Simulate before you act

British food retailer Tesco found that running a computer simulation of a proposed supply chain restructuring paid off.

By James Aaron Cooke -- Logistics Management, 9/1/1999

Computer bits are cheaper than bricks. That's why some companies use computer modeling to determine the value of building a new distribution center before spending millions of dollars on a construction project.

Tesco Ltd., Great Britain's leading food retailer, can attest to the advantages of computer modeling. Before launching a supply chain restructuring, it used a state-of-the-art simulation tool to determine whether to revamp its frozen-foods distribution network. That computer simulation validated corporate plans to restructure the network and build a separate facility specifically for frozen-foods storage. "We were in need of some facts and figures to substantiate our decision," says Joe Galloway, Tesco's divisional director-supply chain information technology. "That's where using the simulator came in ... it allowed us to use a fact-based approach to prove our decision was the right one."

Specialized Deliveries

The giant British food retailer traces its roots back to the post-World War I period when Sir Jack Cohen began selling groceries in London's East End. The brand name Tesco first appeared on tea packets in 1924. The name came from the initials of T.E. Stockwell, a partner in a tea supplier, and the first two letters of Cohen's surname.

Today, Tesco has become the number-one food retailer in the United Kingdom. Headquartered in Chestnut, Hertfordshire, it operates some 639 stores. In addition to its British outlets, the food retailer has stores in Ireland, Northern Ireland, Hungary, Poland, the Czech Republic, Slovakia, and France, as well as in Asia. For the fiscal year ending in February 1999, it reported gross revenues of nearly $30 billion.

To serve its British stores, Tesco runs 13 distribution centers itself and subcontracts the operation of another six centers to third-party logistics providers. Each distribution center--or depot in British parlance--operates around the clock, seven days a week, typically providing about 2,500 deliveries daily. A distribution center might serve anywhere from 50 and 80 stores, depending on the region.

Tesco operates its own private fleet for store deliveries; in fact, that fleet, which includes 1,200 trailers, is the second largest in the United Kingdom. In addition to moving products from the distribution centers to the stores, the fleet vehicles also pick up inbound goods from suppliers.

The grocer uses specialized delivery trucks, which have three separate compartments for different temperature zones. Operating compartmentalized vehicles lets Tesco haul a wider variety of products in a single shipment.

Tesco groups its products into four categories based on their temperature requirements. "Ambient" products are general grocery and non-food items found on store shelves. "Semi-ambient" products include some types of produce. The "chilled" category covers fresh meat, fish, poultry, and most produce. And, finally, there's the "frozen-foods" category, whose items normally require shipment at minus 25 degrees Celsius.

Eight of Tesco's British distribution centers carry a mixture of ambient, chilled, and frozen products. "These composite depots have two or three temperature regimes, including frozen, under one roof," says Galloway.

Two years ago, Tesco executives began weighing the idea of creating a stand-alone warehouse strictly for frozen-food items, which account for about 10 percent of the company's grocery-store sales. The rationale was that a separate facility would allow the retailer to expand its range of frozen-food products and gain operational efficiencies. "We were playing with [the idea of] opening one dedicated frozen depot in the south [of England] and taking the frozen chambers out of four southern composites," says Galloway. "We felt that would give us economies of scale."

Before they approached the company's board of directors with the plan, Tesco's distribution executives decided to simulate the plan's impact on distribution with a computer model.

Virtual Restructuring

In October 1997, Tesco approached IBM Corp. of Armonk, N.Y., to discuss using the consulting firm's software simulation tool to evaluate its plans for revamping frozen-food distribution. That tool is a Windows NT-based software application dubbed The Supply Chain Analyzer.

The Analyzer mimics the gamut of supply chain activities from receipt of raw materials to factory production to distribution. It can create scenarios for manufacturing, inventory planning, supply planning, and distribution. Because it can depict different hypothetical situations, the software gives companies a way to see the physical, financial, and informational impact of supply chain restructuring on a distribution network.

It took IBM consultants six weeks to set up and run the computer model with Tesco's help. Galloway reports that much of that time was spent gathering a year's worth of detail-laden data about its composite facility operations to put into the model. "We were looking for data on the actual orders that went through our supply chain by [product] line and by store," he says.

Once the data were fed into the application, it corroborated the soundness of the model. Galloway says the Anaylzer's profile of the current frozen-food distribution operations came within 1 percent of its actual costs. "That validated our theory that the simulator could do the job in terms of modeling our environment," he says.

When Tesco executives ran the same data through the computer model to simulate a restructured supply chain with a dedicated frozen-food facility, the results supported their assumptions. The model indicated that the food retailer could achieve distribution savings in the range of 2 to 5 percent, depending on the actual mix of frozen-food products stored in the dedicated facility.

To begin with, transportation costs would drop because Tesco could eliminate trips between distribution centers and make more direct store deliveries. Under the existing setup, the food retailer engaged in a stock-holding practice known as "twinning." One composite facility would hold half the frozen-food product mix, and a second warehouse would store the remainder. Because of twinning, a truck would have to retrieve products from two warehouses before it could deliver a full range of frozen foods to one store. "By sourcing out of one depot, you eliminate one trip," says Galloway. In addition to consolidating outbound trips, Tesco also determined that it could realize some savings on the inbound haul because it would only have to move products from suppliers to a single point rather than to two or three warehouses.

If all of the frozen-food supplies were stored in a dedicated facility, the model showed, Tesco could actually reduce its stock holdings or even expand its mix of frozen-food products and increase stores sales in this category.

By building a special warehouse for frozen foods, Tesco also would eliminate the need to construct more facilities in the future. Moving frozen foods out of the composite distribution centers would free up warehouse space for the expansion of chilled products, says Galloway. "So we are also able to defer building another composite facility."

The computer modeling also demonstrated that using a single-point facility would not impair service to Tesco's stores. "We have a service requirement that 98 percent of goods stored in a particular distribution center be in stock at any given time," says Galloway. "Using the simulator, we proved that service levels wouldn't be degraded."

The simulation also showed that the company might benefit by trying some alternate approaches. "We could see an advantage to not servicing all of the products through one central point but having some kind of cross-docking through the other four composites for stores not close to the central facility," Galloway recalls.

Finally, the simulation gave Tesco some insights into its current operation that allowed it to make an immediate, money-saving change. The company discovered that it could cut back deliveries of certain slow-moving items to once a week and still maintain adequate stock for its stores. "There were some quick wins for us," says Galloway.

Getting the Green Light

With its case for restructuring bolstered by the results of the computer modeling, Tesco's distribution management presented its proposal to the company's board of directors. "It's a way of proving to the board that it's the right decision," says Galloway.

In the first quarter of 1998, the board approved an $80 million project to buy land and construct an automated dedicated frozen-food warehouse. Since then, the grocer has been scouting for a suitable site north of London to construct a 500,000-square-foot building. Once the building is completed in September 2001, Tesco will turn over the facility's operation to a third-party logistics company.

Although computer simulation helped persuade the board to approve the restructuring plan, it had another benefit as well. The simulation gave Tesco's logistics managers a deeper insight into their own supply chain's operation. "By the end of the exercise," says Galloway, "they had a better understanding of that area of the business. It got them thinking about costs and efficiencies of the supply chain."