Wheels of Commerce

In a rapidly evolving supply chain, a growing number of branded wine shipments are now subject to the same considerations as any other FMCG. James Graham reports

THE LOGISTICS OF supplying the global wines and spirits industry is increasingly moving from being a back-office function of the business to become a leading player in its own right.

The fact that producers, retailers and transport providers are treating the international movement of alcoholic products as seriously as the health of the vine comes as no shock, despite the surprising detail that as recently as the late 1990s, nine out of every ten litres of alcohol produced in the world were consumed domestically.

Talking to logistics managers, it soon becomes clear that a number of issues face the movement of alcoholic products outside a country’s borders and have moved the logistics function forward.

The sheer volume of exported wine, for instance, has made the industry realise the importance of specialist logistics knowledge.  As an example, last year the US exported 281.8 million litres of wine worth half a billion dollars. This translates into some 17 million cases.

This is dwarfed by the world’s largest export producer, Italy, which in 1996 exported 1.4 million tonnes of wine.  Many responsible for transport in the industry have noticed that the global rise of the branded product, especially New World wine, is having unexpected repercussions on transport planning and provision.

From New World wineries such as Gallo and Southcorp are coming labels that become FMCG (fast moving consumer goods). 

This implies large volumes, a supply that has to be constant and predictable, transport costs squeezed to a minimum and systems established to allow a certain branded wine to be available to ontrade end-users as well as off-licence customers with the predictable certainty of the daily loaf of bread.

Another issue has become "transparency" in the chain – wine producers, distributors and retailers sharing data through internet portals – to achieve the seamless merging of wine production and global commercial transactions.

Another issue has been the rapid development over the last decade of specialist, third-party logistics providers who have cultivated a specialisation in the requirements of moving bottled and bulk alcohol products.

While commercial trends might seem to be promoting the growth of international trade, new considerations are making such free trade in alcohol more difficult.  For instance, the need for tightened security in the transport chain is demonstrated by the decision of some wine importers to the US to join the US Customs’ Trade Partnership Against Terrorism Program (C-TPAT).

One transport provider with a long association with the European wine trade is JF Hillebrand, which claims its customers will benefit from a steady flow of shipments to the US market since it has now joined the programme, since participants benefit from expedited processing of cargo entering the US and fewer inspections.

"C-TPAT certification is crucial in allowing us to maintain just-in-time supply chain delivery to the US market," explains David Ferris, vice president of logistics at JF Hillebrand USA. "Our customers will now benefit from efficient supply chain management that is recognized by US Customs as being in compliance with their strict security procedures."

C-TPAT is a voluntary initiative, and to become a member companies must carry out a rigorous review of supply chain security including procedural, physical and staffing issues as well as conveyance protection.

US Customs rewards participation with "an entry process marked by the efficient release of goods and the prompt resolution of any outstanding issues affecting Customs processing of shipments".

"There are lots of key issues facing global drinks logistics," says Eric Wright, operations director at freight forwarder Kuehne & Nagel’s wine & spirits division, "but to us the most important aspect is the customers’ required delivery date (RDD).

We need to persuade the other links in the chain how important this is, and how it must be made to happen.  "Every link has its own concerns and different points that they consider as important to them, but unless the trade delivers on time, there is no repeat order," he warns.

"Executives spend time visiting overseas sites to explain this function, and with local offices being developed in major markets, it helps to emphasise that no part of the chain can afford to lose sight of this date at any time."

The company’s website carries the slogan "Sorry, no ageing possible during transport."  "We are specialists in the movement of beer, wines and spirits and as such we understand the requirements of the trade in general, and have built up knowledge and expertise over many years, developed with the help of many of our customers.

The ability to react to changing markets, on a daily basis if required, has to be achieved in a seamless way so the supply chain works without interruption," explains Wright.  Kuehne & Nagel moves mainly cased products, from every wine growing region of the world to the UK.  Cased product is by far the larger part of the industry.

Given the high value of the stock transported, what issues does Kuehne & Nagel face on security in transit? According to Wright, "Control has to be exerted on all the important steps during movement, particularly when it reaches the UK shores.

Procedures for checking that all systems have been followed need to be in place at all times, even if this means a double or triple check to ensure the safe passage to delivery."

Asked if there are any aspects of wine logistics that he might say he "loved or loathed", Wright is open: "We all love the feeling of seeing the product on the shelf, ready to be bought by the consumer, and knowing we helped make that happen.

We could say that we ‘loathe’ the inconsistency in Customs rules and regulations.  As these are left to local interpretation, what is fine in one part of the EU or UK is not in another part, which can create difficulties in the supply chain."

As with any business, in global logistics it’s often size that matters, and the Australian wine industry is a good example of this.  As a beneficiary of the technical advances in the sector, Australian growers are now able to boost exports to key markets in the EU by using some of the largest containers on the sea coupled with boosted timetables that cut sailing times to Europe to just one month, increasing their reliability and popularity with buyers.

In fact, the 40  foot containers used to bring Western Australian wines to the UK are now so heavy they are above the weight limit allowed on UK roads.  Each international standard container can load upwards of 1,850 cases, says Jeremy Pearson, sales and marketing director at Tilbury-based London City Bond, and would exceed UK weight limits on public roads.

But as the company’s warehousing is located within the private limits of Tilbury docks, there is no issue as these containers stay completely on private property – but the benefit offered to the major Australian exporters is obvious.

Another key area in the setting up of effective logistics chains and systems globally, is distribution. A drinks business on the global scale of UK-based drinks group Diageo has, for example, a distribution network that works on a global scale.

Brands such as Smirnoff, VAT 69, Gilby’s and Guinness each have their own complex dynamics in storage and distribution to meet worldwide demand, and the company has had to create systems to deal with this efficiently and effectively.

The company has created distribution hubs to support sales in grouped countries.  The key factor is commonality of SKUs (stock keeping units) and the associated inventory needed to support and meet demand.

SKU management is based on each single product having its unique number.  Half of the company’s distribution centres are managed based on predicted demand and inventory levels, made to stock rather than "made to order".

This enables Diageo to use inventory to support efficient transport or meet appropriate production efficiency requirements, as well as avoid the need for express road services as product can be drawn from stock close to the market.

The majority of Diageo’s transport is outsourced. In most cases it has a "pay as you go" model for physical transport apart from, at the moment, the transport of Guinness in the UK where there is a dedicated third party fleet.

Business is dominated by certain peaks and therefore flexible transport arrangements suit its business model better.  Transport planning is not done at brand level.

Supply centres (production sites) produce a mix of brands and SKUs so each centre plans its transportation based on market demand and production.  A substantial proportion of production is exported and hence shipping constraints also come into force.

"We differentiate between the relationship for the physical provision of transport and the management of the requirement.  For the latter we have a mixed model where in some cases we have our own in-house resource building loads and routes to then book with hauliers opposite third party suppliers providing the service.

A key factor can be the delivery profile full unit loads (our in-house model) versus large volume part loads where transport optimisation may require external input from a third party to build a more cost effective load possibly through a satellite platform," explains a Diageo spokesman.

"We rank the physical provision of transport as an ‘open market’ item where good quality suppliers are readily available and competition high.  If the reverse existed depending on market/location/requirements then we could choose to form a more strategic alliance.

An understanding of the characteristics of the marketplace in terms of supply and demand is important and this is a first step within our category management process," he explains.  But how does the cost of distribution impact on Diageo’s bottom line? In truth, the company is more concerned about the real cost to its business if distribution fails.

"In terms of failing to satisfy the customer requirements then it has a big impact through potential lost sales as alternative brands are readily available in this competitive marketplace," he says.

"Most of our customer service teams would subscribe to OTIF (On time and in full) levels in the high 90s, average 98%, which also reflects how much emphasis we put upon the strategic sourcing of suppliers and getting the balance right between cost and service.

"In terms of distribution as a percentage cost of sales value including tax then the cost is very low. In terms of how much we spend as an organisation or to a key market then the total value is quite significant.

In the total UK market the spend may be in the region of around £45m, while globally it could be about £400m.  Consequently Diageo, unlike many other organisations, treats distribution as a procurement category item (rather than a task managed at functional level) and deploys a small dedicated global procurement team to strategically lead this category," he says.

It is unlikely the company would change distribution channels to shave cents while OTIF is so high and it is quite mindful of the often overlooked cost of change.  "The issue for us is not price reduction but delivering value back into the organisation which can be a combination of hard and softer issues.

You would have to understand our category management process to fully appreciate how we manage cost, but it is worth noting that distribution is given a high profile in this organisation and that we are quite scientific regarding the process."

Most of Diageo’s product is moved bottled to gain production efficiency and to best use its assets.  It does, however, move liquid between plants and uses external co-packers where demand exceeds capacity to supply.

"We have a number of bottling sites around the globe and so we can regionalise production for some brands.  There is also the heritage issue that suggests Scotch, for example, should be produced and bottled in Scotland, Baileys in Ireland, Tequilla in Mexico, etc.

We do, however, regularly examine local bottling opportunities and impact upon our asset base, lead times and costs," he concludes.

Reflecting the changing nature of much of international drinks logistics activity, UK offtrade retailer Thresher Group has looked to redefine the nature of its global logistics, working closely with beverage logistics specialists JF Hillebrand.

The move sees the drinks retailer working more closely than ever with producers to source product more efficiently, more quickly and more cost effectively, resulting in a dramatically different end-to-end supply chain and improved logistical capabilities.

The first container of product was from Chile, where the Thresher Group has just launched the initiative, following a successful trial period in South Africa.  The business plans to establish this system in every significant wine trade lane by early 2004.

The new model brings together some of the latest thinking in effective supply chain management from across the retail sector, and centres around establishing a clear partnership arrangement with producers, logistic service providers and Thresher Group whereby comprehensive sales forecast datais shared on a greater level than ever before.

This allows producers to better predict their own production needs and better manage production schedules, resulting in shipments which accurately reflect sales demands.  Product is consolidated for the first time into one central warehouse in the source country.

Here, all producers make their delivery to one location, ensuring the business is better able to control load planning, with mixed loads leaving the source country as needed.  This contrasts with the old method where producers sent their own stock for shipping in full container quantities.

This process has allowed the lead time on stock ordering to be halved, ensuring the business is more responsive to the changing demands of customers and therefore the needs of retail units.

Stuart Higgins, supply chain director at Thresher Group comments, "Following a successful trial period in South Africa, we know the project works and intend to roll it out to our other main producing regions worldwide.

The initiative is not only cost efficient, it is great news for shops.  "We have had an excellent reaction from producers who appreciate our new collaborative approach and, following negotiations with other major producers, we are very confident about the future of this programme.

We have been able to achieve our goal of higher product availability with lower overall stockholding and this gives us the competitive edge we are looking for in the global wine supply chain," he says.

It won’t be too surprising, then, to see other retailers moving towards similarly forward thinking systems in the near future.