Diageo restructures for success

By Toby B. Gooley, Managing Editor -- Logistics Management, 6/1/2006

Until last year, Diageo, one of the world’s largest makers of alcohol beverages, was duplicating efforts when it came to logistics. The company’s Customer Service & Supply (CS&S) group was supporting its Spirits and Beer businesses with separate logistics teams, distinct supply chains, and different enterprise resource planning (ERP) systems. That approach had served the company well for many years. “Diageo was operating within distinct verticals based on the business needs at the time and on established areas of expertise,” recalls Senior Vice President, Customer Service & Supply Scott Barnhart.

Then a series of developments spurred the company to restructure its logistics operations into a single organization. As one might expect, that strategy has introduced many efficiencies and saved a great deal of money. But it has also been the catalyst for what Vice President, Logistics Erik Snyder calls “a chain reaction of interdependent initiatives that address our business needs.”

Two Strategic Initiatives

After acquiring the Joseph E. Seagram Company’s spirits and wine business in 2001,Diageo found itself shipping some 85 million cases a year to a larger customer base. At that time, several third-party logistics companies (3PLs) were managing multiple carrier bases in three modes of transportation: ocean, rail, and truck. Meanwhile, driver and equipment shortages, regulatory changes affecting truck drivers, and record demand for truckload and intermodal capacity were making it more difficult to meet the shipper’s transportation needs.

The CS&S team recognized that it was time to rethink Diageo’s logistics strategy. “With the acquisition of Seagram, we increased our scale and challenged ourselves to evaluate the status quo of how we were operating so that we could recognize opportunities for streamlining our business,” explains Barnhart.

Toward that end, the team focused on two strategic initiatives. The first was the implementation of SAP’s ERP system for both Spirits and Beer, a critical step toward developing a single, integrated logistics network. “SAP enabled CS&S to have total visibility across both supply chains and the ability to manage the business holistically,” says Snyder.

The second initiative was a restructuring of CS&S to support an integrated supply chain. During the planning stage, CS&S asked Diageo’s customers and internal stakeholders about their needs. Based on those surveys, the group identified and prioritized several requirements: Ensuring transportation capacity to meet changing market demand; consistently meeting customers’ expectations; providing timely, accurate data and proactively communicating exceptions; using preferred carriers; and reducing costs through better asset utilization.

That feedback helped the group design a three-part structure. Transportation is responsible for freight moves, including ocean, drayage, intermodal, over-the-road, bulk, boxcar, and dedicated fleets; Warehousing is responsible for third-party and plant-located warehouse operations; and Inventory Control/Compliance is responsible for reconciliation of physical and “book” inventory and for customs compliance. This structure allows the CS&S logistics team to extract more value from carrier and 3PL relationships, develop specific functional expertise, and manage a single, integrated network, Snyder says.

One Improvement After Another

The move to a single network called for a more unified management approach. Diageo issued a rigorous request for proposal (RFP) to its incumbent 3PLs, offering them the opportunity to take on the entire operation. After careful consideration, the CS&S team chose Exel Inc.

Almost immediately, the partners launched initiatives that have led to one operational improvement after another. Once all truckload volume began flowing through Exel’s transportation management system (TMS), Diageo could for the first time capitalize on synergies in its network to “essentially feed ourselves capacity,” says Snyder. Single-source oversight also allowed Diageo and Exel to establish dedicated fleets in four locations, begin managing raw materials through the network, and introduce continuous moves. “For example, we use our dedicated fleet to move glass from a warehouse to our plants, and we use the same fleet to move finished product back to the warehouses,” Snyder explains.

The new system, moreover, has helped Diageo consolidate its carrier base and implement uniform performance standards and measurements for both Spirits and beer. And the partners have developed a Web-based tool that lets the shipper, 3PL, and external customers view the status of all domestic shipments.

Although initially there was a dip in service, Snyder says, on-time delivery rates have improved, thanks in part to the use of dedicated fleets to overcome capacity constraints and ensure on-time delivery of critical shipments. The team's newfound ability to set up continuous moves across the Spirits and Beer businesses while leveraging transportation procurement and maximizing intermodal usage has significantly reduced transportation costs, he adds.

If Diageo’s strategy could be summed up in a single phrase, it would be this: Simplicity pays off. “Consolidating the Spirits and Beer networks … has created a single, consistent way of working with customer-service and supply-planning teams,” Snyder says. Adds Barnhart: “The purpose of the logistics reorganization was to drive costs out of our supply chain. There was a lot more value in simplifying our structure and processes than we could have gained from a head-count reduction in our logistics team.”