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Chain reaction

Published:  23 July, 2008

As the wine supply chain undergoes major change, Jo Burzynska sees how the businesses involved are shaping up as wine is shipped out

The days when wine was believed by many consumers to magic itself onto the shelves of Britain's shops, restaurants and bars have long gone. The rise of imports from the distant New World, combined with tighter margins and a public that wants deliveries to its door by yesterday, means that everyone has been forced to pay more attention to the mechanisms that bring wine from producer to importer to the final customer. The growth of wines from the far-flung countries of the New World as a proportion of the UK's wine-importing business, has been one of the greatest challenges faced by distributors in recent years. As David Charlesworth, sales and marketing director of value-added services at international logistics provider, P&O Nedlloyd, explained: "In the 80s, 8-9% of wine imports would have been from the New World, and now it's 34-35%. This is a big shift in terms of the origin of wine from a logistical and geographical closeness. There has been a growing number of challenges in the last 15 years as to how people will cope with these long-distance chains. This has become a key challenge to the wine industry." Shipping times of 40 days or more have extended the supply chain, and consequently have altered buying patterns. There is now a tendency for people in the UK to order in larger lots, although small quantities ordered more frequently are more manageable. Distributors are also under pressure from New World suppliers to ensure that wine distribution gives them a "competitive edge" rather than turning out to be "a road to hell" - the alternatives posed in the title of the lecture given by Michael Lainas, general development director of Cert and MD of Octavian, at the recent Australia Day Conference. As the supply chain becomes more complex, there have been greater efforts to link the different stages of distribution. Charlesworth said: "The world now begins before the warehouses, which has been one of the big changes. The more advanced players are trying to integrate this primary distribution with secondary distribution, which was traditionally very separate." Not all members of the chain are aware of its intricacies and potential for waste, a problem noted by David Mawer, commercial director of wine and spirit freight forwarder, FFG Hillebrand: "We believe that significantly improved supply-chain efficiency will only be achieved once the various stakeholders in the transaction can see and influence events outside their own particular sphere of responsibility. They need to be able to look further up or down the chain to see the impact that could be gained by different distribution practices. This might even mean more investigative work for them, although certain changes in practices at certain stages of the supply chain will provide overall cost savings." To this end FFG Hillebrand followed one shipment of wine from South Africa for a client, from the growers to the stores. Its report identified areas of supply concern which included the lack of control up to FOB (free on board); seal integrity and risk of loss of stock; damage from repeated rehandling of stock; shipment delay while awaiting compatible "ready dates" on all consolidated orders; handling issues of mixed loose loads, further complicated by the stock of each wine being spread throughout the container. Although the solutions FFG Hillebrand offered are confidential, Mawer commented: "The result speaks for itself: a potential total supply chain cost saving of at least 23p per case. The solutions suggested also stand to benefit others in the supply chain - growers, suppliers, brokers and customers alike. It makes our job a lot easier too!" Another change in the structure of the wine industry has been the substantial increase in the proportion of wine sold by supermarkets, which tend to work with fewer lines and larger quantities. Charlesworth observed: "This has meant having to dovetail a lot of secondary distribution into supermarket supply chains. Supermarkets buy either from a distributor in this country, or from origin. The latter means getting into complex areas where they need information as to where their wine is. They are beginning to deploy sophisticated supply-chain mechanisms along the chain in order to plan the secondary distribution while the wine is still on the water. They must make that stock as a part of the working stock."


The wine supply chain has always been intricate and fragmented, and with more distant suppliers and ever-more demanding customers, things have been getting more complex. In order to manage it more efficiently, systems are being developed to allow players at every stage to be able to exchange swiftly the information that they need. IT and the B2B Internet revolution have played a crucial role in linking players via the Web, eradicating inconveniences such as lengthy strings of telephone calls to locate stock, and offering a transparency which should benefit all. For the tax warehousing group, London City Bond, "Logistics is now as much about systems and communications as about warehousing." Jeremy Pearson, LCB's sales and marketing director explained: "What has dramatically changed, is that customers now have total stock and order visibility. This means being able to see delivery failures and act pro-actively. What we did notice this Christmas, was that people didn't fail. With transparency you can see everything. There's nowhere for the warehouse keepers and distributors to hide any more." A system such as FFG Hillebrand's AXIS, which allows customers to view supply chain information on an order, transcends time zone restrictions and keeps customers up to date on the position of crucial stock such as promotional shipments. Currently covering only the UK, the company is rolling out AXIS globally in April, and is soon to add versions coming from different perspectives along the supply chain, with broker and European supplier versions, and is in the process of trialling supplier and warehouse versions. These new systems must be able to be integrated into the supply chain, the reason that AXIS uses the same product codes as the customers. FFG Hillebrand's IT manager, Guy Barnard, explained: "This enables the consolidation of AXIS data with the customer's internal data, providing for the first time complete supply chain visibility." Within the individual operations, such as the warehouse, computerised systems are being implemented to aid communication and streamline operations. As Lainus commented: "IT is absolutely critical now. It's an enabler in nearly every area." Like many warehouse groups, NEMS has made heavy investment in IT over recent years, initially to increase the efficiency and traceability of its stock. The last couple of years have seen it implement further time-saving systems. NEM's managing director, Charles Bucknall, outlined the changes: "In the past two years we have taken our IT a stage further, so that our software can be linked directly to a commercial website, enabling the downloading of orders direct to our bonded warehouse, creating all the paperwork required for picking, packing, invoice and despatch/distribution." As well as linking warehouses to its customers, software is increasingly used for liaisons between the bonded warehouse and HM Customs & Excise. These systems must be reliable, as if errors occur, it is the warehouse that is liable for duty. The whole system is set to become totally electronic when the Customs Freight Simplified Procedures (CFSP) are implemented this summer. CFSP, which is designed to bring UK duty calculation in line with EU requirements, involves the electronic submission of statistical and fiscal information to Customs & Excise. In software such as Online's CustomsLink, designed to cope with the new procedures, this is done by e-mail. Although CFSP would appear to be an additional complication in the link between bonded warehouse and customs, it should eventually make this process swifter and safer. Graham Hough, business development manager, Exel Integrated Services (formerly MSAS McGregor Cory Logistics), said: "CFSP will try to eliminate the need for paperwork and reduce forgeries by electronic means through e-mail or the Web. This means it should be done faster, as before, documentation had to be returned. We welcome it, if it benefits the bonded warehouses in stopping the fraud by reducing the time the process takes, as we're liable until the goods reach the customer from the bond." He added: "We've been sent a note from Customs & Excise stating that inefficient bonded warehouses will not be accepted. It's going to be a tough year and one which will see more trade coming to the well-run operations." The integrity of the warehouse looks to become more crucial to Customs & Excise, as observed by Bucknall: "As we see HM Customs & Excise diminish in size and presence, with a massive increase in smuggling, there is an increasing reliance by HM Customs & Excise on warehouses to keep track of customers and take a commercial view on whether a customer is bona fide, rather than companies receiving information from HM Customs & Excise." As well as embracing new technology to cope with the demands of the industry and Customs & Excise, changes have come to the bonded warehouses in the form of the rise of inter-trading, which some feel will only increase. More deals are being made within the bonds, which can benefit both parties by speedier transfers avoiding the need for delivery. While there have been few objections to warehouses facilitating trade between merchants and importers, the possibility of warehouses trading the wine themselves - made easier by the Internet - has caused some concern. Last year Cert, which owns Octavian warehouses, developed, launched this month. The e-tailing site lists wines stored by Octavian, that Octavian's customers have agreed to sell to bringmywine when a purchaser is found via the website. Although Cert funded the set-up of, Lainus stressed that it is an independent company with dedicated management and a separate shareholding, that has a contractual relationship with Octavian. But at London City Bond, Pearson is uneasy: "In the past there has always been an unwritten rule that a bonded warehouse keeper and distributor should not trade in alcoholic drinks. Indeed, older members of the trade will recall the pride warehouse keepers took in advertising: No trading interests'. After all, we know the price of every wine under our roof, where it came from, where it goes to and in what quantity." He added: "As merchants have placed more trust in and work with their logistics suppliers, as they in turn focus on sales and marketing, LCB believes that this unwritten rule applies more now than ever."


The growing complexity of the supply chain means more merchants are leaving the logistics in the hands of the experts in order to save time and money. Pearson observed: "More and more wine merchants are realising that they're sales and marketing operations, and are steering clear of logistics, passing that back to the warehouse keeper." Bucknall said: "As transport and logistics become more critical to the bottom line than ever, I see warehousing and in-warehouse services becoming more important in the overall contribution to product profitability. Companies will increasingly want to concentrate their energies on their area of expertise, utilising large regional centres to carry out their logistic services, but also in addition there will be other services that can be carried out in the warehouse, increasing the value of partnerships." Now logistic providers are having to provide a far wider range of services than just distribution and storage, as Bucknall observed: "Customers are increasingly looking for a one-stop solution to their warehousing needs, by this I mean that we are becoming more of an active part of their product: assembling, labelling, picking and packing into their packaging -which we might have sourced, ordered and stocked - and then delivering it within their customer's timespan. As margins are diminishing, any savings or efficiencies that we can offer are becoming increasingly important to the overall competitiveness and margin of the product. Indeed today, we even operate an off' licence for a client from our premises."


When the wine leaves the warehouse, a new set of challenges are encountered. Congestion on the roads is a serious problem which distributors must get round. Lainas said: "Congestion is forecast to increase dramatically, which will result in fewer deliveries per day. Now vehicles have to make 38% more deliveries to deliver the same number of cases." This is being worsened by the growing demand for just-in-time (JIT) deliveries. With establishments such as hotels and restaurants making more smaller orders, more deliveries must be made, resulting rising delivery costs." Government pressure, resulting in proposed road pricing regimes, increased parking restrictions and pedestrianisation, are all measures that make life on the road all the more difficult. Cert has been active in lobbying the Government to make the distributor's voice heard, while attempting to cut the number of journeys it makes. Lainas commented: "One of the main inefficiencies is lack of consolidation in deliveries, which can result in multiple deliveries to one location in the same day. We ran a pilot a couple of years ago where we took one consolidated order for one hotel from the people who used us, which resulted in 52% less deliveries. I think it would be a prize for suppliers and distribution if the level of consolidation were increased." However, there is still work to be done in convincing hotels, restaurants, bars and retailers to be more flexible about delivery timing. Deliveries to the major multiples is another area Lainas highlighted as causing concern to distributors and suppliers. Lainas said: "Major multiples don't all follow the same principles of distribution. Many don't want consolidated deliveries, so separate ones have to be made for each brand owner, which creates inefficiencies." Vendor-managed inventory is another sore point. This is where the supermarket has a contractor running a depot for it, to which the supplier will be asked to send stock. This will then be called off as and when it is needed by the supermarket. The supplier will be paid for it only when the stock is taken, and has to pay for storage in the meanwhile. Thus the cost of holding the stock is passed down the supply chain to the supplier, who has little choice in the matter in the face of the might of the multiples.


Some of the most recent high-profile distribution problems were encountered by e-tailers, which promised customers quick order despatch but failed to deliver. A survey last year by IMRG among CEOs and senior managers in online retailing, found a third of respondents saw fulfilment as a major obstacle in the sector's development. It appears this is a major area in which improvements must be made. One of the most high-profile fulfilment failures in wine e-tail was experienced by Virgin Wines. Virgin Wines' "buy one get one free offer" generated so many orders that its delivery company, Fastrack, was unable to cope with the volume. Fastrack's whole inventory system collapsed, leaving Virgin Wines uncertain as who had received its wines and who had not. After pacifying its customers with money-off vouchers, Virgin Wines took on Express Despatch to work alongside Fastrack, and reported the successful delivery of 99.7% of its pre-Christmas orders within its stated delivery period, and in time for Christmas, with an average delivery time of three and a half days. Even if deliveries can be made on time, they tend not to be at the times people want, such as evenings and weekends. Chris Mitchell, marketing and PR director for Virgin Wines, said: "A perfect system does not exist yet. The home delivery system is lagging behind customers' demands. Even the supermarkets who do it themselves are faced with the same problems, such as cancelled slots. It's difficult to get right." Mitchell feels that while the emphasis has been on delivery in a short space of time, what is more important is allotted times. At one of the "veteran" wine e-tailers, ChateauOnline, Sophie Jump, ChateauOnline's UK country manager, explained how it has taken the company some time to find an appropriate system: "Over the last two years we have changed our logistics system several times before finding the right one. In the first model wine was sent directly from the producer to the customer. In practice this didn't work, as although wineries make excellent wines, they have problems with packaging, breakages and filling in customs forms." She added: "In 2000 a great deal of money was invested in logistics and customer service. We're down to 0.001% breakages now, but this is our sixth trial. It's taken us a while and investment to get it right." Costs are another problem with home delivery. Lainas commented: "Consumers question delivery charges when they can walk into their local shop to buy a bottle of wine. All companies have different strategies on delivery prices, from free upwards. The cost of doing a home delivery can be from 3-15 per delivery. The problem is, if you want to offer a quality service that costs 15 but is offered at 3, you must absorb the costs and see an erosion of gross margin. It's a difficult area and not many people have come up with the solution." It looks to be a long road ahead, but if all stages of the chain work together, it should be far less of a rough ride.