Suggest ways in which logistics can play a part in the marketing mix for:Sample Page

a a manufacturer of cleaning products like Cleans (Case study 2.2)

case study 2.2 Segmentation at CleanCo

CleanCo is a manufacturer of cleaning products that serves the European grocery retailing market. CleanCo currently segments its customers on the value of customer accounts. The primary division is between national accounts, for which 10 accounts constitute 70 per cent of sales by value, and field sales, which comprise a long ‘tail’ of more than 200 accounts that together make up only 30 per cent of sales. Due to the size of the field sales structure, a secondary classification groups accounts by channel type: neighbourhood retail, discount and pharmacy as summarised in Table 2.3. 

Whilst CleanCo currently segments its retail customers by account size, its sales organisation has identified two significant types of buying behaviour displayed by the customer base, shown in Table 2.4:

● volume-driven buying behaviour;

● margin-driven buying behaviour. Volume-driven customers are keen to capitalise on both product and supply chain cost savings in order to pass them on to their customers to drive volume sales. There are two variants of the volume-driven behaviour:

● everyday low price (EDLP);

● discount. Retailers pursuing an EDLP strategy strive for continuous price reduction from suppliers such as CleanCo to drive a fairly consistent, high volume of sales. This should result in a relatively stable pattern of demand in the washing and bathing sector. Discounters, on 

the other hand, are looking for bargains so they can ‘stack ‘em high and sell ‘em cheap’, a strategy more likely to result in a volatile demand pattern. Margin-driven customers are keen to add value for their customers by offering a wide selection of products and valueadding services. This strategy also results in a relatively stable demand pattern in this sector. However, a complicating factor when trying to deconstruct the buying behaviour of CleanCo’s retailer customers is that several secondary factors are used to support products in the marketplace. Such factors include product types (e.g. premium, mid, utilitarian), product range (e.g. current products, end of lines, ‘b’ grade), merchandising requirements (e.g. category captains) and promotions strategy (e.g. roll-back, 12-week, 4-week, Hi-Lo). Promotions are by far the most disruptive of these factors and occur in all three types of retailer behavioural segments. Although the promotions generally are planned well in advance with the retailers, they cause significant disruption to the supply chain operations due to the peaks and troughs in demand that they create. Furthermore, the deeper the promotional activity, the greater the volatility created and the greater the disruption to the supply chain. This has the effect of masking what is fundamentally a fairly stable demand pattern with somewhat artificial volatile demand. Consequently, neither the current sales account segmentation nor the potential behavioural segmentation can be used to determine different supply chain strategies for each segment. Instead, each operation within the supply chain makes decisions based on the functional criteria that affect its part of the supply chain – decisions which bear no relation to either ofthe two retailer segmentation approaches. Thus, there is a misalignment between marketing segmentation and supply chain strategy, as illustrated in Table 2.5. 

We develop the management processes ‘source’, ‘make’ and ‘deliver’ in the next chapter.

Questions

1 How could CleanCo deal with promotions when using the behavioural segmentation approach?

2 Could this be used to drive different supply chain strategies and why?

b a retailer such as Tesco (Case study 1.1);

case study 1.1 Tesco PLC

Tesco PLC is the UK’s largest food retailer, with a revenue of about £65 billion (excluding the Tesco Bank business) for the financial year 2012–13. As illustrated by Table 1.1, Tesco has grown into a global business since the mid-1990s and now has approximately 7,000 stores across 12 countries in the USA, Central Europe and Asia, employing over 530,000 people. The number of stores in the UK alone has risen rapidly from 2,300 in 2010 to 3,146 in 2013, in part due to the opening of further Tesco Express stores (smaller convenience stores), 54 of which opened over a 6-month period in 2013. Whilst Tesco PLC is now undeniably global, with more than half of the stores outside the UK, the UK business still dominates, accounting for around two thirds of the revenue. With this in mind, the remainder of this case focuses on Tesco UK. Tesco states that its new core purpose is ‘we make what matters better, together’. This reflects that society desires business to demonstrate that it has a purpose beyond profit – a sense that large companies should be contributing more to tackling some of the big challenges. The world has changed from a culture of ‘more is better’ to one of ‘making what matters better’. As a responsible corporate citizen in the area of logistics alone, Tesco is the UK’s market leader in the use of biofuels and works hard to reduce its CO2 emissions per case delivered, through initiatives including rail, barge and alternative fuels. The company also buys considerable numbers of double-deck trailers to move more cases per trip. Consistent with the multi-channel approach (discussed in Section 2.1.2), Tesco UK operates an online Tesco store (Tesco.com), where its full range of products, estimated at around 75,000, is available. Indeed, now 50 cities outside the UK have access to 

this service. Through this growing channel, products can be delivered direct to the customer’s home or, by using ‘Click and Collect’, the customer nominates a convenient Tesco store (or drive-through) from which to collect their shopping. Whilst, typically, Tesco online orders are ‘picked’ from stores open to customers (rather than distribution centres), Tesco UK is beginning to establish ‘dot-com-only’ stores, and in 2013 five such stores had been opened. The product range held by the stores has grown rapidly in recent years as Tesco broadens its presence in the non-food market for electrical goods, stationery, clothing and the like. This massive range is supported by thousands of suppliers, who are expected to meet agreed service levels (correct time and quantities) by delivering to Tesco within specific time ‘windows’. In England alone 270 suppliers are supplying over 1,250 products each. Volumes are impressive with over 2 billion cases of product shipped from suppliers to the stores each year. Indeed, part of the Tesco business model is a virtuous circle where Tesco develops economies of scale, which allows it to invest in offers for customers, which in turn leads to Tesco selling more, and so on. So how does Tesco maintain high availability of so many product lines in so many stores? This question goes to the heart of logistics management for such a vast organisation. Logistics is about material flow, and about information flow. Let us look at how Tesco deals with each of these in turn.

Material flow from suppliers to stores

An early reform for supermarket operation was to have suppliers deliver to a depot rather than to every store. During the 1980s, distribution to retail stores was handled by 26 depots, which operated on a single-temperature basis, and were small and relatively inefficient. Delivery volumes to each store were also relatively low, and it was not economic to deliver to all stores each day. Goods that required temperature-controlled environments had to be carried on separate vehicles. Each product group had different ordering systems. The network of depots simply could not handle the growth in volumes and the increasingly high standards of temperature control. A new distribution strategy was needed. Many small depots with limited temperature control facilities were replaced by fresh food depots which can handle many products at several temperature ranges. The opportunity is to provide a cost-effective daily delivery service to all stores. Typically, a fresh food depot can handle over 80 million cases per year on a 40-acre site. The warehouse building comprises 36,000 square metres divided into 3 temperature zones: –25°C (frozen), 1°C (chilled) and 12°C (semi-ambient). Each depot serves a group of between 50 and 500 retail stores. Delivery vehicles for fresh food depots use insulated trailers divided into chambers by means of movable bulkheads so they can operate at different temperatures. Deliveries are made at agreed, scheduled times using a combination of inhouse and outsourced logistics. Grocery and non-food goods, such as cans and clothing, are delivered separately. In recent years Tesco has established four store formats – Extra, Superstore, ­Metro and Express – which vary dramatically in size from 5,500 square metres (Extra) to 280 square metres (Express), stock accordingly varying product ranges and are located in different locations from out of town (Extra) to city centre (Express). This diversification presents major challenges to supply chain management. For instance, delivering to a Tesco Express in the middle of London will require frequent small deliveries using small vans facing restrictions in delivery times. On the other hand, a Tesco Extra will require lorry load deliveries of a much wider product range (Stasinopoulos and Mena, 2010).

Information flow

So much for the method of transporting goods from supplier through to the stores, but how much should be sent to each store? With such a huge product range today, it is impossible for the individual store to re-order across the whole range (store-based ordering). Instead, sales of each product line are tracked continuously through the till by means of electronic point of sale (EPOS) systems. As a customer’s purchases are scanned through the barcode reader at the till, the sale is recorded automatically for each stockkeeping unit (SKU). Cumulative sales are updated every four hours on Tesco Information Exchange (TIE). This is a system based on internet technology that allows Tesco and its suppliers to communicate trading information. The aim of improved communication is to reduce response times from manufacturer to stores and to ensure product availability on the shelf. Amongst other things, TIE aims to improve processes for introducing new products and promotions, and to monitor service levels. Based on cumulative sales, Tesco places orders with its suppliers by means of electronic data interchange (EDI). As volumes and product ranges increased during the 1990s, food retailers such as Tesco aimed to de-stock their depots by ordering only what was needed to meet tomorrow’s forecast sales. For fast-moving products such as types of cheese and washing powders, the aim is day 1 for day 2: that is, to order today what is needed for tomorrow. For fast-moving products, the aim is to pick to zero in the depot: no stock is left after store orders have been fulfilled. This means that the same space in the depot can be used several times over. Deliveries to stores are made in two waves, at specific times and within defined windows. This helps to improve product availability at stores throughout the day, and thus support changes in demand. Updated by Joe Thomas (Tesco) 2010 and through access to the Tesco PLC website (www.tescoplc.com), October 2013

Questions

1 Describe the key logistics processes at Tesco UK.

2 What do you think are the main logistics challenges in running the Tesco UK operation?

c an automotive repair and recovery firm such as Tillers Auto (Case study 1.6); In each case, specify the organisation you have in mind and explain the reasons for your suggestions.

case study 1.6 Talleres Auto

Talleres Auto (TA) is an SME based in Barcelona. TA attends to broken-down vehicles, providing a roadside repair and recovery service. Two of the parts that TA frequently uses are starters and alternators, which are obtained from a local distributor. In turn, the local distributor orders parts from a prime distributor. Starters and alternators are obtained from a remanufacturer, who replaces the windings and tests the products using parts bought from a component supplier. A diagram of this part of the supply chain is shown in Figure 1.11.

 

• Talleres Auto is the installer

• TA buys starters and alternators from a local distributor

• The local distributor buys from a prime distributor

• The prime distributor buys from the remanufacturer

• The remanufacturer buys components from a component supplier

Figure 1.11 The Talleres Auto supply chain

Most of TA’s customers make ‘distress purchases’ – their car has broken down and they want it to be fixed quickly. So TA needs a fast replacement service from the local distributor. Whilst both the distributors recognise the need for fast replacements, the performance of the purchasing department at the remanufacturer is measured on cost savings. Thus the component supplier thinks that the name of the game is low cost. (Source: Christine Harland)

Questions

1 What are the order winners and order qualifiers at TA?

2 What are the order winners and order qualifiers at the component supplier?

3 What impact on customer service is this lack of alignment likely to cause?

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