Case Study:Lean Supply Chain Management,Tesco

The Tesco supermarket chain in Britain has been a pioneer in retailing for more than a decade. In the mid-1990s, as he looked at the opportunities for retailers provided by the emergence of lean logistics, Graham Booth, Tesco’s supply chain management director (now retired), had a very simple insight: A rapid replenishment system triggered by the customer would work in any retail format. What’s more, it would work even better if the same replenishment system, using the same suppliers, cross-dock distribution centers, and vehicles serving many stores, could supply every retail store format. Booth saw that there might be very little difference in real costs in supplying the same item through any store format.This was because the purchase price from the supplier could be negotiated for the whole network, not by format,and the same replenishment system making frequent milk runs to larger stores could also stop at small stores to share logistics costs. The cost disadvantage of smaller outlets, due to weak supplier leverage and expensive logistics, would largely disappear.

Booth approached Dan Jones and his research group, asking how Tesco could benefit from Toyota’s supplier logistics methods to reduce time and effort. Dan suggested “taking a walk”—examining a typical provision stream, in this case the one for cola soft drink products. He urged Graham to invite the other functional directors at Tesco—retail, purchasing, distribution, and finance—along with the operations and supply chain directors of Britvic, the company supplying the cola. On a cold day in January 1997 this group set out, walking back through the provision stream for cola from the checkout counter of the grocery store through Tesco’s regional distribution center (RDC), Britvic’s RDC, the warehouse at the Britvic bottling plant, the filling lines for cola destined for Tesco, and the warehouse of Britvic’s can supplier.

Along the way, Dan and his team from Cardiff kept asking simple questions: “Why are products missing from the shelves? Why does a sales associate need to re-sort products from roll cages that have just come off the truck from the RDC? Why is so much stock needed in the back of the grocery store, at the Tesco RDC, and at Britvic’s RDC? Why are there huge warehouses of cans waiting to be filled near the bottling plants?” And so on. The walk was an eye-opener. When Tesco and Britvic directors analyzed the map they drew of the process as they walked, they could see waste at every step, along with huge opportunities for saving costs while increasing the satisfaction of the end customer. As Booth looked at the situation, he realized that practically all of Tesco’s practices for getting goods from the supplier to the shelf would need to change. The first step was to hook the point-of-sale data in the store directly to a shipping decision in Tesco’s RDC. This made the end customer at the checkout point the “pacemaker” regulating the provision stream. Tesco then increased the frequency of deliveries to the retail stores. After several years of experimentation, Tesco’s trucks now leave the RDCs for each store every few hours around the clock, carrying an amount of cola proportional to what was sold in the last few hours.

At the RDC, cola is now received directly from the supplier’s bottling plant in wheeled dollies. They are rolled directly from the supplier into the delivery truck to the stores. And once at the stores, the dollies are rolled directly to the point of sale, where they take the place of the usual sales racks.This innovation eliminates several “touches,” in which employees moved cola from large pallets to roll cages, to the stores, and then onto dollies to reach the shelves, where they were handled one last time. (In drawing the provision stream maps of the original process, Tesco discovered that half its cost in operating this provision stream was the labor required to fill the shelves in the store.For fast-moving products like cola, the Tesco RDC is now a cross-dock rather than a warehouse product, with goods from suppliers spending only a few hours between their receipt and their dispatch to the stores. To guard against sudden spikes in demand, a buffer stock of full dollies is still held aside. But because of the frequency of replenishment, the buffer is very small. Back at the cola supplier, even larger changes have taken place. Britvic improved the flexibility of its filling lines, so it can now make what the customer has just requested in small batches with very high reliability. This means that there are practically no finished goods awaiting shipment in Britvic’s filling plant.

The final logistics step is for Tesco’s delivery truck to take the dollies several times a day from the RDC on a milk run to a series of Tesco stores. At each store it collects the empty dollies and then visits several suppliers to return them. At each stop it also picks up full dollies and then returns to the Tesco RDC to restart the cycle. That may sound like a good way to increase truck miles and logistics costs, and many traditional managers, including those at Tesco and Britvic, have assumed it must. However, in practice, these methods substantially reduce the total miles driven along with freight costs, while also reducing total inventories in the system.

The consequence, in terms of performance, is remarkable.Total “touches” on the product (each of which involves costly human effort) have been reduced from 150 to 50. The total throughput time, from the filling line at the supplier to the customer leaving the store with the cola, has declined from 20 days to 5 days. The number of inventory stocking points has been reduced from five to two (the small buffer in the RDC and the roller racks in the store), and the supplier’s distribution center for the items has disappeared. As he grasped the logic of lean logistics, Booth realized that his simple insight was valid: A rapid-replenishment system triggered by the customer would work in any retail format. What was more, it would work even better if the same replenishment system, using the same suppliers, crossdock distribution centers, and vehicles serving many stores, could supply every retail format.

Using those insights, Tesco set out to create a range of formats, beginning in Britain, so that households could obtain fast-moving consumer goods from a complete variety of outlets. This has led to tiny Tesco Express convenience stores at gas stations and in busy urban intersections; Tesco Metro stores (at the small end of the “supermarket” range) on busy streets and in high-density urban areas; traditional Tesco supermarkets in urban and suburban areas; Tesco Extra on the suburban perimeter as an answer to “big boxes” retail stores operated in Britain by Wal-Mart’s ASDA subsidiary; and Tesco.com for the Web shopper. The strategy has worked quite brilliantly, permitting Tesco to establish the lowest cost position among British retailers (including Wal-Mart) while posting progressively higher margins and steadily increasing its share in every format. But this is just the beginning. By offering households a range of formats for every circumstance and pioneering the use of loyalty cards, which give discounts to frequent shoppers, Tesco is in a position to know everything a household buys during the course of a year at all formats, and where and when they buy it. In fact, 80 percent of items currently bought in Tesco stores are bought by loyalty-card holders. These loyal customers obtain close to 100 percent of their needs at the range of Tesco outlets.

Source: James P. Womack and Daniel T. Jones, “Teaching the Big Box New Tricks,” Fortune, November 14, 2005.

QUESTIONS

1. What key insights of Tesco’s SCM director Graham Booth helped revolutionize Tesco’s supply chain and range of retail store formats? Can these insights be applied to any kind of retail business? Why or why not?

2. How did Dan Jones and his research group from the Cardiff Business School of Wales demonstrate the inefficiencies of the Tesco and Britvic supply chains? Can this methodology be applied to the supply chain of any kind of business? Why or why not?

3. What are the major business and competitive benefits gained by Tesco as the result of its supply chain initiatives? Can other retail chains and retail stores achieve some or all of the same results? Defend your position with examples of actual retail chains and stores

Case Study : Finance

The Hunt Brothers and the Silver Crash

In early 1979, two Texas billionaires, W. Herbert Hunt and his brother, Nelson Bunker Hunt, decided that they were going to get into the silver market in a big way. Herbert stated his reasoning for purchasing silver as follows: "I became convinced that the economy of the United States was in a weakening condition. This reinforced my belief that investment in precious metals was wise . . . because of rampant inflation." Although the Hunts' stated reason for purchasing silver was that it was a good investment, others felt that their real motive was to establish a corner in the silver market. Along with other associates, several of them from the Saudi royal family, the Hunts purchased close to 300 million ounces of silver in the form of either actual bullion or silver futures contracts. The result was that the price of silver rose from $6 an ounce to over $50 an ounce by January 1980.

Once the regulators and the futures exchanges got wind of what the Hunts were up to, they decided to take action to eliminate the possibility of a corner by limiting to 2000 the number of contracts that any single trader could hold. This limit, which was equivalent to 10 million ounces, was only a small fraction of what the Hunts were holding, and so they were forced to sell. The silver market collapsed soon afterward, with the price of silver declining back to below $10 an ounce. The losses to the Hunts were estimated to be in excess of $1 billion, and they soon found themselves in financial difficulty. They had to go into debt to the tune of $1.1 billion, mortgaging not only the family's holdings in the Placid Oil Company but also 75,000 head of cattle, a stable of thoroughbred horses, paintings, jewellery, and even such mundane items as irrigation pumps and lawn mowers. Eventually both Hunt brothers were forced into declaring personal bankruptcy, earning them the dubious distinction of declaring the largest personal bankruptcies ever in the United States.

Nelson and Herbert Hunt paid a heavy price for their excursion into the silver market, but at least Nelson retained his sense of humour. When asked right after the collapse of the silver market how he felt about his losses, he said, "A billion dollars isn't what it used to be."

Source: G. Christian Hill, "Dynasty's Decline: The Current Question About the Hunts of Dallas: How Poor Are They?" Wall Street Journal, November 14, 1984, p. C28. Republished by permission of Dow Jones, Inc. Via Copyright Clearance Center, Inc. 1984 Dow Jones and Company, Inc. All Rights Reserved Worldwide.

Sangrah( Marketing Casestudy): Fairness Wars

Who's The Fairest of Them All?

In June 1999, the FMCG major Hindustan Lever Ltd. (HLL)1 announced that it would offer 50% extra volume on its Fair & Lovely (F&L) fairness cream at the same price to the consumers.

This was seen by industry analysts as a combative initiative to prevent CavinKare's3 Fairever from gaining popularity in retail markets. HLL's scheme led to increased sales of F&L and encouraged consumers to stay with F&L and not shift to the rival brand. In December 1999, Godrej Soaps4 created a new product category – fairness soaps – by launching its FairGlow Fairness Soap.The product was successful and reported sales of more than Rs. 700 million in the first year of its launch. Godrej extended the brand to fairness cream by launching FairGlow Fairness Cream in July 2000

· 1] HLL, a 51.6% subsidiary of Unilever Plc, was the largest FMCG company in India, with a turnover of Rs114 billion in 2000. The company's business ranged from personal and household care products to foods, beverages, specialty chemicals and animal feeds.

· 2] Initially HLL offered Rs. 5 off on F&L. This was followed by 20% extra volume for the same price, which was later increased to 50% extra volume.

· 3] In 1983, C.K. Ranganathan (Ranganathan) established Chik India, with an investment of Rs.15000. Chik India was later renamed Beauty Cosmetics, and then went public in 1991. In 1998, the company was renamed CavinKare Ltd.

· 4] Godrej Soaps' major product lines were toilet soaps and detergents, industrial chemicals, cosmetics and men's toiletries. It had interests in several other businesses such as real estate, agro produce, etc through its subsidiaries.

In April 2001, the consumer goods business of Godrej Soaps was demerged into a new company. The chemicals division remained with Godrej Soaps, with the new name, Godrej Industries.

By 2001, CavinKare's Fairever fairness cream, with the USP of 'a fairness cream with saffron' acquired a 15% share, and F&L's share fell from 93% (in 1998) to 76%. Within a year of its launch, Godrej's FairGlow cream became the third largest fairness cream brand, with a 4% share in the Rs. 6 billion fairness cream market in India. The other players, including J.L. Morrison's Nivea Visage fairness cream and Emami Group's Emami Naturally Fair cream, had the remaining 5% share. Clearly, the fairness cream and soaps market was witnessing a fierce battle among the three major players – HLL, CavinKare, and Godrej – each trying to woo the consumer with their attractive schemes.

Background:In 1975, HLL launched its first fairness cream under the F&L brand. With the launch of F&L, the market, which was dominated by Ponds (Vanishing Cream and Cold Cream) and Lakme (Sunscreen Lotion), lost their dominant position.

The dominance of HLL's F&L continued till 1998, when CavinKare launched its Fairever cream in direct competition with F&L. Within six months of its launch, Fairever captured more than 6% of market share.The success of Fairever attracted other players. Every product in this segment was witnessing growth higher than the overall personal care product category growth

The fairness cream market was growing at 25% p.a., as compared to the overall cosmetic products market's growth of 15% p.a. In 2000, there were 7 main brands in the fairness product market across the country.

Fair (Ness) Wars!

In 1998, CavinKare launched Fairever fairness cream. The company took care to stick to the herbal platform that its consumers had come to associate with all CavinKare products. Fairever seemed to be an instant success. Fairever's market share jumped from 1.23% in 1998 to 8.13% in 1999. The brand was expected to grow from Rs 160 million 1999 to Rs 560 million in 2000. Its success attracted many players, including Godrej (FairGlow) and Paras Chemicals (Freshia). Existing products like Emami Naturally Fair and F&L were promoted with renewed vigor.

In December 1999, Godrej launched FairGlow fairness soap and created a new product category. The soap claimed to remove blemishes to give the user a smooth and glowing complexion. FairGlow was positioned as a twin advantage soap – a clean fresh bath and the added benefit of fairness. In early 2000, Godrej Soaps launched Nikhar, which was based on the ancient Indian formula of milk, besan and turmeric. Though Nikhar and FairGlow were positioned differently – Nikhar targeted fairness and FairGlow claimed to protect skin naturally – the objective of both was the same, get more of a stagnating market.

In April 2000, HLL introduced Lux Skincare soap, positioned on the sunscreen platform. Priced at Rs.14 for a 75gm cake, it was able to garner only a 0.5% share by 2000 end. In comparison, the mother brand Lux had a share of 14%. Retailers claimed that sales for the Lux variant were poor as it promised only protection from ultraviolet rays.

While this soap prevented one from growing darker, it did not promise to enhance the complexion. By 2000 end, F&L cream seemed to be losing ground not only to other creams but also to FairGlow soap. The switch from cream to soap was largely because soaps were perceived to be less harmful to the skin than cream. HLL did not have a product in its soap portfolio for this segment, and this was where Godrej seemed to have gained

However, in 2001, HLL followed Godrej's footsteps and launched Fair & Lovely Fairness Soap. This intensified the competition. F&L's extension into soaps was in tune with HLL's strategy to develop and grow the premium segment of the market. Since the growth in the toilet soap market had slowed down, the industry felt that premium soaps would re-energise the market.

Sangeeta Pendurkar, Marketing Manager, HLL, said, " We are targeting the 50,000 tonne premium soaps market with F&L. We believe F&L soap will synergise with F&L cream as research reveals that the usage of both will deliver better fairness." Analysts felt that though FairGlow had the first mover advantage, F&L soap's growth potential could not be underestimated given the strong equity of the mother brand. In 1999, HLL and CavinKare hiked the price of F&L and Fairever by Re. 1 from Rs.25 and Rs.26 respectively.

In 2000, Fairever was back to its original price to maintain price parity. Many stockists said that this was done to push the product against F&L. A stockist commented, "The company was trying out this price to compete with F&L and other new brands that have come in. But we did not see higher sales due to this and the company reverted to its original price." F&L too followed suit. During 2000-01, while the fairness cream market was growing at an average of 15% Fairever's growth had slowed down. Analysts felt that this was mainly because Fairever was priced higher than competing products. Meanwhile, in January 2000, HLL filed a patent infringement suit for Rs.100 million in the Kolkata High Court against CavinKare Ltd.

HLL alleged that CavinKare was using its patented F&L formula without its knowledge or permission. HLL obtained an ex-parte stay on CavinKare, but CavinKare got the stay vacated in a week's timeIt also filed a patent revocation application in the Chennai High Court and defended the suit on the grounds that HLL's patent was not valid.CavinKare further claimed that the ingredients contained in the composition were 'prior art' and that the new patent was not an improvement of the earlier patent, which had expired in 1988. In September 2000, the companies suddenly opted for an out-of-court settlement.

CavinKare gave an undertaking to the court that the company would not "manufacture and/or market either by themselves or by their agents any fairness cream by using silicone compound in combination with other ingredients covered in patent no. 169917 of the plaintiff (HLL), namely Niacinamide, Parsol MCX, Parsol 1789, with effect from September 15, 2000." HLL also gave an undertaking that it would not interfere with the sale of the cream manufactured on or before September 15, 2000, lying with the wholesalers, re-distribution stockists, and retailers.

Promotional Wars:

During 2000-01, with major players entering the market, the existing products were promoted with renewed vigor through price reductions, extra volumes, etc. Many products were marketed aggressively. While F&L advertisements projected fairness comparable to the moon's silvery glow, FairGlow offered the added benefit of a blemish-free complexion. But Fairever, which sold at a higher price, did not initiate any promotional activities. B. Nandakumar, President (Marketing) CavinKare, explained, "We will not tailor our product to the competition. We'll do so for the consumer. Freebies are not the only way to garner sales." However, analysts believed that CavinKare did not undertake any promotional activities due to lack of financial muscle.

On February 14, 2000, as a part of its promotional activities, Godrej Soaps announced the 'Godrej FairGlow Friendship Funda'5 in various colleges in Maharashtra. In August 2000, it launched the 'FairGlow Express,' the first branded local train in India, in Mumbai, in partnership with Western Railways. In December 2000, Godrej took its FairGlow brand to the web by launching www.fairglow.com. Later, it launched a unique online promotional scheme – 'the FairGlow Face of the Fortnight.' Every fortnight, one winner was selected and showcased on the website. The winner also won prizes like perfume hampers, gold and pearl jewellery, holiday for two etc. In early 2001, Godrej Soaps also launched its FairGlow cream in an affordable sachet (pouch pack). The 9gm sachet was priced at Rs. 5, and claimed to give around 15-20 applications per pack. It was initially launched in South India, and was expected to enter other markets very soon.

The Wars Continue Unabated:

In early 2001, three major players – HLL, CavinKare and Godrej – competed fiercely to penetrate the market further with their attractive schemes. A growing number of pharma and OTC drug companies like Emami, Ayurvedic Concepts, Paras etc. also entered this segment.

Companies were also facing competition from Amway, Avon, Modicare etc., which were into direct selling. The market was seeing a major convergence of product categories with the emergence of more and more variants to fill every conceivable niche. This heightened competition forced companies to increase their advertisement spends. HLL re-launched F&L and quadrupled its advertising expenditure.

CavinKare more than doubled its ad spends from Rs.215 million in 1999 to Rs.500 million in 2001. Godrej and Emami too planned to raise their ad spends. But even as ad spends increased, fakes entered the market. Fair & Lovely's fakes were rampant with names like Pure & Lovely and Fare & Lovely. Fairever's copies were Four Ever, For Ever or Fare Ever.

In early 2001, HLL launched Nutririch Fair & Lovely Fairness Reviving Lotion to protect its brand from any threat in the premium segment. The new product was claimed to be scientifically formulated to protect the skin from harmful ultraviolet rays and enhance natural fairness. The new formula, containing Triple UV Guard Sun protection system and the fairness ingredients Vitamin B3 and milk proteins, promised to restore and protect the natural skin colours from the sun's darkening effects. The product was also claimed to contain Niacinamide making it the only patented formula fairness cream. It was targeted at women in the age group of 18-35 and was priced at a premium.

A 50ml pack was priced at Rs.38 and a 100ml pack at Rs.68. HLL also launched 'Pears Naturals Fairness cream' at the same time.

By mid 2001, the fairness concept was no longer restricted to creams and soaps, but had expanded to talcs also. Emami was test marketing a herbal fairness talc in the South.

The rapid expansion of the fairness business had two consequences: cutthroat competition and a flurry of copycats. Every company - from the market leader to the new entrants – was forced to rethink its marketing strategies, spend lavishly on advertisements, and even seek legal action against unfair claims.

Even though there was no scientific backing for the manufacturer's claims that their products enhanced fairness, prevented darkening of skin, or removed blemishes, sales of fairness products continued to gallop. Dr R.K. Pandhi, Head of the Department of Dermatology, AIIMS, Delhi, said, "I have never come across a medical study that substantiated such claims. No externally applied cream can change your skin colour. Indeed, the amount of melanin in an individual's skin cannot be reduced by applying fairness creams, bathing with sun-blocking soaps or using fairness talc." In 2001, the organised market of branded fairness cream products was worth about Rs 6 billion. The unbranded and fakes market was estimated to be Rs 1.5 billion. The market was big and the potential was even bigger. In India, beauty seemed to be associated with fairness more than with anything else. With such an attitude firmly entrenched in the minds of millions of people, the fairness products market would see fair days ahead.

Questions:

1. Identify the chinks in the HLL armour that made it loose the lion’s share in the Fairness market.

2. If you were the marketing manager of HLL what strategies will you adopt to handle the increasingly intense competition?

Contributed by: Megha & Arti

Team Sangrah (marketing)

Credits:http://www.icmrindia.org/free%20resources/casestudies/Fairness%20Wars1.htm

IGNISENSE'10- 16th , 17th January

Dear Folks,

This is Piyuesh Modi . Kindly post ur suggestions and views on ur own college festival IGNISENSE. It would be of immense help to us.

regards

Team Ignisense.