Tesco uses technology to tighten supply chain

The breathtaking transformation of the UK grocery scene accelerated last week with Tesco’s launch of a new “extranet” to share trading data and other information with its suppliers. A year ago, admits Joe Galloway, divisional director of supply chain systems at Tesco, “there were people in Tesco who said ‘no way will we share Epos data”. Now, he says, “the possibilities of information sharing are limited only by the imagination”. Within a few years retailers and suppliers will be collaborating on projects “that today people wouldn’t dream of” using information “currently considered as confidential”, he predicts.

In its current form, the Tesco Information Exchange (TIE) is a long way from that. It is a trial, involving only a handful of suppliers, and the information shared focuses entirely on supply chain efficiencies – avoiding stock-outs during promotions, for example. But it is the Tesco vision that matters.

Galloway claims we are moving towards an era when “a standalone business is an endangered species”. Leading edge firms are creating a “step change in business” where “many-to-many networks” of companies compete against each other using “lean thinking” to cut waste across the entire supply chain from raw material to final consumer, and work together in win-win relationships to “increase continually value for customers and earn their lifetime loyalty”.

At the centre of this web, or “virtual organisation”, lies its orchestrator and co-ordinator. It subcontracts the “doing bits” such as manufacturing and logistics to “concentrate on the brand, the marketing, the leadership and the vision – the things that matter and that you can’t outsource”. Good role models include Nike, Virgin – and, in the future, you guessed it – Tesco.

This needs a little decoding. One way of looking at it is to see it as an application of the insights of Efficient Consumer Response to marketing. ECR’s message is that there is little point in maximising the efficiency of a separate department or company if you don’t also maximise the efficiency of the interface between them – aligning objectives and processes using shared information – to make the whole thing sing. Applying this logic to marketing we see little point, for example, in brand A promoting the hell out of brand B (and vice versa), if the net effect of both actions is to simply cancel each other out. Why not align the marketing objectives and processes of retailer and manufacturer brand to build both brand and category instead?

Having glimpsed the awesome opportunities, retailers such as Tesco, Sainsbury’s and Safeway are leading a mad scramble to transform retailer/supplier relationships. The heart of this transformation is the retailers’ realisation that the only way to get their suppliers on board is to bargain:”If we use you to build our brand, you can use us to build yours.” Whereas retailers in the Eighties were a mere distribution channel turned barrier, in the new millennium they will become the main marketing engine for brand manufacturers – if, and only if, they use their own brand engines to drive their retail customers forward through joint marketing (and the increase sharing of cost and margin information to help make the process lean).

If all that sounds dreadfully esoteric, it’s not. The first practical implications of this sea change are already becoming apparent through TIE, and through templates for joint retailer/manufacturer management of ranging and merchandising, and promotional event management, currently being tested under the auspices of the Institute of Grocery Distribution. Take TIE. Using its information exchange capabilities it has helped Tesco develop (with suppliers such as St Ivel) best practice approaches to the planning, implementation and evaluation of promotions. The system allows both sides to monitor the effect of the promotion and to adjust stock levels accordingly.

That is step one. Once all or most suppliers are on TIE, it will be difficult for them to manage their promotions through Tesco in a way that does not conform to this template. Step two for Tesco is to use the overview TIE provides to help reduce current promotions chaos, by cutting down on the overall number of promotions in a planned, strategic way, and increasing the impact of the chosen few.

To qualify, these promotions will have to meet strict criteria (including objectives and timings), and brand manufacturers which do not pass muster risk being left out in the cold. It doesn’t stop there. Under the draft IGD template unveiled at an IGD conference on ECR last week, a key part of the promotions planning process is agreeing the role for the category laid down by the retailer (is it “destination” or “routine”, for example?), plus a role for each brand within the category.

Chris How, director of sales at Colgate-Palmolive, suggested three obvious brand roles: a “price signpost”, where the brand leader is sold at a discount to signal good value; a “value adder”, where the brand leads consumers to higher price points; and “volume builder”, where a struggling brand comes in at extra-low prices.

Question: how long before brand managers start building such roles into their brand plans? And how big an influence would such decisions have on those plans – which media, message, pricing strategy, what sort of promotion, and so on? For many a traditional brand manager this degree of retailer “interference” may be hard to swallow. But then, the traditional brand manager continues to assume that the old packaged goods marketing model, which uses heavyweight advertising to “suck” demand through stores, still exists.

Under the emerging model, his main link with his consumer is the store itself – a hugely powerful medium in its own right. And to get that medium working for him he must be paying for it not only through retailer margin, but by placing at least some of his brand equity and resource at its disposal.

This is all very uncomfortable, complex, and uncertain. But then, as Galloway remarks, in evolution it is not the strong or intelligent that survive. It is the adaptable.

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