Saturday, February 9, 2013
How Tesco decides what to stock
Last week’s class discussions revolved around demand forecasting to determine the production, inventory, and capacity levels of a firm in order to maximize the supply chain’s profit. Forecasting the demand is really important especially if you are in a supermarket business where you need to stock up right amounts of goods at the right time. Also, managing inventory related to perishable goods like vegetables, meat and other food items presents a different challenge altogether. There are a lot of factors that influence consumer buying behavior like state of economy, seasonal changes, price of goods etc.
Tesco, one of the UK's biggest grocers has found that weather has the biggest impact on sales after general state of economy which prompted it to create its own weather team in hopes of better forecasting temperatures and how consumer demand changes with them. [i]The team spent three years in research, and created its own software to determine how shopping patterns change “for every degree of temperature and every hour of sunshine”. This software seemed really help full in forecasting the demand in the UK where weather is so unpredictable that it is often a downpour followed by sunshine within same hour several times a day. [ii]
The software program contains detailed regional weather reports for the past 5 years and also what each Tesco store in the UK sold as a result of weather. Tesco’s team found a lot of interesting and useful patterns like a rise of 18 degrees in temperature leading to a 300% increase in sales of barbecue meat or a 50% increase in sales of lettuce. Also, in contrary to what people usually believe sales of ice cream were found to be highest not in summer but at around a temperature of 77 degrees in the southern parts of the UK and around a temperature of 66.2 degrees in the North.[iii]
Overall, the demand forecasting based on weather now helps Tesco to stock right amount of product on the shelf every day of the year which also means they don’t order too much, reducing the wastage of food and also costs . It also helps Tesco in its quest to become more environmentally friendly by cutting down unnecessary wastage and saving on energy that would otherwise be required to refrigerate huge quantities of products.