Tesco has ramped up its non-food position in Central Europe by consolidating its clothing and hard-lines supply chains there. Joanna Perry examines how the project was achieved

Tesco wants to be an international retailer and as strong in non-food as it is in food. Its launch in the US last October and announcement last month of plans to takes its Express fascia to China are where much recent attention has been focused. However, its more established international businesses are still very much developing and innovating to help it meet these aims.

In Tesco’s last interim statement, chairman David Reid made a fairly innocuous statement about the grocer’s advances in Central Europe. “Our new clothing and hard-lines distribution centres, located close to Bratislava, which handle general merchandise for the whole of Central Europe, are now fully operational and delivering significant benefits,” he said.

But that doesn’t come close to conveying the scale of the centralised non-food operation created in the region, which has been supported by a£200 million investment and a significant technology project.

A team of 60 staff – of thirteen nationalities – from Tesco and technology consultancy Enabler Wipro worked on the implementation of an Oracle-based IT infrastructure. It has underpinned the creation of a consolidated purchasing and logistics operation across Poland, the Czech Republic, Slovakia and Hungary, with links to the UK buying teams.

Since 2006, Tesco and its technology partners have worked on the development of the systems; first for the clothing business and then for the hard-lines business.

In the first stage of the project, Tesco rose to the challenge of building the clothing business and supporting supply chain from scratch, in less than a year.

The Oracle Retail Management System, its financial application and a third-party warehouse management system had to be integrated with Tesco’s existing store set-up in each of the countries. The implementation of these systems for the clothing business went live in phases, starting in August 2006 and finishing in March last year.

The first phase to go live was for the purchase order buying processes. Enabler Wipro European general manager for retail Mike Davies explains: “There was a great desire to build the foundation quickly. Tesco had announced the aim of growing non-food from£1.6 billion to£2.75 billion within five years in the region. It wanted the ability to place orders and receive the stock on the new system, because clothing orders are done quite far in advance and using the new system for the region would improve purchasing power.”

New buildings were constructed to house the operation. It was essential to make sure that orders were processed on the new system so there was stock to fill these warehouses once they were finished. The first clothing orders made using the system began to be received in November 2006.

The need to extend the system’s remit from clothing to non-food influenced the project from the start. Davies explains: “We knew we were building a platform for non-food and not just clothing, so we knew we had to build something robust. Now we have moved forward and built the system for hard lines.”

The next step in the development of the system will occur if Slovakia adopts the euro. This is due to be decided by the middle of 2008, with a view to a changeover on the January 1, 2009.

Tesco chose Oracle’s applications because it is the retailer’s preferred enterprise solution vendor in areas such as merchandise management. Davies says: “It was possible for Tesco to see other clothing retailers running this application, so they could see it had the necessary functionality to support the operation. However, it knew that there would have to be some minor modifications for hard lines.

“The first thing Tesco did was a feasibility study to work out how it would make the system work for its business.” He adds that Tesco wanted to use Enabler Wipro’s experience of “how to bend the system without modifying it”, because it needed to get the purchase order buying processes up and running quickly.

Tesco also always has to look carefully at how many changes it makes because of the operating model. Tesco’s operating model has grown out of its “Tesco in a box” standardised systems, which were deployed initially to four countries. Although different countries are at different stages with the operating model, the aim is to standardise business processes and deliver technology architecture and systems that can be replicated in each country it operates in.

Davies says: “There is a desire within Tesco to stay as close to the operating model as possible, because then it is easier to support and upgrade systems.” Tesco was able to do this because business processes could be created to fit with the software.

While starting from a relatively blank canvas had its benefits, it also created extra pressures. “One of the challenges was creating something from scratch,” says Davies. “To build that supply chain and mobilise the cross-country, cross-cultural team took a bit of doing. It was a credit to the programme management team; they freed up people to look at this.”

One of the big successes of the project was the central project team that was made up of both Tesco’s IT and business staff. Davies says that it is crucial that the same people who develop the system are also managing and using it, because it is a business solution that is there to support them in their work.

Tesco also learnt valuable lessons in the first phases of the project for clothing, which it was then able to apply when the systems were later rolled out for the hard-lines business. Davies says: “If we did it again, most of what we did would be repeated, but we might do more testing across the supply chain.”

The testing process was complicated by the need to ensure that the systems would work in the multiple environments where they have been deployed. They are accessed by staff in London, the central operation and staff in each country.

Creating a template

Other parts of Tesco will feel the benefit of this project in the longer term. “The idea was that we could use the Central Europe project as a template for clothing and then hard lines that could be offered up to the operating model,” says Davies.

However, he adds that because the operating model constantly evolves with each major project that Tesco undertakes – such as its launch of the Fresh & Easy format in the US – the template is likely to be adapted for further implementations.

Nevertheless, the systems have had a huge impact on the business. Some 18,500 lines of own-brand clothing – all with relevant labels in one of four languages – can now be supplied to the four countries and each store can be replenished daily. Direct sourcing has increased from 25 to 75 per cent of clothing volumes and Tesco has also been able to rationalise its supplier base from 1,000 to just 75.

“At the top level, Tesco wanted to consolidate its position as a pioneer in non-food in Central Europe,” says Davies. He explains that the project was intended to help position Tesco as a “fashion destination”, not just based on price, but also on how fashionable the clothes are. To ensure this, he says, the system had to be efficient and minimise markdowns by “getting stock out there quickly and selling it through”.

In its latest interim results, for the half year to August 22, Tesco reported that its European sales jumped 18.8 per cent at actual exchange rates to£3.6 billion. The Czech Republic and Slovakia delivered strong growth and Tesco says that it was also pleased with the profit growth in Hungary, despite the subdued economy.

In particular, its compact hypermarket format has worked well in Slovakia. Half of its total space in the country is this format, with 37 stores of this kind opened and four more planned for the second half of Tesco’s financial year.

Davies says the project demonstrates that large companies can still be agile. The speed of the project has allowed Tesco to deliver on its core aims quickly, despite the long lead times associated with sourcing clothing.