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The procurement function of Tesco Plc with Greece

Introduction

Risks are an inventible component of the supply chain. It’s no surprise then that risk management programs are abundant. Increasingly, organizations are taking up several actions that primarily aims at not only reduce risks from the organization’s perspective but also facilitate long term relationship with the suppliers (Fernie & Sparks, 2009). This is becoming relevant because of the associated effect of globalization on the supply chain. Procurement is, therefore, positioned as a critical integrative process, and the process has been extended from cost minimization to the creation of long term value and delivery. This paper looks into the concept of procurement management from various aspects such as supplier relationships, supply chain networks, value chain, global outsourcing, strategic procurement, and risk management. The paper shall focus on Tesco Plc., alongside their suppliers in Greece.

The perspective of Procurement Management

Maximizing profits through cost minimization has been a traditional procurement practice. A cost-conscious approach emphasizes cost reduction through the suppliers. However, increased competition and product complexity call for innovative products that make low cost impossible. In a highly innovative market, organizations find that they cannot have all that it takes to fulfill market demands as well as manage risks. Thus, procurement has become increasingly focused on efficient supply chain management (Lysons & Farrington, 2012). In retrospect, a dynamic market environment has caused a change in the procurement patterns.

Procurement concepts are increasingly evolving to capture changing business paradigms. Before the 1970s, procurement functions were simply based on back-office functions that supported sequential business functions. In this era the concern was more on establishing string purchasing functions rather than establishing arm length relationships with suppliers. In the 1980s and 1990s, business processes demanded intra organization collaboration where the procurement office is now central to the organization’s functions (Dionne, 2013).  In response to a dynamic environment, procurement functions have evolved, becoming more complex, requiring a combination of both cross-functional integrations as well as a higher level pf inter-organization interaction.  Accordingly, procurement function’s that focus on building inter-organizational relationships have emerged as a stagey for sustainable competitive advantage.

In this respect, the Chartered Institute of Purchase and Supply (CIPS) (2019) defines procurement as “the business management function that ensures identification, sourcing, access, and management of the external resources that an organization needs to fulfill its strategic objectives.” The primal objective of procurement is, therefore to develop reasonably priced products that are of high quality as well as create value-adding activities that lead to the satisfaction of the final customer.

An Overview of Tesco Plc.

The business transformation of Tesco in the last decades is one of the most remarkable stories in the history of Britain’s retail business. From considerably small beginnings, Tesco has grown to become one of the leading international retail giants within and out of Europe. Founded in 1919, the company has diversified geographically and is currently operating in more than 15 countries. Tesco operates in Asia, Europe, and the USA, but a significant source of its revenues is from the United Kingdom (Tesco PLC, 2018). The company is ranked as third largest retail giant in the world, with over 500,00 employees and revenues of £55,917million and profits of £1017 million in 2017. Tesco uses a variety of techniques from loyalty cards, cheap pricing to multistore format to ensure customer loyalty. The visible component of Tesco and format of the retail outlet, plus the range of products and services are more visible. However, what is not visible in the supply chain strategies that underpin the success story of Tesco Plc.

 The supply chain of Tesco’s 1970s is vastly different from the modern one, especially the hypermarkets, convenience stores, and even the online platforms, more so international markets following Tesco expansion to global markets. In all this, the distribution and supply of products have been fundamental.

The UK’s Trade with Greece

Greece is among the provider of agricultural produce to the EU and also the UK.  UK National Statistics show that from 1999 to 2015 (Export.gov. 2019). Greece has been UK global trade partner trading about 38 Billion Pounds in imports and 30 Billion in exports. UK’s main exports from Greece are fruits, nuts (fresh and dried), vegetables (preserved or prepared), and fish (fresh or frozen).

Tesco Plc. Trade with Greece

According to Tesco Performance Report (2018), Greek Deli supplies about 45 products, including olive oil, wine, cheese, honey as well as Organic products to Tesco Plc. According to the report, Tesco sales of organic products are substantially high.

Supply Chain Risks in partnering with Greece Suppliers

Procurement strategies that are keen on lowering costs and expanding markets are the primal competitive reasons that have led to the domestic and international expansion of Tesco Plc. Moreover, globalization has made firms to be increasingly specialized as well as dependent on their supply chain trade partners (Emmett & Crocker, 2010). As a result, the focus of SCM is no longer on firms but risk management and gaining a competitive advantage. Implicitly, firms need not only account for endogenous risks in the firm but also the exogenous one in both the upstream and downstream partners as well as macro-environment in which the firm operates in. Risks are not only ubiquitous but also investable in the supply chain. Uncertainties in the supply chain are articulated around three major pillars; 1) Process and control risks, this involves issues to do with quality, quality failure and the impact to a firm’s internal operations; 2) Risks related to supply and demand, such as demand volatility and sourcing; these risks are external to the firm but internal to the supply chain; 3) Environmental risks are risks that are external to the firm and the supply chain but have affects the supply chain and operations (Wolf, 2011).).

Environmental risks are of utmost importance because they supersede the operations functions and the supply chain; hence, they can affect all the business risks that are borne by the firm. Environmental risks can be classified into three major categories, natural risks (such as floods, earthquakes), political risks (changes in policies, and protective policies), and macro-environmental risks pertain to all external threats such as economic crises and fluctuations in foreign exchange.

Political Instability

Risk managers not only have to contend with the physical and internal risks to their operations. They are also increasingly confronted with the hazard that is imposed by political instability. Most recently, the United Kingdom voted to withdraw from the EU providing a potential volatility in supply markets concerns for the future (Pogkas, 2017). A possible degradation between UK and Greece could lead to unfavorable trade relations. Tesco Plc. Could face supply disruptions especially if the underlying trade agreements between the UK and Greece are to change. Greece and UK collaborate closely within the framework of NATO, European Union and a range bilateral trade relations (Gov. UK, 2019). As a member of EU, UK can trade freely without having to pay taxes for supplies from Greece. However, things may change pending the Brexit. Brexit may result in changes in policies, which could, in turn, affect logistics and procurement activities.

Economic Risks

Another notable risk in Greece pertains to the state of the economy. Prior to joining the EU, Greece has been struggling financially, and in 2006, Greece declared that it was bankrupt. Even though EU and the International Monetary Foundation (IMF), came to their rescue, these organizations also embarked on a significant austerity drive, which involves drastic rise in taxes, cuts in spending, plus reforms on the labor market (BBC, 2015). This has had a devastating effect on Greece’s weak economy, and trade relations, especially imports from the country would be more expensive if the suppliers from Greece choose to recover from the financial crisis by increasing the cost of their products.

Food Safety and Regulations

Another possible risk pertains to quality and food-related issues. Consumers expect food in retail stores to be fit for purpose, of good quality, and also have a long shelf life.  Managing the supply chain to maintain quality food and goods that fit consumption has a direct cost and even a service implication to the retailer. There are many dimensions that are to be managed one is to have proper ISO certification with the suppliers. Another important dimension includes setting temperature-controlled supply chains to ensure that food’s shelf life is maintained to ensure consumer safety (Fernie & Sparks, 2009). At its simplest, temperature-controlled supply chains (TCSC) mandate’s that food should be maintained in rooms that are temperature controlled rather than expose them to the prevailing ambient temperature at the various stages of the supply chain. Maintaining such supply chains is complex and also involves legal and quality assurances and food safety from production to consumption.

Issues of food safety is also a primal concern in the retail business. Failure of food safety and food poisoning are typical on localized and individual level. Retail chains have thus focused their attention on risk assessment and management when it comes to food safety. In the UK, the Food and Safety Act defines the handling, storage and transportation requirements for food products. One provision is that it is a complete offense to sell food that is unfit for human consumption. The Food Standards regulation recommends that food should not be stored in temperatures that could cause risks to health. This implies that there should be through tightening system in the supply chain. In fact, the General Hygiene Act of 1995 requires that food retailers should adopt a risk management tool such as the Hazard Analysis Critical Control Point (HACCP). “HACCP is central to the discipline of chill chain integrity in logistics, the Quality Assurance department conducts a survey of the supply chain under its control, to identify those circumstances where the product might be exposed to unsuitable conditions, or hazards” (Fernie & Sparks, 2009).

Technological Changes

Changes in product sources can have a significant effect on the supply side. Technological changes are disruptive yet also beneficial in the supply network. As technical capabilities have developed, international and international outsourcing has also emerged. Products can be easily sourced from across the world to satisfy demands. Technology has made it possible to meet customers’ requirements for consistency and quality, including aspects of food safety, as well as freight handling (Dionne, 2013). However, technology also represents a fundamental shift in the SCM in the organization and underlying supplier relationships.

Another critical risk pertains to meeting customer’s demands at the right time and place. As noted above risks in the supply chain is inevitable; disruptions are therefore frequent and so is the possibility that such disorders may affect availability of products.

Sustainability

Apart from working with suppliers that are ISO certified, there is an increased concern that suppliers also meet up sustainability practices. Being green-conscious has become a cause of concern for many organizations such that companies are focused on producing and delivery of products that do not harm the environment, the climate, does not deplete natural resources and does not contribute to social injustices and inequalities (Dionne, 2013).  This is to say that the work environment should be congenial to not violate fundamental human rights. For example, companies like Apple and Nike have been in the spotlight for using child labor as well as having unfit working conditions and wages for the workers in developing countries. With this said, one primal way that companies look at sustainability is to manage the supply chain right from where the raw materials are obtained to the ultimate disposal and recyclability of their products. Companies are increasingly looking at these issues with the ultimate goal of creating a sustainable environment by producing environmentally friendly products.  In addition to sustainability and ethical supply chain is critical to ensure Corporate Social Responsibility and adheres to moral conduct, which helps eliminate litigations.

The responsibility and onus due diligence that is placed on business has a significant effect on the control and monitoring performance of the SCM. Most important, however, is that there is an increased effect on the company’s governance and business relationships. If a retailer wishes to be protected from claims regarding their products, in addition to their practices, there is need to ensure that the suppliers are undertaking good business practices (Fernie & Sparks, 2009). This is true for retail brands as well as products that are outsourced or shipped outside the UK. Therefore, tracking and traceability become more critical and good partnerships become fundamental. As the cost of putting in place effective SCM rise, increasing the quality of partnerships with suppliers becomes not only a cost-benefit but also a safeguard against several risks. In this respect, managing partnerships have been crucial to SCM since the 1990s.

Tesco Plc. Risk Management Strategies

Over the years, Tesco Plc. has made considerable transformations in its supply chain. Some time back, Tesco was on the spotlight for mistreating its suppliers, even though Tesco has strategic agreement policies with suppliers, renewing supplier’s contracts after two years, Greek Deli accused Tesco of deducting money unfairly from their suppliers and even making payments 90 days after the due date (Daily Mail, 2015). There was uneven balance of power and practice with suppliers, which saw the company suffer financially. As a result, in 2015 Tesco revolutionized the way it works with its suppliers because of the “need to drive the best deal for our customers, but we were always seen as fair.”

Relationship with Suppliers

According to Emmett & Crocker (2010) selection of quality, suppliers can decrease a company’s cost because a company’s profit is largely pegged on the level of performance, commitment, and continuation of relationship with suppliers. As an example Tesco has in place more than 5000 suppliers, out of which it has in place strategic partnerships with some of them.  To begin with, Tesco Plc has in a long term supply arrangement with its suppliers, which identifies the best suppliers across the world and then builds relationships between three to five years and even ten years. Having multiple suppliers is key to eliminating disruptions in the supply chain. Relationship management is critical. Therefore, in 2015, Tesco launched an online supply network that connects with more than 5000 suppliers to identify how they are treated (The Grocer, 2015). According to the company’s CEO, Tesco’s principal emphasis is no procurement and supplier relationships. Another important aspect pertains to contract management with suppliers; this aspect critical aspect ensures that products and services suppliers responsond  to demands promptly.

In essence, Tesco manages its supply chain from the farmers. When it comes to the partnership with Greek food, Tesco is at the center of all the activities. For instance, farmers deliver their products to the food processing center, after packaging the processed food is collected and delivered to Tesco’s warehouse and then to the sales point (The Gorcer, 2019). Similarly, Tesco has consolidated some of its operations to suppliers such as Branston, who ensures stable demand. The supplier also benefits because Tesco’s oversees the automation and factory equipment.

Tesco has also partnered with its suppliers to adopt Sustainable Development Goal by having suppliers publish food waste data in the operations. The aim is to reduce food waste from the farm. Moreover, Tesco also partners its significant suppliers to charity partners to donate their surplus to the communities they are operating in.

Non supplier-related Risk Management Practices in Tesco

An important part of maintaining loyalty is to deliver the right value to consumers at the right time. Toyota developed a method called continuous flow. This system allows continuous flow of goods by allowing the movement of a single product through every stage of the supply chain (Fernie & Sparks, 2009). Tesco has in place a continuous flow system that is placement of batch data processing with flow system; then using the flow system; multiple daily orders are sent to suppliers, which allow for several deliveries, thus reducing inventory holding through varying quality and cross-checking.

The other thing Tesco Plc does is to value stream its processes. “The processes are assessed mapped from bottom to top, and then value streamed where designs are created. Then Tesco synchronizes aspects of lean manufacturing by its suppliers; Eventually, Tesco utilizes consumer demands from loyalty cards to rethink about the services and products that should be offered and their location in the value stream. This system is downright the creation of a supply chain that is customer-driven” (Fernie, & Sparks, 2009).

Tesco Plc. also has an international sourcing system (TIS) that is responsible for procurement. The system gives priority to Total Quality Management (TQM) and Just in Time (JIT), which involves the delivery of the right quantity of goods with minimum lead time and resources. In terms of operations with Greece, the Grocery division places an order TIS through quality testing (ISO certifications). Compatibility measures are also taken with safety and health regulations (which should adhere to UK food-related regulations). Moreover, suppliers also undergo ethical and technical audits through different stages of the supply chain (Report on TIS, 2013).

Conclusion

Tesco’s success in the retail business is a combination of many activities including effective supply chain management. Tesco Plc has adopted strategic procurement to select the best suppliers as well as maintain quality products at reduced cost possible. Suppliers’ relationship management skills have become critical, especially agility of delivering products on schedule, ensuring product reliability and consumer satisfaction. Theoretically this sounds simple, but coordination in the supply chain is practically challenging. As a result, Tesco Plc also has non supplier-related tactics such as TQM, lean management and so much to manage its supply chain. Indeed, both the downstream and upstream chains are not flexible enough to respond to end user’s demands. Ultimately, risk management should be a continuous and flexible system.

 

References

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Gov. UK. 1 October 2015. Doing business in Greece: Greece trade and export guide. https://www.gov.uk/government/publications/exporting-to-greece/doing-business-in-greece-greece-trade-and-export-guide

Daily Mail. 2015, 5 February. Tesco acts like a Godfather Daily Mail. Retrieved from www.dailymail.co.uk/news/article-2940649[Accessed on 25 October 2019].

The Telegraph. 2013, 9 February. Report on TIS. The Telegraph. Retrieved from www.telegraph.co.uk/finance/newabysector.[Accessed on 23 October 2019].

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The Grocer. 7 August 2019How Tesco works with suppliers. https://www.thegrocer.co.uk/promotional-features/how-tesco-works-with-suppliers/596398.article

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