Tesco seeks efficiencies in supply chain

Supermarket giant Tesco has announced that it is working on plans to cut logistics costs by £450 million by financial year 2019-20. It plans to make its distribution system more efficient and responsive as part of its strategy to boost group operating margins from 2.18% to 3.5-4.0%.

In its H1 2016 financial report, Tesco s that it is seeking around £1.5bn of operating cost reductions in the next three years, and these are to be realised through a more efficient and responsive distribution system, a simpler store operating model as well as goods-not-for-resale savings.

Tesco’s plan also involves generating around £9bn from operations that include about £400 million from reduction in stock.

Tesco reported a 1% rise in like for like sales. Operating profits were up 60% to £596 million on sales up 3.3% to £24.4bn.

The group reported a one per cent rise in like-for-like sales in the first half. Operating profits was up 60 per cent to £596m on sales up 3.3 per cent to £24.4bn.

The cost reduction plan is part of a package of six strategic drivers (see below) outlined by chief executive Dave Lewis. “While the market is uncertain, we have made significant progress against the priorities we set out two years ago, stabilising the business and positioning us well for the future,” he said. “Today, we are sharing the plans we have in place to become even more competitive for our customers, even simpler for colleagues and an even better partner for our suppliers, while creating long-term, sustainable value for our shareholders.”

Tesco aim to reduce operating costs by £1.5bn through initiatives in three areas – the store operating model, goods not for resale, and logistics and distribution.

With regard logistics and distribution, Lewis outlined a series of initiatives to cut costs by some £450m, focusing on optimising range, stock flow and fulfilment. These include:

“Partnerships, sales forecasting and lower stock holding

Lower fulfilment costs

Opportunities to integrate supply and logistical systems

Common international systems

Industry leading packaging solutions”

Improving the store-operating model would save some £550m, said Lewis. Operational improvements would include:

“Moving from nights to day

Changes in trading hours

Single customer service desk

Replenishment savings

Scan as You Shop”

Lewis said there were potential savings of some £500m in the area of Goods not for resale, focusing on leveraging organisational scale. These include:

“Single procurement policy

Finance transformation

IT systems
Functional roadmap”
For the 26 weeks to 27th August, UK like-for-like sales were up 0.6 per cent in the first half, while volumes were up 2.1 per cent. The group also said there had been an improvement in UK supplier satisfaction measure at 78 per cent (up from 51 per cent in 2014/15).
The six strategic drivers outlined by Lewis are:
“A differentiated brand
Reduce operating costs by a further £1.5bn
Maximise the mix to achieve a 3.5 – 4.0 per cent group margin
Maximise value from property
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