manufacturers on a small number of major retailers is
significant. Retailer concentration, new channels of physical goods distribution, the emergence of
own label products, and the use of new information systems have combined to increase the capacity
of the retail giants to exert power over their suppliers.
Bargaining power has shifted to buyers. Nowadays, many suppliers do business with only one
large-volume buyer. The buyer potentially can dictate terms with many suppliers because any one is
replaceable. However, it is difficult for a supplier to find another buyer of comparable size.
Meanwhile, there are many ways retailer can exercise their market power, such as requiring bids on
large volume orders, expecting prompt payment discounts, demanding more in terms of product
specification.
The forces behind this power-shift process are not difficult of find. With the trend of retailer
concentration, the market is dominated by a few large retail chains. Although size alone does not
necessarily increase power, size has enabled the large grocery retailers to take control over physical
goods distribution, to generate vast amounts of customer information, and to introduce own label
goods. Added together, these developments have enhanced the power of the major retailers.
æ
Control of Distribution Channel ---- From Push to Pull
In the past, manufacturers controlled distribution and "pushed" goods through relatively small
retailers. Today, the vast size of the large retailers means that they are pulled through from the
manufacturers. Advantages to retailers include bulk purchase discounts, improved stock control,
and tighter security all of which are said to have significantly contributed to the growth of the major
retailers. In this context, it is more likely that the large retailer, rather than the manufacturer,
directly determines the stock holding and product range on the criteria of space maximization,
turnover, quality and profit margin. Retailers are increasingly likely to desire just-in-time (JIT)
deliveries, which can inevitably be costly and damaging to the profitability of manufacturers.
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æ
Control over Information ---- EPOS
We are entering a new era of consumer awareness and concerns. Both manufacturers and retailers
are responding to this and are turning their attention to meeting consumer perceptions and
requirements. This requires the design of products and services to meet consumer requirements. It
is a major shift from the old "commodity" mentality of production at all costs and then worrying
about finding a market later.
A development that threatens manufacturers more severely than changes in distribution is losing
control over information, particularly customer information. Recent developments enable a few
giant retailers to generate vast amounts of information through EPOS (Electronic Point Of Sale)
and related systems on customers buying habits, daily demand variations and geographical
variations.
In the 1980s the benefits realized from EPOS were significant but largely focused on internal
efficiencies. For instance, savings were made from cutting out the labour involved in individual
pricing of goods and faster and more inefficient throughput at the check-out. Customer throughput
information was also used for more efficient staff scheduling, and for limiting fraud by eliminating
the opportunity for check-out operators to deliberately enter lower prices on the keyboard. Some
retailers have also used EPOS information to establish throughput norms and to monitor the
number of items per hour that check-out operators pass through. More recently, retailers have
increasingly turned attention to more strategic uses of the vast amounts of information being
generated based on more sophisticated analyses of the data. More sophisticated systems, in
particular, those for improving market analysis, and those relating to automated sales and stock
handling systems, were quickly developed and widely used by retailers. Thus, retailers could
successfully change the buying behaviour of customers. The extensive use of these information
flows can put manufacturers, who lack such knowledge, at a distinct disadvantage.
æ
Retailer Own Label Products ---- Store Franchise vs. Brand Franchise
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The introduction of the Value Added Concept is another important factor impacting the
manufacturer-retailer relation. With this concept, retailer own label products, which use the store
name as the brand, have seen strong growth. This approach directly threatens the established major
manufacturers, and has and does cause considerable consternation. Marks and Spencer, while
representing a small share of the food retail market, pioneered retail brands and, perhaps, provided
a model for other retailers. According to the Grocer (1996), since then, nearly all Britain's leading
food retail chains have developed their own label products which accounted for two thirds of sales
in 1996.25 Greater size gave the retailers more leverage to obtain favorable deals on their own label
ranges, and they became a relatively quick and easy means of bolstering margins and profits.
Having a successful own label range also helps give retailers a 'store franchise' to counter the
manufacturer's 'brand franchise'. The ambition of all the major retailers is to extend their own label
market share still further, is confirmed by a massive increase in advertising expenditure focused
specifically on own label (as distinct from general retail promotion) in the late 1980s and early
1990s.26 By developing new products with their own label, retailers are driving innovation and
attempting to capture more of the available profit from the manufacturer.
To sum up, in UK food industry, those increasing changes, such as retailer controlled distribution
channels, the retailer interface with the final customer, and the emergence of retailers own label
brands, are perceived as highly problematic by the manufacturers. The major retailers have been
able to take advantage of their size to exercise purchasing power, and to enhance their power
capacity by taking control of the key variables of distribution and information. The retailers, more
and more, dominate, lead and control UK food supply chain.
4.2 Supplier-Retailer Relationships in UK Food Supply Chain
The organisation and power structures of UK food retail supply chain has dramatically changed
over last two decades. The implications of these changes on all the partners of the supply chain are
also significant. The retailer has to try and cut costs to continue to compete internationally.
Obtaining savings from supply chain partners can only do this. This has been achieved through
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stronger and longer-term relationships with manufacturers, producers and distributors.
Having discussed the changing power shift from manufacturers to retailers in UK food industry,
now it is necessary to analyse the different relationships in this area.
Many researchers suggested that it was nonsensical to discuss the power relations in food industry
without focusing on a specific referent (Ogbonna E., and Wilkinson B. 1998; Robson A and
Rawnsley W, 2001) .27 On other words, it is essential to segment both manufacturers and suppliers
the to different groups according to their different market power. In the following part of this paper,
both retailers and manufacturers in UK food industry are segmented as two classes, namely,
primary retailers/manufacturers which are always the leading firms among their business field and,
secondary retailers/manufacturers which usually are either new or smaller competitors but also
have some degree positions in the industry. Due to different market they target, the relationships
with its counterparts also vary. Here, the complicated relationships between retailers and
manufacturers are concluded as four typical types. The following table briefly illustrates these types
of relationships with related participant in UK food supply chain. I will explain them in detail in the
following part.
Table 3: Types of Relationship in UK Food Supply Chain
( Primary Retailers : top four retailers
Secondary Retailers : large chains but outside top four
Primary Manufacturers : leading manufacturers with strong brands
Secondary Manufacturers : medium or small suppliers with secondary brands)
Relationship
So-called
"partnership"
Partnership
Alliance
High Dependence
Participants
Primary
Manufacturers
VS
Primary Retailers
Primary
Manufacturers
VS
Secondary Retailers
Some Primary or
Secondary Retailers
VS
Secondary
Manufacturers
Retailers
VS
Retailer own label
brands Manufacturers
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The first "so-called partnership" relationship between primary manufacturers and the primary
retailers has a perception of a degree of mutual dependence. While the advantages retailers are
given through market share and customer information may give them a great power capacity, the
manufactures retain a degree of countervailing power through brand franchise. For instance,
manufactures appealed to the government to curb retailer power that, they claimed, was to
detriment of customer choice and the price of goods. Hence retailers often find that they have to
tread carefully. Maintaining legitimacy can be an important motivator in developing
inter-organisational relations, and it is perhaps in response to a perceived threat to legitimacy that
the major retailers increasingly employ the rhetoric of "partnership" and "commitment" to
characterize their relations with some of their major suppliers (Warner, 1998).28 Therefore, in this
relationship, genuine partnerships are not easily to found in the supply chain; relations are more
often strained, and sometimes adversarial.
The second partnership relationship is between the primary manufacturers who are concerned with
developments in retail branding and are seeking to develop closer ties with those secondary
retailers, who are also large but outside top four, with few or no own label brands. This is part of
their on-going strategy to maintain brand franchise. It is possibly here that serious partnership
might be found.
The third one is the relationship between some primary or secondary retailers and secondary
manufactures. Here, the large retailers are developing strategic alliances with medium and small
suppliers of secondary brands. The reason for this is that retailers see it as a way to counter the
power of the major manufacturers. What the retailers thought is to stop them from being
complacent by eroding the power of the major manufacturers.
Fourthly , the relationship between retailers and their supplier of own label brands is in quite
dependent. Here, these suppliers are always like a subcontractor. It is easier for the retailers to
develop close relationship in which they dominate, because the high dependent situation of these
dedicated suppliers. In addition, retailers were willing to give greater access to EPOS generated
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information to such suppliers. Also, they even could directly control the management of such
suppliers. For instance, the retailers always require their suppliers to buy which kind of machinery
and to update which systems.
All in all, there is a more complicated picture of the power dynamics at play in UK food industry. It
is vital to understand the differentiated relationships when discussing the power structure in UK
food supply chain.
4.3 Balance of Power in UK Food Supply Chain
Ogbonna E. and Wilkinson B. (1998) have emphasised that power to control is not just dependent
on variables which can more or less be controlled by the party holding power, but also the extent to
which the party over which the power is held has "countervailing" power. The presence of
"countervailing" power can always be found to a greater or lesser degree in practice in the UK food
supply chain. The potential-to-excise "countervailing power within UK food supply chain leads
another issue that to balance the power over the supply chain is always suggested.
In the past, as long as retailers were small, autonomous and dispersed, they were highly dependent
on the large manufacturers. However, this is no longer the case now. Currently existed various
relationships have different power implications.
From the analysis above, covering the relationships between UK food manufactures and retailers,
can be determined that although the tendency of growing retailer power obviously exists, the
balance, in greater or less degree, is also the aim for most of players, including both retailers and
manufactures. Although pursuing more co-operative relationship is the increasing need for both
sides, the pure partnership or alliance seems hardly to realise in real life. According to the retailer
manager talked, when the major retailers publicly talk of developing "partnership" with the leading
branded manufacturers, it is only in their own terms. Retailers will only follow routes where it is in
their interest to do so.29 The manufacturers, on the other hand, also think more about directly
competing against retailer's own brand in order to avoid the erosion of their power. Brand franchise
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is the primary defence of the branded manufacturers, and potentially they have on their side public
intervention should the retailers overstep the mark. While both sides appeal to the need to maintain
competition and customer choice, the balance of power is uncertain.
On one occasion in 1977, Tesco removed all Nescafe and Maxwell House coffee from supermarket
shelves for a month, thereby forcing them to cut prices. But finally, the event ended in the retailer
capitulating. In this case, it might have had little effect on total retail turnover of Tesco, but the
danger of losing the customers who were loyal to Nescafe and Maxwell House was significant.
However, this instance appears to have been exceptional, implying that the retailers' continued
dependence on manufacturers' brands, at least in some sectors, limits retailer exertion of direct
control. There is likely an unwritten 'understood but unspoken' agreement, to resist price -cutting
or supply own label, between the leading firms of both sides due to the exist of "countervailing"
power.
4.4 More Co-operation not Confrontation
Traditionally, buyer-supplier relationships in food industry have tended to be towards the
inherently arms length and adversarial (Fearne A, Hughes D and Duffy R, 2001).30 An almost
exclusive focus on price, to the exclusion of other product attributes and supplier services, ensures
that supplier-retailer relationships are, characteristically, confrontational and, in most cases,
dominated by the retailer. In this type of relationship, the primary goal of buyers is to minimise the
price of purchased goods and services. This totally price-driven model has the effect of fostering an
ethos of constant confrontation between retailers and their suppliers - manufacturers, distributors,
growers etc. (and passing the advantages of this on to its customers through its EDLP - Every Day
Low Price - policy). Meanwhile, working with very limited net profit margins, retailers have come
to rely on slotting fees and promotional allowances to bolster overall profitability. Thus, the retail
product offer has more to do with transfer payments from manufacturers to retailers than the
presentation of a range of products that maximises shopper satisfaction. Under this model costs
could only be reduced by squeezing suppliers' prices which left them unable to invest in the
systems needed to ensure the quality control required by manufacturers. Therefore, the traditional
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adversarial model is a classic case of win/lose, with both buyers and sellers spending considerable
amounts of time searching for ways to capture some of the other party's margin.
This model of buyer-seller relationships does little to engender long term co-ordination or
co-operation between buyer and supplier. However, the introduction of concept such as ECR and
its widespread adoption in UK food supply chain, requires the retailer to appraise its relationships
with key suppliers and to move away from confrontation and towards co-operation.
As I have discussed in last chapter, the key principle of ECR is shared information between
manufacturers and retailers. Unlike in the confrontation relationship the benefit was finally
obtained by squeezing the profit margin of suppliers, in the partnership model of ECR, that benefits
can be accrued through a better allocation of shelf space in the retail store, fewer wasteful
promotions and new product introductions and more efficient physical replenishment by
collaboration between retailer and manufacturers. Although suppliers still have to be highly
competitive, under partnership arrangements cost reductions are achieved through cooperation
rather than confrontation. They state that bargaining is not based only on price but on how to reach
the target price while maintaining a reasonable level of profit for the supplier. Therefore the focus
of these relationships is on mutual benefit and as a result trust and collaboration replace mistrust
and antagonism.
Apart from partnership relation, strategic alliance is another co-operational relationship model also
widely practiced within the UK food industry. A strategic alliance is an agreement mutually entered
into by two independent firms to serve a common strategic objective. It is often more flexible than
a contract or full vertical integration. Central to the success of a strategic alliance are trust between
firms and a strategy which is to the mutual benefit of all the participants; sometimes the alliance
may also place legal obligations on the parties. For example, a meat processor might reach an
agreement with a group of pig producers to obtain finished pigs of a certain quality, providing
producers with a list of acceptable breeders. A meat processor might also introduce a high quality
packaged pork product jointly developed with a major retailer under a strategic alliance (Fearne &
Hughes, 1999
).31
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Chapter 5 Learning From Automotive Supply Chain (1)
----
Successful Experience from Auto Industry
During last century, automotive manufacturing has been recognised as the most economically
significant industry in the world, having stimulated most of the innovations in general industry. The
success automotive industry achieved also provides numerous resource for the other industries to
learn from.
The following two chapters illustrate an overall picture of how UK food retail supply chain could
has learnt from automotive industry. The outline of successful experience in automotive supply
chain and what food supply chain could learn from are introduced in this chapter. In following
chapter, a real case study will interpret how Tesco, one of the most powerful firms in UK food
industry, has been educated by Toyota.
5.1 Supply Chain in Automotive Industry
The automotive industry involves multiple players in long, complex, global supply chains. In the
last two decades, competition in this sector has increased significantly throughout the world.
Meanwhile, the focus of competition has been gradually shifted from the production of individual
company against company, to supply chain against supply chain.
The automotive business has been played out on a worldwide stage. The relationships within and
between automotive supply chains in the past tended to be fixed, linear and clearly demarcated. In
order to decrease production costs and increase the speed of the development of new products,
automakers have sought to outsource part of their traditional activities. Thus, Supply chains became
long and complex and there are many important players both upstream and downstream of the
major assemblers. Consequently, competition can be thought of as occurring between supply chains,
e.g., Nissan's vs. Ford's, with the added complexity that these chains may share common elements
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(e.g., component suppliers, dealerships, or even jointly developed products, for example), as well as
within supply chains, e.g., an assembler and component supplier each may want to add significant
and unique value to the vehicle's electronics capabilities. Speed and flexibility ( agility) in detecting
shifts in market opportunities and reconfiguring these supply chains to respond to those
opportunities will be the important rent-earning assets.
An insight into the supply chain of automotive industry shows that, unlike food supply chain which
is retailer-driven", the automotive supply chain can best be described as a "producer-driven" with
the supply chain with multi-layered production systems organised hierarchically into tiers (see
Figure 5). The governance structure of the automotive supply chain has changed gradually during
the last two decades. Previously, subsidiaries of transnational assemblers developed local supply
networks. Today, original equipment manufacturers (OEMs) and 1st tier suppliers tend to form
parallel global networks based on the global lead sourcing/follower supply.
Figure 5: A Simple Automotive Supply Chain
Consumers
Dealer Networks
OEMs/Asse
The transnational OEMs are the major players in co-ordinating production networks, including
2
nd
Tier Suppliers
3
rd
Tier Suppliers
1
st
Tier Suppliers
1
st
Tier Su
Lower-Tier Suppliers
ppliers
2
nd
Tier Suppliers
3
rd
Tier Suppliers
Lower-Tier Suppliers
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their backward and forward linkages. Vehicle assemblers are putting immense pressure on the
supply chain, reducing cost has became an essential aim for their operations.
Apart from cost reductions, the assemblers are also making increasing demands or enhanced
productivity, quicker delivery times and time to market. In order to improve the overall efficiency
of their operations, assemblers are now taking an active role in specifying the production and
quality systems of their suppliers. This has been prompted in no small part by innovations in
internal production flow and quality assurance (such as JIT production), which necessitate close
integration of production schedules, logistics and quality procedures between OEMs and their
suppliers.
Simultaneously , there is a global trend towards greater collaboration between vehicle assemblers
and component manufacturers in design, research and developing components. This signals a move
from the sequential and arms-length pattern of relationships that existed previously between
assemblers and their component suppliers. For example, over the last few years, assemblers have
shifted more of the responsibility for product design and production to their 1st tier suppliers.32
These new sourcing patterns have replaced the traditional supply chains and revamped the
relationships that OEMs have historically had with their suppliers.
In recent years car production and sales in the UK have reached record level. The UK provides a
manufacturing base for 7 leading volume vehicle manufactures, 9 commercial vehicle production
facilities, 17 of the top automotive design firms.33 The UK is home to the world's most successful
motor industry. With the investor from American, Japanese, and European continent manufacturers,
nowadays, automotive businesses in UK are leaders in many areas of manufacturing, purchasing,
product development and logistics. Major global investors have brought with them world best
practice to the UK industry. The skills and knowledge of the automotive industry provide a key
source for other industries, including food retail supply chain, to learn from.
5.2 Learning from Automotive Industry
It is really useful to discuss the supply chain management in automotive industry, and the lessons
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the food retailing supply chain could learn from it. The Japanese automotive supply chain is one of
the most successful examples in the global auto industry. The paramount importance of meeting
consumer needs, more quickly, more effectively and more efficiently led them to share their
strategic vision with their suppliers and their distributors and invite members of their respective
supply chains to contribute to the process of making the Japanese motor industry the 'best in class'.
Following the success enjoyed by the Japanese motor industry during the late 1980s and early
1990s, manufacturers worldwide began to view their supply chains as an important source of
competitive advantage and lead their changes in supply chain significantly.
The food industry has been slow to emulate the success of the motor industry and it is only in
recent years that supply chain management has made its way onto the boardroom agendas of the
world's leading food manufacturers and retailers. The changes of supply chain in the UK food
retailer sector over the last few decades are striking. Retailer concentration, new channels of
physical goods distribution, the emergence of own label products, and the use of new information
systems have combined to increase the capacity of the retailer to exert power over their suppliers.
Therefore, retailers, in particular, multiple retail giants inevitably take on the task of leading the
changes. Initially, the emphasis was on logistics and the reduction of leadtimes and inventory levels,
reducing uncertainty and making better use of production capacity and under-utilised resources.
Thus, efficiency was the key driver at the outset. More recently, the emphasis has moved towards
innovation and the creation of value-added in the supply chain, with new product development and
improved customer service a key motive for supply chain management in the new millennium,
embracing new technology and capitalizing on the information revolution which have been created
by the Internet. ECR with its business activities are the main forces driving these change.
As earlier discuss in last chapter, however, unlike what happened in automotive industry,
supplier-retailer relationships in food industry are more characteristically confrontational due to the
almost exclusive focus on price. It seems like the lack of trust between trading partners has made
the task more difficult and the process longer in food retail supply chain.
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5.3 Toyota Model
Toyota is widely acknowledged as one of the most efficient manufacturers in the world. It has
grown from humble beginnings to become the world's third-largest carmaker behind General
Motors and Ford. The main driver of Toyota's growth is not brilliant products, although they
regularly top the quality ratings, but a brilliant production system, whose logic pervades everything,
from customer relations, product development and manufacturing, to supplier relationships.
Because Toyota buys in three-quarters of the value of the car, a key part of its success is spreading
this logic to its first, second and third-tier suppliers, giving it the most efficient supply base in the
world. In Japan Toyota has around 300 first-tier suppliers - many western carmakers have more
than 2,000 - mostly co-located close to its home base in Nagoya. Each part number is sourced from
two or three different suppliers, and each supplier provides a wide range of part numbers to Toyota.
Relationships with suppliers are based on 30 years of joint process analysis to improve performance
and drive out waste and cost.
As a result, parts are made just-in-time as required by assembly and picked up every two to four
hours by milk runs from Toyota. At least 99.9995 per cent of the required parts are delivered right
first time, on time. In other words five missing, defective or late parts every one million - which
makes a huge difference when you are assembling 3,000 parts into a car every 60 seconds. Try
building 1,000 cars a day with 98.5 per cent availability - representing 15,000 defects per one
million.
Over the last 20 years, Toyota has also transformed its after-market parts distribution system using
the same principles. Dealers pre-diagnose and preorder parts they need each day, instead of
carrying months of stock, and get two to three deliveries a day on milk runs from local distribution
centres. These in turn are replenished daily from regional distribution centres (RDC). Most of its
parts suppliers can now make and ship all the parts required in a day by the next day to the RDC.
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The principles underlying Toyota's business system can be concluded as following:
• identify exactly the value the customer wants
• distinguish between the actions necessary to create that value and the actions which just add cost,
all the way from raw material to the end customer
• align the value-creating steps so the product moves through them with minimum interruptions
• only make and ship exactly what the customer orders or takes from the shelf, as quickly as
possible
• keep reconfiguring the value stream to remove interruptions and become evermore responsive.
What Toyota was doing is organising to manage the entire value stream for each product family,
rather than leaving each firm to optimise its own activities and buffer itself against others upstream
and downstream.
The aim is to pull products through the value stream quickly and accurately, rather than make a
forecast well ahead of demand and sell the resulting stock. It is based on improving operational
capability and joint process analysis, rather than relying on supplier auctions and big centralised
information systems.
5.4 The Situation in UK Food Sector
In the food sector, traditional retail supply chains work according to the motto "better, centralised
and distant". Each firm operating within these supply chains seeks to optimise its own activities and
buffer itself against others upstream and downstream. And customers are strangers, walking
anonymously through the store selecting from what is available.
The motto of tomorrow's leading-edge supply chains will be "fresher, simpler and closer".
Products will flow quickly and seamlessly down value chains which encompass many different
firms, in direct response to consumer orders. Consumers themselves will no longer be strangers.
Far from it, they will be an integral, crucial and value-adding link in the whole process.
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Such a customer-driven supply chain is, in many ways, a complete contrast to today's structure. All
the existing assets - including production facilities, distribution centres, logistics operations,
ordering systems and retail stores - have been designed and developed for the status quo. To
incorporate the trend of "fresher, simpler and closer" they will all need to be reconfigured.
Tesco, a pioneer of the supply chain reformation, has worked hard to improve processes in every
area of its supply chain over the last years, and already has many of the new progresses in place.
Between 1983 and 1996, Tesco made big strides towards modernising its supply chain, introducing
POS scanning, centralised automated ordering, centralised distribution, automated warehouse
control and EDI with its main suppliers.34
Despite its leading position in the retailing industry, Tesco knew there was still a lot more to be
done and sought the best role model to learn from. Toyota's success inspired the supply chain team
to further reform Tesco's supply chain. In 1996, a re-organising project was launched in Tesco by
working with Cardiff University Business School. The essential of this project was to introduce
lean concept, in particular learned from Toyota, into Tesco's supply chain. The following chapter is
an outline of this project.
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Chapter 6 Learning From Automotive Supply Chain (2)
----
Case Study: Supply chain Improvement in Tesco
Based in the UK, Tesco is now recognised as major International Group. It has delivered underlying
international operating profit of £212m and with now almost half its store space is outside the UK
until the end of 2002 fiscal year. The UK remains however Tesco's core business. It has grown
market share through its customer-focused strategy, and is continuing the aim to be Britain's best
value supermarket.
Tesco launched its Step Change programme ( Resource: Tesco Annual Report 2001 ), which has
delivered over £230m of efficiency savings which have been passed on to its customers. These
programmes have focused on primary distribution, labour schedulers and Continuous
Replenishment, all of which have been fully implemented in its stores. This has made the shopping
experience better for customers and simpler for stores. As part of this programme, the project of
introducing the successful experience of Toyota supply chain management to Tesco, occupied a
central role. This chapter examines this project after a briefly introduction of Tesco's supply chain.
6.1 Tesco's Supply Chain
The key to Tesco's successful UK strategy is that it delivers first-class value, choice and
convenience throughout the customer offer. To create value for customers and to earn their lifetime
loyalty is the Tesco core purpose.
Tesco sources a large number of products from producers across the UK. Tesco is indirectly the
biggest customer of UK agriculture. All products are supplied to Tesco in a finished state, ie they
have been washed, processed and packed prior to delivery to the Tesco store and so no processing is
done by Tesco. The suppliers buy the raw materials for their products from a variety of other
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suppliers, producers, growers or farmers and then process the product in some way to produce the
finished product that Tesco sells. Meantime, Tesco works hard to ensure its supply chain has the
capability to deliver good quality local products that are good value.
However, the power of consumers, coupled with intense competition in a mature market, has
created a challenging climate for retailers. Price and choice are as important as ever, but retailers
also compete fiercely on availability , product freshness , opening hours and ease of shopping. So,
each year, retailer supply chains must cope with more complicated challenges and higher
performance expectations.
Tesco has a different set of challenges associated with its 250 million customers worldwide. As the
market leader, Tesco is expected to test new approaches and push supply chain performance to new
levels. The role of the supply chain team is growing in importance. Tesco believes that the supply
chain team must help to deliver the corporate strategy, find new and cost-effective ways to please
customers and create a positive working environment in partnership with suppliers.
To cope with the new challenges occurred in industry, Tesco started on a journey of lean thinking
with just-in-time principles to re-organise its supply chain system. Generally, it can be defined as
the following five steps:35
1. Specify 'value' as defined by the customer and not by the company.
2. Map the supply chain and identify all forms of waste, i.e. any activity that does not add value for the final
customer.
3. Devise new processes ensuring that minimal physical contact is made with the product (one touch).
4. Aim to draw the product through the supply chain, i.e. at the rate of consumer demand rather than based on
production constraints.
5. Adopt a continuous improvement philosophy, never be satisfied with the status quo.
In addition, to avoid out of stock, in particular, the promotional items, a CPFR (Collaborative
Planning Forecasting and Replenishment) system was used to manage promotions with suppliers
more effectively. CPFR is a rigorous approach to sharing information following a series of 'best
practice' rules. It works well for them and their suppliers and also for their customers.36
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6. 2 Tesco's Supply Chain Reorganisation Journey 37
To cope with the challenges in new business environment, since 1996, a series of reform by
utilising lean thinking, from particularly Toyota, in Tesco's supply chain have been implemented.
The project aims to create a customer-driven supply chain. Such a customer-driven supply chain is,
in many ways, a complete contrast to today's structure. All the existing assets - including
production facilities, distribution centres, logistics operations, ordering systems and retail store s -
have been designed and developed for the status quo. To incorporate the trend of "fresher, simpler
and closer" they will all need to be reconfigured.
6.2.1 From traditional value stream to flow value stream
6.2.1.1 First step - mapping the traditional value stream
Tesco chose several product families, assembled a team from each operation and took a walk,
following both the product travelling downstream and the order travelling upstream, and drew a
map of the value stream.
It was an eye-opening experience (See Figure 6). The stream revealed that there were lots of rooms
for improvement. This is what they found in the traditional value stream in 1996:
Figure 6: Traditional Value Stream
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æ
High stock handling in the store.
More stock and handling at the RDC as every product was put away, pulled down and picked by
store. On the manufacturer's side, high level of stock were remained at the manufacturer's NDC in
order to respond quickly to incoming orders and cope with the lead times of batch production;
meanwhile, at the manufacturing and packaging plants, there are even more stocks of raw materials,
half products and finished goods. The project team found that, in total, the product had been
handled 170 times and spent up to 20 to 60 days (for fast to slow-moving variants of this product)
sitting in one of seven different stocking points.
æ
Low utilisation of machines
The production machines producing for Tesco were only producing saleable product for between
30 to 50 per cent of available time. The rest of the time was wasted by waiting, change-over, or
repair. This was typical of most manufacturing firms running batch production. Furthermore it
became clear trucks were only being used effectively for 30-50 per cent of available time, spending
time queuing to unload and often back-hauling empty.
æ
Bull-whip effect
The project team found that when the order issued upstream, it was processed in batches (overnight
or once a week) by eight different systems, and all double-guessing each other. Cardiff ITELS
Project calculated that the relatively smooth signal from sales was being amplified by a factor of
four . It made synchronised production unthinkable. Almost all this demand amplification was
caused by multiple decision points, long lead times, poor product availability, waiting to full truck
loads and different ordering cycles, reorder triggers and system algorithms. (See Figure 7)
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Figure 7: Demand Amplification
(Source: Cardiff ITELS Project)
æ
Lower fulfillment of the average shopping basket
While average availability of 98.5 per cent was good for that time, it translated into much lower
fulfillment of the average shopping basket of, say, 40 items. Before selecting substitutes, this
translates into a 55 per cent chance of finding all 40 items on the shelf. Even though the customer
will fill their basket by selecting substitutes, it reveals plenty of room for improving the
performance of the grocery supply chain, particularly for home shopping.
6.2.1.2 Second step - creating flow value streams
These reviews of the supply chain process and the resulting maps triggered off many studies and
projects at Tesco and its suppliers. As these projects progressed, Tesco began to understand what it
would take to create value streams which really flow towards the customer.
From the lean principles they concluded three objectives:
• one touch, continuous replenishment so products and orders flow through the value stream
quickly, rather than waiting to be processed in batches
• harnessing the data required to allow customers to pull the right products through the value
stream quickly, with as little amplification as possible
• applying flow and pull upstream to include production, packaging, transportation and store
handling.
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Applying these into practice, Tesco began to create a flow supply chain process (See Figure 8).
Lots of work were done in their shop floor and DCs. In the store, work began on ways to reduce
handling and streamline the flow of goods to the shelf. For very fast-moving products, such as soft
drinks, wheeled dollies replaced the need for shelving and shelf filling.
Moreover, these dollies could be loaded at the end of the production line and wheeled through all
the intermediate steps to the store without any further handling. Cross-docking has achieved in
these products, and in-store replenishment labour has been reduced by an impressive 92 per cent
and at the RDC by 85 per cent. Indeed 14 per cent of ambient volumes now flow on dollies and
Tesco has saved the cost of building an entire conventional RDC.
Figure 8: Flow value stream
Besides, more recently work also began in RDCs to streamline incoming receiving and inspection
and to prepare to flow fast-moving products straight through to sortation and dispatch, only putting
away the surplus from the full truckload.
These smaller, off-line stocks could also be used as a buffer - to cope with peaks and troughs in
demand - and safety stocks - against failures to deliver. At the same time, continuous
replenishment of store orders together with multiple deliveries, rather than batch processing
overnight improved speed and accuracy as well as levelling the workload in the store.
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6.2.2 Reorganising the supply chain
After above analysis in Value Stream maps, Tesco began its supply chain reorganisation project
through both its upstream manufactures and downstream customers.
6.2.2.1 Synchronisation and lean manufacturing - upstream
Tesco also began to explore how its systems could pass orders continuously to its suppliers, rather
than once a night. This delivers could lead the reduction in two aspects.
• Lead-times: it reduces lead times because orders are calculated when needed, rather than waiting
for a batch to run.
• Bull-whip effect: Suppliers' systems can respond on a continuous basis it helps to eliminate much
of the noise in the order signal.
This in turn opens up the possibility of making to order and synchronising production with demand.
High volume replenishment orders can then be delivered directly to the RDC, bypassing the NDC.
Many changes have been carried out by co-operation with its suppliers.
æ ECR to share the information
An important step is for Tesco and its suppliers to jointly analyse changes in demand patterns using
CPFR as an essential part of ECR system, to adjust production volumes and decide where the
off-line stocking point should be and how much stock it should hold at any one time. Tesco has, in
common with many retailers, struggled not with the concept of CPFR but with establishing a shared
need with its suppliers.
Many manufacturers of Tesco have already been using lean manufacturing techniques to achieve
much higher machine utilisation. Several have also been developing equipment to, for instance,
continuously fill a soft drink line, rather than mixing big batches in tanks, to make smaller and
variable-sized batches.
æ Lean manufacturing
The next step is to improve changeover times to the point where every product can be made every
cycle - every day fast-moving products and every week for slow-moving products.
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When companies have this level of accuracy and responsiveness together with leveled orders they
can begin to use much simpler pull systems to trigger production in line with demand, rather than
manually adjusting the weekly MRP schedule, itself based on relatively old forecast data. Many of
Tesco's suppliers were reluctant to move from batch manufacture to lean manufacturing and so
Tesco had a programme of education for them. It believed greater value could be delivered to
customers through the application of these principles.
æ Using milk runs to delivery stock
Besides, instead of suppliers delivering stock to Tesco distribution centers, Tesco picks up products
from suppliers using milk runs, very much like Toyota. This will help improve transport utilisation
and back-hauling, as well as allowing levelling and synchronisation of deliveries to RDCs. It will
also place a greater discipline on suppliers to have exactly the right products ready for shipment,
ultimately direct from the production line. Smaller suppliers might collaborate to run their own
milk runs to a consolidation point and milk runs could be extended upstream to pick up packaging
and ingredients.
6.2.2.2 Concerning more about the customers --downstream
Nevertheless, all above great work culminates in one place - where product meets consumer in
store, on the shelf. No supply chain can perform efficiently without information, but until recently
retailers had virtually less information about the most important supply chain player of them all -
their customers. They had aggregate data from bar code scanning, but they had no idea of who
these customers were, what they were buying, when or where.
Tesco always think much of customer information. Tesco has been filling that information vacuum
since 1993 when it launched its Clubcard scheme. In addition, after Tesco introduced home
shopping in the late 1990s, home shopping is conducted with known, named consumers whose
transaction data you can collect. Moreover, with home shopping, it is in the position - for the first
time - to discover what consumers wanted to buy but couldn't, because it was not available and its
staff had to choose a substitute for them.
All this data adds up to one critical change. The customer is no longer a stranger. Tesco could use
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loyalty card and home-shopping data to customise the range of products displayed in each store to
the buying profile of that stores' customers.
This will give customers a better targeted offer and at the same time ensure exactly the right stock
is in the right place, eliminating another source of order amplification and enhancing both the
customer experience and the effectiveness of the supply chain.
Stores that stock the products its customers want, rather than everything available in the retailer's
wide repertoire, are much more able to fulfil true consumer demand.
Furthermore, Tesco has taken the card much further and put it at the heart of its operational systems.
It acts as a focus for improving the operation and integration of the whole supply chain, not just on
the enabling IT.
6.2.3 Achievements
The achievements of these reformations would be significant. The data below are the rough
calculation by the project team to revealed the improvement that Tesco's supply chain would gain
once the reformations were implemented.
Traditional
Flow
Touches
170 170
Throughout time (days)
20-60
5-15
Stocking points
7
2
Machine effectiveness %
30-50
70-80
Transport effectiveness %
30-50
50-70
Transport trips (incl. Customer)
5
4
Decisions points
8
2
Order amplification
4:1
2:1
Service level %
98.5
99.5
Basket fulfillment % (40 items)
55
82
Table 4: Achievement
After all above pieces being taken in place, products will be made to order and picked up by milk
round, where they flow through the RDC and out to the store within five to 15 days, being touched
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only 70 times and stopping in only two stocking points. (See Table 4) Machine effectiveness should
rise to 70-80 per cent and transport effectiveness to 50-70 per cent, as well as cutting out one trip
and many extra miles. Orders will pass through only two independent decision points and
amplification will fall from 4:1 to 2:1. Most important of all, service levels will rise to 99.5 per cent,
increasing the chance of first-time fulfilment of the basket of 40 items to 82 per cent.
This must be a win-win situation for all parties compared with today's traditional value stream.
However, the foundation of the flow system is that every step becomes interdependent - and fully
capable of delivering exactly to promise. Without the collaboration with other throughout the
supply chain, there will always be a need to carry intermediate safety stocks.
In addition, sales and order data need to be passed upstream continuously with minimum
interruptions and manipulation. Without this there will always be the need at each point to
second-guess (bull-whip effect resulted) and keep buffer stocks. Of course, contingency stocks are
needed for known sales volatility, promotions and the introduction of new products.
Nevertheless, achieving this level of process excellence is still a long way to go. The flow value
stream could not obtain without co-operation with others in the supply chain. As I have discussed
in earlier chapter, the change of retailer-manufacturer relationship from traditional confrontation to
future cooperation is actually big challenge for both. In Tesco's case, the way forward is to build
win-win deals where both sides gain - such as smoothing orders in return for synchronised
production - and based on fair outcomes so that both sides want to continue to the next round,
driven by a shared view of the eventual outcome.
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CONCLUSION
The UK has seen a significant move in food industry. Above discussion illustrates these developing
trends of the UK food supply chain during last few decades and, reveals a more complex picture in
the future development.
Firstly, the supply chain effectiveness and efficiency is evidently improved. The widespread
implementation of technological innovations and the extensive organisation structure integration
have driven the UK food supply chain to be the "most sophisticated" example in the world. The
increased SKUs and service level, reduced leadtimes and stock level, significantly contributed the
industry's remarkable financial performance and customer satisfaction.
Secondly, the changing trends of UK supply chain during last few decades determined the leading
role of major retailers in the development of food supply chain. Meanwhile, with the increasing
process of power shift from manufacturers to retailers, a small number of retailer giants, have been
the key driving force behind these significant developments and leading further vertical integration
over UK food supply chain.
Thirdly, further development of new technologies, in particular, the deep and extensive utilisation
of ECR systems, suggests a fundamental change of retailer-manufacturer relationship is inevitable.
The important ECR philosophy - sharing information with the others in the supply chain -
determines that the benefits of ECR will only be fully realised if there is a move away from
traditional confrontational relationships to relationships based on co-operation, openness and trust.
Therefore, my conclusions are two-fold: first, the trend of power concentration on major retailers
has enabled them to implement the new technologies throughout all the supply chain and
consequently driven the development of UK food supply chain; secondly, further utilisation of new
technologies, on the other hand, requires the major retailers to release more power to their suppliers
in order to create a more co-operative relationship. However, forging successful partnership
between historic adversaries - retailers and manufacturers - in an almost "exclusive focus on price"
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market is a huge challenge, in particular, when the counterparts have unbalanced power.
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REFERENCE
1
Samuel H. Huang Mohit Uppal and J. Shi, A product driven approach to manufacturing supply
chain selection, Supply Chain Management: An International Journal , Volume 7. Number 4, 2002,
189-199
2
Christopher M. 1992, Logistics and Supply Chain Management . Pitman Publishing, U.K
3
Cox, A. 1999. Power, value and supply chain management, International Journal of Supply Chain
Management , Vol.4, No.4
4
Cavinato, J.: Identifying Interfirm Total Cost Advantages for Supply Chain Competitiveness.
International Journal of Purchasing and Materials Management 27(4), 10-15 (1991).
5
Lambert and Pagh, Kotzab, 1998, Supply Chain Management: Implementation Issues And
Research Opportunities, The International Journal Of Logistics Management, vol.9(2).
6
Hughes, D. and D. Ray. 1999. The Global Food Industry in the 21st Century, Food Industry
Management , Wye College, University of London
7
Fearne A., Hughes D. and Duffy R., Concept of Globalisation Management in a Global Food
Industry, Food Industry Management , Wye College, University of London
8
Fearne A. and Hughes D., Success factors in the fresh produce supply chain: insights from the
UK, Supply Chain Management: An International Journal. Volume 4. Number 3. 1999. pp.
120-128.
9
Howe, S. (1998), ``Vertical market systems in the UK grocery trade: analysis and government
policy'',
International Journal of Physical Distribution & Logistics Management , Vol. 26 Nos 6/7, p. 217.
10
All adapted from Schroder B., and Marks N., The Retailer-Driven UK Food Industry: Structure,
Performance and Implications for Australia, Australian Agribusiness Review - Vol. 4 - No. 2 -
1996, Paper 4.
11
Keynote Market Review, 1991, UK Food Market , Keynote Publications, Middlesex
12
Kogan Page, The Grocers, Andrew Seth and Geoffrey Randall, 1999.
13
According to the interview with Mrs Ann Plenderleith, the store of manager of ASDA Sefton
Park, Liverpool
14
Retail Business Quarterly Trade Reviews, No. 32, December, 1996
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Project : Development of UK Food Retail Supply Chain
Name : Yuanyi Fan
15
Wood, P.K. (1996), "Preparing for ECR at the store level", Chain Store Age , Vol. 72 No. 5, p.
230; Hoban, T. (1993), "Efficient consumer response (ECR): perceived barriers and opportunities",
PhD thesis, North Carolina State University, Raleigh; Sansolo, M. (1993), "ECR", Progressive
Grocer, Vol. 72 No. 11, pp. 47-50.
16
Robins, G. (1994), " Sailing into ECR's uncharted waters " , Stores, Vol. 76 No. 10, pp. 43-4.
17
Cooke, J. (1994), " Logistics quality: part III - beyond quality… speed ", Traffic Management,
Vol. 33 No. 6, pp. 32-7; Fiorito, S.S., May, E.G. and Straughn, K. (1995), "Quick response in
retailing: components and implementation", International Journal of Retail & Distribution
Management , Vol. 23 No. 5, pp. 12-21.
18
Penman, I. (1997), "Efficient unit load", Logistics Focus, Vol. 5, pp. 2-6.
19. Kurt Salmon Associates (1993), "Efficient consumer response: enhancing consumer value in
the grocery industry", American Meat Institute, Food Marketing Institute, Grocery Manufacturers
of America, National Food Brokers Association, Uniform Code Council.
20
De Roulet, D.G. (1993), "ECR: better information cuts costs", Transportation & Distribution ,
Vol. 34 No. 10, p. 63.
21. Harris, J.K.,et al.,all adapted from John K. Harris Paula M.C. Swatman and Sherah Kurnia,
Efficient consumer response (ECR): a survey of the Australian grocery industry, Supply Chain
Management , Volume 4 · Number 1 · 1999 · pp. 35-42
22
March, J.G. (1966) The power of power. In Varieties of political Theory, ed. D. Easton,
pp.39-79. Englewood Cliffs, Prentice hall, NJ.
23
Emmanuel Ogbonna and Barry Wilkinson.(1998) , Power relations in the UK grocery Supply
Chain , Journal of Retailing and Consumer Services . Vol.5, No.2, pp.77-86.
24
Burt, S. and Sparks, L. (1994) Structural change in grocery retailing in Great Britain: a discount
re-orientation? International Review of Distribution and Consumer Research 3(1), 195-217
25.The Grocer, 29 June 1996
26. Retail Business Quarterly Trade Reviews, No. 32, December, 1994
27. Emmanuel Ogbonna and Barry Wilkinson.(1998) , see Ref. 23;
Ian Robson and Vikkey Rawnsley, Co-operation or coercion? Supply Chain Management: An
International Journal Volume 6 . Number 1 . 2001 . 39-47
28.Warner, L. (1988), The powers that buy, Marketing, 23, p26-27.
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Project : Development of UK Food Retail Supply Chain
Name : Yuanyi Fan
29. According to the interview with Mrs Ann Plenderleith, the store of manager of ASDA Sefton
Park, Liverpool
30. Fearne A, Hughes D and Duffy R, Concept of collaboation-supply chain management in a
global food industry, Imperial College at Wye, University of London
31. Fearne, A. & Hughes, D. 1999. Success factors in the fresh produce supply chain: insights from
the UK, International Journal of Supply Chain Management , Vo.4, No.3.
32. Helper, S. and Sako, M. 1995, Supplier relations in Japan and the United States: are they
converging?, Sloan Management Review , Vol. 36 No. 3, pp. 77-84.
33. Adapted from the website of Department of Trade and Industry, UK,
http://www.dti.gov.uk/sectors _automotive.html
34. Jones, D. J. and Clarke P., Creating a Customer-driven Supply Chain, ECR Journal, Vol. 2, No.
2, Winter 2002, pp. 28-37.
35.Patel T., Leading the Supply Chain, Business Briefing: Innovative Food Ingredients , 2002, pp.
1-3.
36. Adapted from Tesco Annual Report, 2002.
37. The information of this project is adapted from "Creating a Customer-driven Supply Chain",
Jones, D. J. and Clarke P., ECR Journal, Vol. 2, No. 2, Winter 2002, pp. 28-37.
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Project : Development of UK Food Retail Supply Chain
Name : Yuanyi Fan
Appendix 1
GLOSSARY
CAO: Computer Assisted Ordering
CM: Category Management
CPFR: Collaborative Planning Forecasting and Replenishment
CPFR: Collaborative Planning, Forecasting and Replenishment
CRP: Continuous Replenishment Programme
ECR: Efficient Consumer Response
EDI: Electronic Data Interchange
EDLP: Every Day Low Price
EP: Efficient Promotion
EPI: Efficient Product Introduction
EPOS: Electronic Point Of Sale
EPR: Efficient Product Replenishment
ESA: Efficient Store Assortment
FTD: Flow-Through Distribution
RDC: Regional Distribution Centres
SCM: Supply Chain Management
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Appendix 2
Self Assessment
Quality of the Project
The main objective of this project is to gain a reasonable development trace of UK food retail
supply chain during last few decades by searching and analysing the changes occurred in the
industry. This paper has achieved the following points:
Outlined the most significant changes, which evidently affected the food retail supply chain
during last few decades, such as the concentration trends, the emergence of retailer own
label product, the implementation of new technologies, and the power sift from
manufacturers to retailers.
Analysed the current power structure and relationships of UK food retail supply chain.
Extensively discussed the implementation of new technologies, in particular, the ECR
systems, and its impacts both on the supply chain performance and further development of
retailer-manufacture relationship.
Illustrate what the food supply chain could learn from the successful experience of
automotive supply chain, and proved that by introduction of Tesco's case.
The major strength of this paper, which demonstrates the effort and creativity on the project, is
having concluded the cause-and-effect relations of the changes in the UK food supply chain, and
assumed the impacts future development. However, on the other hand, the weakness of this paper is
that the source of essential information I applied are almost from public press and journals, which
are usually the work done by the previous researchers. This research methodology limits the quality
of this paper due to less first-hand data.
Personal Development Through the Project
As an important part of the MSc study, it is the chance I can attempt to apply what we have learnt
in last year into this dissertation. The completion of this paper enhanced my skills as below
Reviewing the knowledge we have learnt related to SCM, operational strategy management,
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and lean thinking.
Extensively understanding with the operations in food retail industry, and briefly familiar
with the automotive supply chain.
Analysis ability. e.g. information collection, cause-and-effect analysing, conclusion thinking
Communication skill. Though this paper is based on the information collection from public
resources, the interviews and visiting with retail staff are also adopted even few. All these
work not only enhanced the knowledge about food retail supply chain, but also improved
the communication skills, which are essential for future practical work.
Project scheduling skill. Timing is a critical factor for any project. The project strengthens
my sense of proceeding with my paper based on schedule, thus ensure the paper submission
Just-In-Time with quality. This is also the lesson I have learnt.
Experience of Managing the Project
There are some big changes of the actual progress from the previous project schedules (Project
Proposal). The most important reason is due to the lack of understanding on these topics at first,
thus the objectives and writing structure were amended nearly all the time. In addition, personal
plan, such as holiday, also affected the progress of this project. Re-scheduling the project and
starting the work was indeed from the end of July.
Though these big changes of the schedule and objectives, the work progressed still rather smoothly
and completed in time. To be honest, timely meetings with supervisors and instructive advise from
there mostly attributed to that.
Impediments to the Project's Progress
As mentioned earlier, the major methodology of this project is finding a clue by looking
through the public articles about these issue, therefore, the extent of this project is limited on the
previous work. Attempts of further analysis are unable to carry on due to lack of real data. For
instance, in my initial plan, a comparison of the performance between two supply chains --- case
firms from food retail and automotive industries, is an important objective. But the indispensable
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Project : Development of UK Food Retail Supply Chain
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data are always confidential for my business.
Personal difficulties are also the important impediment to this project. Time was always lack during
my research and writing because the part-time jobs occupied a lot of my time.
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Name : Yuanyi Fan
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