How Diageo reduced risk in Asia

By James A. Cooke | Supply Chain Quarterly

By tailoring its supply chain strategy for specific product segments, the global beverage company reduced the risk of disruption to its growing Asian business. In the process, it gained a competitive advantage in this vast and variable market.

The vastness of Asia makes supply chain operations in that region especially susceptible to disruptions. A 2012 study by the Asian Development Bank reported that people living in the Asia-Pacific region are 25 times more likely to be affected by a natural disaster than are residents of Europe or North America. And it’s not just natural disasters that can impact supply chains in that part of the world. Geopolitical upheavals, epidemics, currency fluctuations, port delays, terrorist attacks, and volatile fuel prices also can wreak havoc with Asian supply chains. Despite those risks, many companies view the Asian market as critical to their long-term growth. To succeed in that continent’s diverse and far-flung markets, then, they must adopt strategies to confront such challenges.

One of those companies is Diageo plc, the global manufacturer and distributor of premium spirits, wine, and beer. Serving the Asian market is a complex undertaking for Diageo, which imports more than 60 percent of the product it sells in Asia from Scotland. That’s because of country-specific differences in duties and regulations, a huge range of stock-keeping units (SKUs), the perishable nature of its products, the long lead times for transportation, and market demand volatility. All of those factors can influence inventory, warehousing costs, production flexibility, and customer service.

In order to ensure a steady supply of products to satisfy consumers throughout this diverse and challenging market, Diageo segmented both its product lines and its supply chain into three categories. The company tailored its distribution and inventory practices to each product segment, and used local manufacturing or postponement to minimize the impact of any supply chain disruption on its Asian business.

But the impact of this business model extends far beyond risk mitigation. The differentiated product/supply chain strategy also enabled Diageo to reduce its inventory holdings for certain products while still meeting consumer demand that is specific to national markets—a distinct competitive advantage.

Asia: Targeted for growth

Headquartered in London, Diageo plc is a multinational beverage company. As the world’s largest producer of spirits, it owns such well-known brands as Johnnie Walker Scotch whisky, Captain Morgan rum, Smirnoff vodka, and Tanqueray gin. It’s also a major producer of wine and beer, owning the Guinness label, among others. The company reported more than US $17 billion in worldwide revenue in fiscal year 2013 from sales in 180 countries.

Although North America and Western Europe accounted for 33 percent and 19 percent, respectively, of its net sales in fiscal year 2013, Diageo is looking to emerging markets for much of its future growth. The company is already well established in those markets. In 2013, South America represented 13 percent of net sales; Africa, Eastern Europe, and Turkey comprised 20 percent; and Asia and Australia 15 percent. But Diageo wants 50 percent of its business growth to come from emerging markets by 2017 and is aiming to lift Asian sales to 25 percent of overall revenue by then, says Joy Rice, Diageo’s Asia-Pacific supply chain support director.

That may sound like a tough goal to meet, but the Asian market offers Diageo a tremendous opportunity to increase sales. For one thing, Rice says, Asians consume the highest volume of spirits in the world in terms of gross sales. For another, the Asia-Pacific region is home to one-third of the world’s richest people, making it a target market for luxury goods like high-end beverages. But Asia-Pacific can’t be viewed through a single lens, Rice says, because it includes discrete national markets with different social norms and customs, and various levels of income.

Efficient, responsive, and agile

To address those market intricacies, Diageo five years ago segmented its Asian supply chain into three categories, based on product complexity and predictability of demand. On a volume basis, most of the company’s sales fall within what it terms the “efficient” supply chain category. The products in this category achieve high-volume sales, enjoy predictable demand, and don’t require special packaging or treatment. They’re generally made on dedicated production lines and can be shipped using the most cost-effective form of distribution. Examples of products in this category would be widely available, moderately priced brands like Johnnie Walker Black Scotch whisky or Smirnoff vodka.

The second segment—dubbed the “responsive” supply chain—includes lower-volume product with more volatile demand. To ensure supply in the face of fluctuating demand, inventory is held close to the market where it is consumed. Products in this category can also require customization, such as special packaging. An example would be Johnnie Walker Blue Scotch whisky, a higher-priced, premium blend sold in a silk-lined box with a certificate of authenticity.

The final category—the “agile supply chain”—includes product with highly unpredictable demand that must also reach the market within a critical time period. To ensure adequate supply for this product category, Diageo must have both manufacturing and distribution agility, as serving this specialty category can require production ramp-ups and even sudden exits of a product from the market. An example would be the new Johnnie Walker Explorer’s Club Collection, specially packaged product that’s only available in travel retail outlets and duty-free shops.

Diageo has established local production capacity for each of the three segments. The company considers manufacturing in Asia to be critical to its ability to provide Asian markets with consistent customer service and prevent supply disruptions. “It allows us to keep product closer to the market to reduce lead time,” Rice explains. Moreover, local manufacturing is what makes it possible for Diageo to execute a differentiated supply chain, she adds.

At present Diageo operates 13 manufacturing facilities, either wholly owned, joint ventures, or third-party operations, in the Asia-Pacific region. Diageo’s wholly owned facilities, located in Bundaberg, Queensland, and Huntingwood, New South Wales, Australia, and Incheon, South Korea, produce a wide range of products for the Asian market. Diageo also has joint-venture and third-party bottling facilities in China, Vietnam, Singapore, Hong Kong, Indonesia, Japan, and Malaysia that produce spirits and beer, including some that are specific to local markets.

A key element of Diageo’s Asian risk management strategy was the opening of a product-finishing and distribution center in Singapore in 2006. The center, which has the capacity to handle 8 million cases of liquor annually, allows Diageo to efficiently handle imported beverages. Imported product—for example, Scotch whisky, which can only be labeled as such if it is made in Scotland—is transported in bulk, in cases, and in kegs. It is held in the Singapore facility until there is a specific demand for it. The DC then applies the appropriate labels and tax stamps for the individual national markets and ships the order.

Because it can tailor products to local markets and ship them in response to changes in demand, the Singapore center supports Diageo’s responsive and agile supply chain strategies. “It allows us to mitigate demand volatility,” Rice says. But there have been other benefits, too. “Since its launch, we have improved customer service,” she says. “The decision to finish some of our products in Singapore, rather than Scotland or elsewhere, has reduced lead time from eight to ten weeks down to one to three weeks.”

In 2011 Diageo constructed a “super-premium” finishing center in Singapore, located adjacent to the first facility. The new center further supports the company’s agile supply chain strategy by developing time-sensitive products for special occasions. For example, it creates special liquor packages for the Chinese New Year and Vietnam’s “Tet” New Year celebrations. The center can even produce packages with special engravings on them. Performing these activities in a purpose-built facility has undeniable benefits. “Our super-premium finishing center allows for limited-edition, small-batch orders to be quickly assembled at short notice without compromising cost efficiencies and disrupting the supply chain operations for the rest of our portfolio,” Rice explains.

A competitive advantage

While Diageo’s approach has been very effective in mitigating supply chain risk in Asia, it has also helped Diageo better manage its costs and forward planning. For example, because the Singapore center allows Diageo to reduce long lead times for imported product, especially Scotch whisky, the company can hold less inventory in Asia and still respond quickly to local demand. “By establishing a distribution and finishing center and a super-premium center in Singapore, we’re able to keep our products closer to markets in the region,” Rice says. “Markets now have the option of placing orders with a shorter lead time and improved forecast accuracy.”

Diageo’s differentiated product strategy results in a competitive advantage in Asia, Rice says, because it gives the global manufacturer the ability to sell a range of products that meet different consumer demands, and thus capture a greater share of Asia-Pacific’s various markets. Diageo’s differentiated supply chain design and infrastructure, matched to specific product marketing strategies, makes all that possible. Says Rice: “Establishing differentiated capabilities in our supply chain allows us to support this strategy with speed and agility.”