Tesco's Extranet based supply chain pilot (see Newswire 29 January) is an example of how giant retailers are leading the field in adopting the latest technology.
'Stack 'em high and sell 'em cheap' is the traditional strategy for grocery supermarkets. But the big retail chains have fought themselves to a standstill in bloody price wars over the last decade. Now they are realising that they need to get smarter, not cheaper, and that leading edge IT is an invaluable weapon.
Last year's salary survey by 'Network News' found that, for IT jobs, retail is catching up with traditional high paying sectors, such as finance. This may be surprising, given that retail employs some of the lowest paid staff in the country because of its high use of casual and part time labour.
But it is a trend that is set to continue: customer loyalty schemes, store cards, database marketing, supply chain management, product and regional promotions, store layout and demographic profiling for new store locations are all IT-driven.
While one side of the retail business grapples with the technical, marketing and logistical problems of online shopping, the other side knows that the biggest short - and medium term gains will come from using IT to improve the efficiency of the supply chain.
An example of this is Tesco's Information Exchange (TIE), a high profile Extranet trial which enables seven of its suppliers to track up-to-the-minute sales data of products on promotion.
In a typical supermarket between five and 10 per cent of products can be on promotion at any one time. Estimating consumer demand without current sales data can result in products selling out at peak periods, thus resulting in loss of revenue, or wastage due to over-supply.
TIE will be used at all stages of a product promotion, from the initial proposal, through business planning and supply chain management, execution and final evaluation.
Tesco has 588 stores in Britain, a grocery market share of around 15 per cent. Providing suppliers with information which allows them to tweak supply to meet precise sales figures can have sizeable cumulative affects.
"The supplier spotted that demand on one line had reached 8,000 cases after two days compared to an original forecast of 10,000 for the whole week," said Tesco divisional director, Joe Galloway. "As a result they were able to respond and increase supply at short notice resulting in a profit gain of #20,000."
TIE was jointly developed by Tesco, GE Information Services and St Ivel, the first supplier involved in beta testing.
"Feedback from the National Account Manager for St Ivel, Dan Rusga, has been enthusiastic," Galloway told attendees of Tesco's suppliers' conference on 27 January.
"He said that firstly it re-engineered the way we worked together and we began to take joint responsibility for the planning, tracking and evaluation of promotions.
"Secondly, forecasting improved significantly as it forced us to share estimates very early on in the process and this highlighted if there were any significant differences and ensured we jointly agreed the way forward. A direct result of this collaborative process is reduced waste and improved on-shelf availability. "Dan's final point, is that he estimated that by implementing both the process improvements an using the system we could realistically save 30 per cent of our annual promotional on-costs."
Four more large suppliers - Proctor & Gamble, Nestle, Britvic and CCSB - have joined the pilot along with two smaller suppliers - Kingcup Mushrooms and St Merryn Meats.
The results of the pilot will be evaluated mid-year and, assuming it is deemed successful, a phased roll out to the majority of Tesco's suppliers will begin. More applications beyond sales tracking will also be added as the system develops.
TIE is part of a rolling four-year programme by the supermarket to make cost savings by reorganising the way it works with its suppliers. The original aim was to cut #100 million in four years, but after two a saving of #60 million has already been achieved.
In May last year, Tesco began trials to link its electronic data interchange (EDI) network to a Web-based ecommerce system, enabling smaller suppliers outside of the EDI network to exchange orders, invoices and other documents with Tesco on the same footing as large suppliers.
EDI is used by about 1,700 Tesco suppliers, leaving some 600 smaller businesses for whom IT - let alone EDI - is a rarity. The pilot conducted in conjunction with GE Information Services, used an Internet-based electronic trading system which acted as a gateway to Tesco's EDI network for the small suppliers.
Galloway does not envisage TIE replacing Tesco's EDI network. "It will never be a substitute for EDI for high volume transactions," he said.
TIE is a secure Web site for Tesco trading partners and can be accessed either via the internet or via GE's global network. The systems are physically located at GE Information Services' centre in Amstelveen, Holland.
Security for the trial covers access to the service, access to data, and protection of data (other than email) across the Internet, provided by a combination of firewalls, service passwords and security protocols. Suppliers only have access to their own trading data, not each others. Security will be further strengthened when the system is expanding to more trading partners.
Of course, Tesco is not the only supermarket looking to the Internet to improve supply chain efficiencies. Safeway is also conducting a trial with two suppliers allowing access to part of its supply chain database via the Internet.
But Tesco will push for elements of TIE to be standardised across the food retailing sector, and is discussing such moves with the Institute of Grocery Distribution.
Managing the supply of goods on promotion is the first application for TIE, others are expected to be added as the system grows in scope. But initially it will ensure that when Tesco's stores do stack 'em high and sell 'em cheap, they don't end up with prematurely empty shelves or a ton of stock which has passed its sell-by date.
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