Tesco is working on plans to reduce logistics costs by £450 million by 2019-20.

The supermarket giant wants to make its distribution system more efficient and responsive as part of its strategy to increase group operating margin from 2.18% to 3.5-4.0%.

Tesco cut manual handling incidents by 60pcIn its report for the first half of the year, with the group stating that it was seeking some £1.5 billion of operating cost reductions over the next three years, to be realised through a more efficient and responsive distribution system, a simpler store operating model and goods not for resale savings.

The plan will also involve the generation of around £9 billion in cash from operations, including about £400 million from reduction in stock.

The group reported a 1% increase in like for like sales in the first half of the year, while operating profits were up by 60% to £596 million on sales up 3.3%to £24.4 billion.

The cost reduction plan is part of a package of six strategic drivers (see below) outlined by chief executive Dave Lewis, who explained: “While the market is uncertain, we have made significant progress against the priorities we set out two years ago, stabilising the business and positioning us well for the future.

“Today, we are sharing the plans we have in place to become even more competitive for our customers, even simpler for colleagues and an even better partner for our suppliers, while creating long-term, sustainable value for our shareholders.”

Tesco is aiming to reduce operating costs by a total of £1.5 billion through initiatives in three areas: the store operating model, logistics and distribution, and goods not for resale.

In logistics and distribution, Lewis outlined a series of initiatives to cut costs by some £450m, focusing on optimising range, stock flow and fulfilment. These include:

Partnerships, sales forecasting and lower stock holding

Lower fulfilment costs

Opportunities to integrate supply and logistical systems

Common international systems

Industry leading packaging solutions