Snapshot: Beverage Companies Thirst for Supply Chain Efficiency

It’s a good time to be thirsty. Thanks to changing consumer tastes, the variety of beverage types, flavors, and sizes seems bottomless.

Sports drinks, fruit drinks, energy drinks, bottled water, ready-to-drink tea and coffee, and carbonated beverages join a wide array of wines, spirits, and domestic and imported beers competing for consumers’ taste buds—and dollars.

But the proliferation of so many new SKUs is straining the capacity of supply chains. Beverages already present specific logistics challenges including seasonal spikes, the need for temperature-controlled equipment, special packaging for fragile products, and heavy shipment loads that can cause trucks to weigh out before they cube out.

Some supply chains, such as high-end wine and spirits, are well-suited for each-picking and shipping small quantities. But for companies accustomed to case- and pallet-sized orders of carbonated beverages or best-selling beers, adding new brands and varieties complicates picking by forcing them to accommodate smaller quantity shipments.

Manufacturers, distributors, and retailers are tackling the distribution challenge in various ways, from using half-pallets and smaller cases to adopting new slotting strategies.

“Beverage companies need to re-profile their warehouses,” says Tom Kozenski, vice president product strategy for RedPrairie, a logistics IT solutions provider headquartered in Waukesha, Wisc.

“The wider variety of SKUs chews up precious real estate on the floor of the distribution center. Breaking down cases is more costly, involves extra labor, carries a risk of breakage, and requires the replenishment of pick faces.”

Facilities set up to serve last-mile route deliveries already struggle to balance competing forces: warehouse vs. routing efficiency, carts vs. pallets, driver-friendly vs. warehouse-friendly slotting.

Additional SKUs throw another variable into an industry that is just absorbing the debut of born-on, or freshness, dating.

Drinking in New Challenges

Such challenges are boosting beverage companies’ interest in automation along the entire supply chain, from forecasting through transportation and warehousing to last-mile delivery.

Beverage companies are increasing their use of forecasting tools to set production schedules more efficiently and, in some cases, move from a build-to-order to a build-to-forecast strategy.

This forecasting task can vary considerably—from beer, soda, and water companies looking ahead weeks or months to a vineyard seeking to plan production four to five years out.

Forecasting can help bring some science to the art of winemaking by tracking market-specific attributes over time and refining product mix and rates by as much as half, says Karin Bursa, vice president of marketing at Logility, an Atlanta-based supply chain management software provider.

But the door remains open to more forecasting and collaboration up, down, and across beverage supply chains.

“Many good forecasting systems are available, but they don’t always include the input of key customers, which can hamper forecasting efforts,” says John Spain, senior vice president, global supply chain services for Tompkins Associates, a Raleigh, N.C.-based supply chain consulting firm. “Manufacturers have to guess, based on distribution.”

“Communication, collaboration, forecasting, and trust all have to be in ready supply,” says Kevin Brady, president of Houston-based Satellite Logistics, a 3PL specializing in beverages.

Beverage companies are also scrutinizing their transportation operations. Rising costs are driving them to use transportation management systems that provide better visibility, control over expenses, and more efficient routings for both inbound and outbound shipments.

Some companies combine their forecasting and transportation systems to move product directly from production to retailer, removing the distribution step entirely.

Consequently, some beverage companies are turning to 3PLs to help manage distribution to market.

SKU proliferation remains a major driver behind warehouse management system (WMS) upgrades. About 20 percent of all beverage warehouses use WMS today, but that number will jump to 50 percent over the next decade, estimates Chad Collins, vice president global strategy at HighJump Software, a supply chain execution solutions firm based in Eden Prairie, Minn.

“Paper-based systems provide total inventory numbers, but can’t track the products to individual locations,” he notes. “WMS can tell users exactly where their product is,” boosting productivity by as much as 15 percent.

Beverage companies also rely on WMS to help manage code dates. “Almost all beverages have expiration dates,” says Spain. “Turning inventory quickly is critical.”

Beer, in particular, requires greater attention to reverse logistics processes when it passes sell-by dates and kegs have to be transported from the reseller back to the bottler.

Recalls are also an issue that can be addressed with WMS.

“If, for example, a bottled water company discovers a problem occurred in production between 2 p.m. and 4 p.m. yesterday, it can quickly track where those bottles were delivered,” says Kozenski. “More detailed product genealogies and tracking capabilities to the case level are the next phases of WMS sophistication.”

For wine, the bottle is also a marketing vehicle, so varied shapes and sizes present another obstacle.

M.S. Walker, a northeastern wine and spirits distributor, for example, sells 11 different product sizes for each of its SKUs—from nips to 1.5-gallon bottles. The industry standard unit of measure is a nine-liter equivalent, though cases can vary considerably in size, complicating automated handling.

Non-alcoholic beverages also use packaging as a sales gimmick, introducing new complexities into their distribution systems as well.

The last mile can be the most costly link in the beverage supply chain. While some beverages move through traditional streams, from production to a retail warehouse then on to stores, a sizable percentage of beverages are delivered direct to stores, bars, restaurants, vending machines, and other venues by manufacturers or distributors.

Generally, beverage companies start picking and staging orders for next-day delivery the afternoon before to optimally configure loads for truck transport. The following morning, drivers set out to service their routes.

Even for large customers, direct store delivery is common. So beverage companies are throwing technology at the complexity of managing this challenge—including route optimization, load planning, and automated delivery transactions—to shorten the order-to-cash cycle.

They are also tapping global positioning systems to facilitate real-time status of inventory in transit.

One worry beverage companies don’t dwell on is the economy. While purchase patterns may shift during a slowdown, and seasonal trends persist, beverages are recession-proof. People will always get thirsty.

Operating Within Legal Limits

For alcoholic beverage companies, gaining supply chain efficiencies means navigating a complex and overlapping web of sometimes-archaic federal, state, county, and city regulations.

Despite a trend toward consolidation among alcoholic beverage giants, eliminating overlap is hampered by myriad laws, such as the requirement to maintain a physical presence in states where a company sells.

“When it comes to regulations, other types of beverages hold an advantage over wine, beer, and liquor,” says John Spain, senior vice president, global supply chain services for Tompkins Associates.

Importing product further complicates the issue. In addition to customs clearance, “anti-terrorism and theft regulations concerning alcohol abound, and more are on the way,” he says.

Importers are turning to global trade management solutions to better manage and control inbound inventory movement. Speed is also an issue.

For example, when domestic beer manufacturers debuted born-on, freshness dating to differentiate their brands from imported beer companies, Heineken implemented a multi-stage plan to shorten the distribution process as soon as product hit the port, says Karin Bursa, vice president of marketing, Logility.

Complicated taxation laws also figure heavily into the mix. Beverage 3PL Satellite Logistics, for example, has tweaked its WMS, TMS, and import/export documentation systems with specialized code to accommodate legal nuances in various jurisdictions.

Some states require retailers and restaurants to pay for alcohol in cash or through complex credit systems, complicating the supply chain through the last mile. Penalties for non-compliance can be particularly harsh in states with felony laws, so those handling alcohol must be vigilant about meeting these guidelines.

“Service providers looking for a foothold in the alcoholic beverage industry face a learning curve about new regulations,” notes Kevin Brady, president of Satellite Logistics. Shippers, therefore, need to be diligent in finding partners with appropriate experience.

CASE STUDY: M.S. Walker Manages Bottles, Not Bottlenecks

About 36 million bottles, or three million cases of wine and spirits, flow out of northeastern wine, spirits, and tobacco distributor M.S. Walker’s facilities each year.

But bottles were often “bottlenecked” by manual processes and a poor distribution center layout that funneled orders out of a single dock door, slowing the day’s deliveries to customers ranging from club stores to mom-and-pop bars and restaurants.

An old, paper-based warehouse management system (WMS) not only impeded operations, but made it difficult to process returned product—about 10 to 15 percent of every case—back into inventory.

“We had no controls for products coming back and little transaction visibility,” recalls Michael Saitow, CIO of M.S. Walker, a $225-million direct importer, distributor, private-label spirits bottler, and broker.

Breakage complicated operations even further; the company had to remove damaged items, repackage cases and pallets with intact bottles, and update inventory.

So when M.S. Walker saw a chance to move to a new, larger distribution center vacated by a 3PL that was stocking some of its merchandise—12,000 SKUs, including brands such as Kendall-Jackson, Blackstone, Absolut, and Skyy—it seized the opportunity to upgrade its WMS and reengineer business processes as well.

The new forward distribution facility in Norwood, Mass., runs conveyors from five pick modules to seven dock doors. M.S. Walker uses pick-to-label and pick-to-light systems to handle its bottle-pick, case-pick, and pallet-pick operations, and is exploring the use of voice technology.

The company deployed HighJump Software’s WMS, slotting, and wave-planning solutions with the goal of enhancing accuracy, productivity, and visibility.

M.S. Walker’s high return rate was a result of errors in picking the wrong products, flavors, or sizes, as well as late deliveries due to the fact that it could only load trucks one at a time.

To account for these discrepancies, the distributor began scanning bar codes and capturing images of cartons—including the date/time stamp—as they move down the conveyor. The system verifies the pick against the order and alerts workers to errors.

That reduced the return rate from about 12 percent to less than half of one percent.

“We had been shipping 10,000 cases a day, then putting back 1,000,” says Saitow. “Now we pick once, putaway, and move on to the next truck, with little need for returns processing.”

Returns paperwork that once took five to seven days to process can now be resolved the next day. The seven dock doors also enable trucks to leave the DC on time, forestalling late deliveries.

To address quality control issues, M.S. Walker configured the WMS to quarantine cases or pallets when breakages occur, then instruct hosts to withhold product until it’s repacked and reintroduced as available inventory.

Visibility and accountability are the hallmarks of M.S. Walker’s new approach.

Prior to the WMS solution, “we had no idea what our order accuracy was,” says Saitow. “Now we know it ranges from 99.2 percent to 99.3 percent, and managers can track the origin of those errors. They also receive scorecards that detail the components contributing to these discrepancies.”

Accuracy also has a positive effect on sales. “Once we were able to meet customers’ expectations, we boosted sales through a combination of the WMS and acquisition activity,” Saitow says. “Our new infrastructure enabled us to take on new business.”

The distributor is currently looking at rolling out the WMS at its two other distribution centers in Massachusetts and Rhode Island, and intends to use it to tackle inbound logistics operations.

“We handle last-mile deliveries very well,” says Saitow. “We want to apply the same methodology to our inbound supply chain,” placing more metrics around processes and using vendor quality management to improve supplier performance.

“Scorecarding will be a new process for some suppliers,” Saitow says, but a necessary one to attain M.S. Walker’s goals. “This is still a cottage industry,” he adds. “Many beverage companies are still learning about technologies such as EDI and ASN.”

CASE STUDY: New TMS Uncorks Savings for Ste Michelle

The Cascade Mountains that separate Seattle from the Columbia Valley act as a rain shield, limiting annual rainfall to six to eight inches.

This allows vineyard managers at Ste Michelle Wine Estates to carefully control vine vigor through irrigation, enabling the winery to produce a pleasing array of award-winning wines.

Location is the strength behind Washington’s oldest and most acclaimed winery, which ranks among America’s top 15 producers of premium wines such as Columbia Crest, Conn Creek, Eroica, and Chateau Ste Michelle.

But, for a beverage producer situated 200 miles southwest of Seattle seeking to ship full truckloads of wine in temperature-controlled trailers, location is also a weakness.

While the wine producer was doing its best to manage state-level transportation rates through spreadsheets, it was unable to manage rates at the city or lane level.

Ste Michelle had little information with which to provide visibility to carriers or negotiate rates, and trucks often returned empty due to the producer’s remote location, ratcheting up transportation spend.

Shipping cost audits and payment variances were expensive, and consolidating truckloads took four to five hours. Operations grew even more challenging during Ste Michelle’s busy season from November through January.

Those logistics challenges became more painful as Ste Michelle continued to experience rapid growth. Sales have doubled in the last seven years, and the producer now sells more than 31 million bottles of wine a year—about 8,100 truckloads. Shipment costs ballooned to more than $13 million annually.

As it grew, the company needed to more efficiently control transportation activities, serve customers consistently and on time, and improve management of freight costs and product availability.

“Linking supply chain execution to planning is vital to truly meet customer needs, work collaboratively with suppliers and carriers, and more profitably serve our customers,” says Kevin Conroy, logistics manager for Ste Michelle Wine Estates.

After considering several ERP and WMS systems, Ste Michelle decided to start with transportation management, choosing Logility’s Voyager Transportation Planning and Management system. The company sought a rapid return on investment.

The TMS granted Ste Michelle significantly more control over its transportation activities. Now, the company can manage rates down to the city and lane level and create volume projections.

It also enhanced freight accrual management, with the ability to analyze costs down to the penny against budget and carrier projections.

“We have seen phenomenal improvements in accuracy, and it takes significantly less time to manage the freight accounting process,” says Conroy. “In the past, freight accrual management took an average of four hours daily; now the process consists of running two reports monthly.”

Ste Michelle negotiates volume and rates at the lane level, and was able to standardize that process across all carriers. A $200 average shipping cost audit and payment variance has been reduced to $2.

With better visibility of shipping requirements to share with carriers, Ste Michelle has reduced deadhead miles, a boon to both the shipper and transportation service providers.

Ste Michelle also uses the TMS for lane selection, gaining more efficient routings to customers. The manual truckload consolidation process was cut from four to five hours to two minutes.

Getting a handle on transportation costs has helped Ste Michelle maintain its growth while keeping headcount stable and enhancing carrier relationships. These benefits all quench the company’s thirst for enhancing service to customers.