Online auctions sharpen Tesco's purchasing moves

Supermarket chain Tesco is seeking to expand its B2B operation, by linking its online auctions to movements in the commodity...

Supermarket chain Tesco is seeking to expand its B2B operation, by linking its online auctions to movements in the commodity markets. The target? More profit and lower costs. Karl Cushing reports.

Retail giant Tesco claims to be the biggest, and only profitable, online grocer, with 85,000 customer orders per week. Now it plans to extend its business-to-business (B2B)e-commerce strategy by linking its use of online auctions to movements in base commodity markets to generate savings by changing its purchasing patterns.

"It is a very different way to buy. It is like value chain engineering done properly," said Tesco's director of B2B e-commerce David Armes. "You are building processes that allow you to have near perfect information for little cost. You are getting a lot more information on which you can base decisions and you are better reflecting the fair market price."

Tesco also plans to use its e-commerce infrastructure and supplier-facing portal to drive its move into non-food retailing and it is working with an Asian company, using its searchable Web-based system to improve supply capability and locate new suppliers in the region.

Beth Barling, a senior analyst at AMR Research, said the fact that Tesco is starting to look at commodity markets is evidence of a more "scientific" approach to the economic indicators surrounding its markets. However, she said the overall market penetration of online auctions is "still quite small" and urged more companies to look at the model.

"There is significant cash in auctions and we have achieved return on investment so far," said Armes. He added that any organisation involved in purchasing that did not use auctions needed to "have its head examined".

"Auctions are a very good, very flexible tool and at times they can be a very effective way to negotiate," he explained. "We would also argue that it is very fair, open and transparent."

Another advantage of using auctions is that they help to enforce good practice and processes. Tesco has a 20-day tendering process for each auction which it sticks to rigidly, said Armes.

Collaboration and standards are the key to using auctions effectively and reducing levels of waste, and companies need to reappraise relationships with both suppliers and competitors. "This is a good thing for the industry - we are pursuing this like mad," said Armes.

A founder member of the Worldwide Retail Exchange, an online B2B exchange for retailers, Tesco is also co-operating with other retailers, including Sainsburys, on a standardised cataloguing project, based on an online tool from Welsh firm Udex, which "normalises" data exchanged between suppliers and retailers.

Tesco currently has more than 40,000 product lines running on Udex and by the end of the year it aims to have most of its food products on the system. "Tesco's product file will be maintained by the suppliers, who know most about the products," said Armes.

The company is also looking at using the information generated by Udex to analyse advertising effectiveness, demographics and spend.

However, Armes warned against basing an e-sourcing strategy too heavily on "fancy" IT. "Better, simpler, cheaper is our phrase," he said. Armes believes a key factor behind Tesco's success in using online auctions is that it has based it on the tried and tested Electronic Data Interchange platform it has been using to communicate with its suppliers for the past 10 years.

Its strategy also recognises the importance of people and skills and has kept in line with the company's key goal of process simplification.

Armes warned users not to get carried away with the idea of making huge savings on every auction. He questioned whether large savings were sustainable. Online auctions are "just another tool in the buyer's armoury" and should be used selectively, said Armes, who advised companies to do thorough value assessments before every auction.

Relationships with suppliers also need to be given close attention because a lot of them are still ill-prepared for online auctions, he said, likening them to "bunnies in headlamps".

There is "a lack of commonality and flexibility" in many B2B exchanges, he said, predicting a shake-out in the market.

"Tesco has been doing online auctions for more than two years and it has really got it tied down now - it is a part of its everyday business," said Barling. "It is a great example. What really impresses me is its approach to methodology and processes and its ethical attitude towards working with suppliers."

Another useful weapon in the supermarket's armoury
  • Tesco uses online auctions for direct and indirect purchases, as well as services, and aims to move into non-food retailing

  • The focus is on high value areas. "Fish where the fish are," said Armes

  • B2B e-commerce encourages collaboration and closer relationships between Tesco and its suppliers, especially on product promotions, to keep shelves stocked and reduce waste

  • Tesco is committed to ethically leveraging supplier expertise. Its Udex cataloguing project will result in Tesco's suppliers maintaining its product file

  • The company believes people, behaviour and skills are more important than adopting new technology. Tesco is building on existing IT such as Electronic Data Interchange

  • Process simplification is the target - "Better, simpler, cheaper"

  • Patience is needed: the benefits of B2B will not come all at once

  • Auctions are used to enforce processes and good practice. Tesco has a rigid 20-day tendering process for each auction

  • Tesco has achieved return on investment using online auctions.

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