Whiskey Supply Chain

| Supply Chain Analysis of Single Malt Whisky | BMAN70292: Global Supply Chain Management, Individual Assignment | Table of Contents 1. Introduction 3 2. Proposed Supply Chain Design and Justification 5 2.1 Proposed Design 5 2.2 The Flow of Materials 6 2.3 The Flow of Information 7 3. Whisky Supply Chain Management: the Strategies and Tactics for Improvement 9 3.1 Strategy of the Whisky Supply Chain 10 3.2 Proposed Improvements and Practical Application 10 3.2 Performance Objectives 12 4. Conclusion 13 5. References (in Order of Appearance): 14 1. Introduction Scottish Whisky is amongst the Worlds most famous alcoholic beverages. Famous for its complex flavours, aromas and its amber hue, it has been enjoyed in British Isles for centuries. In the past decade, due to the rapid growth of new markets in countries such as China and Venezuela, the popularity of whisky has spread throughout the world and it has become a major export commodity (Whittam and Danson, 2001). Within the emerging markets, it replaced many traditional drinks (such as Venezuelan rum) as the preferred option. Government regulations concerning alcohol production, etc.

Government regulations concerning alcohol production, etc. The finest whisky takes a long time to mature before it is ready for consumption. The production process is a very complicated one, and requires a lot of time. The Glenmorangie story of turning Water to Whisky shows just how complex it really is. Firstly, malting occurs by adding small amount of water to barley, in order to cause germination. Later, the process of production requires fermenting and distilling. When these steps are completed the process of maturing begins. This is where the distinction between the high-quality and inferior beverages is created. The Glenmorangie Original Whisky, for instance, takes 10 years to mature in oak casks that infuse the liquor with layers of flavour. Specialty whiskies are left in the casks for even longer, to give them a more rounded and developed flavour (Glenmorangie, 2011). The process of whisky production is well illustrated in Figure 1: The IDEF 0 Chart below. Specially selected wood casks Specially selected wood casks Extra mature Whisky Extra mature Whisky Barley Barley Seasoned, white-oak, wooden casks Seasoned, white-oak, wooden casks Condensers Condensers Mash tun, Washback Mash tun, Washback Machines Machines

Employees, buildings, amenities, etc. Employees, buildings, amenities, etc. The inferior product of distillation (waste) The inferior product of distillation (waste) Spirit cut Spirit cut Figure 1: The IDEF 0 Chart for whisky production process, based on: Glenmorangie (2011). Figure 1: The IDEF 0 Chart for whisky production process, based on: Glenmorangie (2011). Bottled and ready Whisky Bottled and ready Whisky Whisky Whisky Alcohol Alcohol Yeast Yeast Hot Water Hot Water Grist Grist Water Water

Malting Distilling Fermenting Maturing (at least 10yrs) Extra maturing Malting Distilling Fermenting Maturing (at least 10yrs) Extra maturing With such a complicated and time consuming production process, the whisky supply chain is a very interesting one. With the recent, growing interest from emerging markets, demand is ever rising. Since the production of a single malt whisky requires at least 10 years (due to the maturation process) the demand may outrun the manufacturers predicted output; this can create backlogs within the supply chain (Burt, 2006). The time-consuming process required to produce quality whisky means that production levels are difficult to predict. Care must be taken to ensure that sufficient amounts of whisky are produced to maximise profit, whilst ensuring that there is not a glut in the market that could lead to reduction in prices. This must be done at least 10 years in advance. On the international market, single malt Scottish whisky benefits from its rarity (Burt, 2006); this makes it desirable as a commodity and increases its monetary value. The production strategy must therefore take into account the manufacturing capability of the distillery, the time taken to get the product to market as well as the predicted market ten years in advance. This is a complicated task. The long-term planning required for the whisky supply chain makes it somewhat unique, and therefore worthy of further investigation. The purpose of this essay is to describe and analyse the possible supply chain of a single malt whisky, from the raw ingredients (barley and water) through the manufacturing process, to the delivery and consumption by the end-customer. 2. Proposed Supply Chain Design and Justification In this section, a plausible design for whisky supply chain is proposed, followed by the description and justification of its components.

2.1 Proposed Design There has been a lot of research done on food and drinks supply chains. However, with whisky producers being known to secure their secret ingredients, this essay can only propose a general supply chain for this luxurious spirit. This supply chain is presented in Figure 2 below. Farmers (1st tier suppliers of barley and other raw, natural ingredients) End-Customers & Consumers Retailers Wholesalers (Ready whisky shipped/transported to national or oversees wholesalers) Manufacturer of whisky (e.g. producer of Glenmorangie) 2nd tier supplier of fertilizers, seeds,pesticides, machinery,etc. 2nd tier glass, paper and other raw materials manufacturer s and suppliers Manufacturers & 1st tier Suppliers of oak casks and packaging Bars, clubs, pubs, restaurants, hotels, etc. DIRECTION OF THE MATERIALS FLOW THROUGH THE SUPPLY CHAIN DIRECTION OF THE INFORMATION FLOW THROUGH THE SUPPLY CHAIN DIRECTION OF THE CASH FLOW THROUGH THE SUPPLY CHAIN Farmers (1st tier suppliers of barley and other raw, natural ingredients) End-Customers & Consumers Retailers Wholesalers (Ready whisky shipped/transported to national or oversees wholesalers) Manufacturer of whisky (e.g. producer of Glenmorangie) 2nd tier supplier of fertilizers, seeds,pesticides, machinery,etc.

2nd tier glass, paper and other raw materials manufacturer s and suppliers Manufacturers & 1st tier Suppliers of oak casks and packaging Bars, clubs, pubs, restaurants, hotels, etc. DIRECTION OF THE MATERIALS FLOW THROUGH THE SUPPLY CHAIN DIRECTION OF THE INFORMATION FLOW THROUGH THE SUPPLY CHAIN DIRECTION OF THE CASH FLOW THROUGH THE SUPPLY CHAIN Figure 2: Whisky Supply Chain (note: arrows connecting the nodes of supply chain represent not only flow of materials but also transportation of goods). Figure 2: Whisky Supply Chain (note: arrows connecting the nodes of supply chain represent not only flow of materials but also transportation of goods). The whisky supply chain proposed in Figure 2 illustrates, in general terms, the movement of information and materials starting from the manufacturers and suppliers of raw materials through to the consumer. 2.2 The Flow of Materials The supply chain begins with farmers, who provide the natural, raw materials, such as water and barley (Glenmorangie, 2011). The chain also includes the 2nd tier suppliers of fertilizers, pesticides, seeds and machinery for the farmers to begin their production of barley. In the similar fashion, manufacturers of whisky require packaging for their product. Therefore, the chain includes manufacturers and suppliers of packaging (corked glass bottles), who deliver the ready product to the whisky producers. However, in order for the packaging to be manufactured, the 2nd tier suppliers of raw materials such as: glass, paper etc., need to be included in the supply chain as well. The flow of materials continues after raw ingredients are transported to the manufacturer. The complicated production process, illustrated in Figure 1, begins. The product is then distributed to wholesalers. Depending on the country that the product is destined for, various modes of transport will be used. For in-land distribution a preferred way may be using the railway or truck-freight solutions. In order to transport the product to overseas wholesalers, the preferred distribution method could be shipping of whisky in containers. All logistics solutions could be provided by the members of the supply chain or the thirdparty provider (Wagner, 2008). After the product is delivered to its destination wholesalers, it would be distributed to retailers or directly to hospitality facilities and, finally, to the end-customers. Many of the Scottish whisky manufacturing companies, such as for instance Glemorangie, have extended their service portfolio to offer tours through their distilleries. Visitors have the opportunity to buy their whisky directly from the producer. Therefore, in addition to the traditional supply route, the supply chain also

includes an additional, indirect (- - -) link between whisky distilleries and the endcustomers (Glenmorangie, 2011). Supply chains are not only about the movement of materials; they are equally, if not more so, about the flow of information and money. As the materials flow from the endsuppliers to the end-customers, the flow of money/payment moves in the reverse direction, as indicated in figure 2. 2.3 The Flow of Information During the production of whisky, and its delivery to the market, the flow of information between the nodes of the supply chain is of particular importance. According to Wadhwa et al (2010), collaboration and sharing of information from the point of origin to the point of consumption (and vice versa) is an extremely important part of ensuring and maintaining the efficiency of a supply chain. As a general principle, the importance of this information flow has been studied by many authors. For instance, Van der Vorst et al (2009) points to the significance of information transparency within supply chains. The paper also highlights the usefulness of sharing data regarding demand, supply and point of sale, as well as creation of a common information exchange infrastructure. Therefore, the proposed whisky supply chain includes the flow of information in both directions from the origin of the supply chain to the end-customers and back, from the endcustomers to the origin of the supply chain. As mentioned previously, the time-consuming production process of single malt whisky leads to the spirit being surrounded by an aura of luxury. However, there are number of factors, which have to be taken into account. The biggest problem faced by Scottish whisky producers is the problem of storage, due to the necessity of maturation. Some producers are well known for shortening the time allocated for the maturation process; however, many connoisseurs would argue that this is a key distinction between high quality and inferior whiskies (Wishart, 2009). The oak casks necessary for the maturation process come mainly from USA. They are made out of oak trees, which themselves take a long time to grow, and have to be later specially prepared before they are leased to the whisky manufacturers (Glenmorangie, 2011). With the main ingredient of whisky being Scottish barley, the manufacturers rely heavily on the farmers to supply this crop. In case of both barley and casks suppliers, the relationships between the nodes of supply chain are extremely important and will be discussed later in this essay. The vitality of information exchange between these nodes in terms of stock replenishment ability is crucial, as each of the raw materials needed by the manufacturer takes years to be grown. The consequence of not being able to gather the resources in time for production, with such a long whisky production process, may take years to recover from. Taking into account the other end of the spectrum, sharing of the information acquired from the customers by various nodes of whisky supply chain, is of major importance. With such a long lead time, the manufacturers of the spirit need to collaborate with their supply partners to match the customer demand to the best of their abilities. This requires cooperation in generation of long-term demand forecasts (based on the information

obtained at the point-of-sale), in order to ensure that they are as close to the targets as possible. Sharing of the demand information and collaboration between different partners of the chain is a vital part of the process, as researched by Wadhwa et al (2010). Wadhwas findings show that transparency, sharing and collaboration of various agents in the supply chain, lead to competitiveness and improved performance. Therefore, building of trustworthy, transparent and sustainable supply chains should be treated not as a risk, but as a vital part of the process. The next section of this essay will address the possibilities for improvement within the whisky supply chain. 3. Whisky Supply Chain Management: the Strategies and Tactics for Improvement Management of any supply chain is not an easy task. The whisky supply chain is further complicated by the product being difficult to categorise. Many researchers have studied the most effective strategies for supply chain management, based on the characteristics of product in hand. Fishers matching of supply chain strategy with product characteristics has influenced mangers to follow certain strategies, in order to ensure maximised efficiency and effectiveness of their supply chains (Fisher, 1997). The framework matches the efficient (lean) and responsive (agile) strategies with functional and innovative products respectively. In case of whisky, defining the category of product it belongs to is not a straightforward task. As explained by Harris et al (2010), with accordance to Fishers findings, the functional products are the ones which are widely available and satisfy basic needs. For such a group of products, demand is predictable and stable, competition is high and profit margins low. On the other hand, the innovative products are fashionable, trendy or the latest hi-tech discovery, with difficult to predict, unstable demand and high profit margins. An attempt to fit whisky into one of these categories shows that it possesses the attributes of both. It is a very fashionable and desirable drink, but at the same time the competition between various manufacturers is high as it is a well established product in the market. Although the demand for whisky cannot be fully predicted, the demand forecast must be made years in advance, and once it has been agreed upon, the output for a given year of single malts will not be flexible for changes. Classifying whisky within the existing categories is made even more difficult by the fact that lead times for the functional and innovative products stretch from 6 months to 1 year, and 1 day to 2 weeks, respectively (Harris et al, 2010). As mentioned before, the manufacturing process of single malt takes at least 10 years, which pushes it outside Harris categories. 3.1 Strategy of the Whisky Supply Chain The features of whisky discussed in the previous section, mean that choosing of appropriate strategy for its supply chain is a challenge on its own. The choice itself should be based on the market knowledge and positioning of the decoupling point. Choosing an agile strategy would be, in the authors opinion, unwise as Boschis (2010) study indicates that this approach is best applied to products within volatile markets, which whisky is not. The market is generally stable, although there have been periods in which the demand has fluctuated, for example the emergence of new markets such as

China. As the production output levels have to be decided years in advance, such fluctuations in demand may affect the opportunity for a distillery to increase its manufacturing effort and take advantage of economies of scale. However, as mentioned in the introductory section of this essay, unavailability of this product adds to its luxurious feel (Burt, 2006). Another strategy of supply chain management is the lean strategy. The focus here is on waste minimisation within the chain as well as treating it as one, value-adding entity (Lamming, 1996). It is the authors opinion that this is a more appropriate strategy for the whisky supply chain. As the demand must be forecasted years in advance and the levels of output cannot be changed during the manufacturing process (i.e. the push tactic is prevalent), positioning of the decoupling point is driven by the forecasts, and not the realtime data. Therefore, the point will be located in the upstream part of the supply chain. All of the stages of production are completed in distilleries, i.e. the postponement strategy is not necessary (Christopher, 2000). Although lack of postponement compromises the flexibility of the whisky supply chain, it is somewhat reassuring that it is only produced and bottled in the original distilleries. 3.2 Proposed Improvements and Practical Application The efficiency and effectiveness improvements of the whisky supply chain will therefore originate from elimination of 7 wastes, with accordance to principles of the lean strategy. The following solutions are proposed to improve the efficiency of the whisky supply chain and ensure its robustness. As demand for whisky has to be forecasted years in advance, there is no solution to the problem of potential under and over production. Whisky, unlike other food and beverage products, improves with age, e.g. GlenDorach 15years old retail price of 45.99, comparing to 39years old 409.99 (The Whisky Shop, 2011). Therefore, surplus can be kept in casks for longer periods of time, which improves the flavour, rarity and commercial value. This gives the supply chain robustness, which does not imply for many other products. Despite this flexibility of the supply chain, care still has to be taken to avoid overproduction, as warehousing and storage capabilities may be limited. As a possible countermeasure it would be a wise decision for the partners in the supply chain to collaborate on the promotional sales tactic, so that overproduction does not result in the financial loses. Promotions and selling at discounted prices to the retailers and/or hospitality facilities would result in whisky becoming more accessible to the end customers, triggering the demand. The minimisation of defects in terms of the whisky supply chain can be ensured by already existing, careful production process. Therefore, the problem of defects does not have to be considered in detail. The problem of unnecessary inventory is a significant one when the whisky supply chain is considered. However, it cannot be omitted at the manufacturing stage, due to the need of at least 10 years maturation of the product in the oak casks. As vast storage capabilities

of the distilleries are a given, the possible improvements should be searched for in other nodes of the supply chain. These could include ensuring that whisky producers deliver their products to the wholesalers on the Just-in-time basis minimising the costs of holding of the unnecessary inventory by their supply partners. In the similar way, in order for the distilleries to optimise the use of their storage capabilities, the farmers, and other suppliers of raw materials, should also be expected to deliver their products on Just-intime basis. When taking into consideration the wastes of inappropriate processing, waiting and unnecessary motion, the solution lies in design of work. Efficiency and effectiveness of the supply chain may be therefore improved by ensuring that organisation of work in terms of time and design, fool-proofing of the processes and good ergonomics is present when all nodes of the supply chain are considered. Excessive transportation is a very expensive problem, which can be solved by the use of e.g. 3rd party logistics providers. This particular solution shifts the responsibility and costs of ensuring product traceability (e.g. RFID tags), safe storage and legal requirements of transportation (especially when international transport is concerned), to the third party. Although such choice is not a cheap one, it is the authors opinion that it would improve the efficiency and effectiveness of the supply chain, as each node would be able to focus on the activities that it is specialised in. 3.2 Performance Objectives In order to verify whether the improvements suggested in section 3.2 are successful, measuring of the outcomes is recommended. Therefore, a set of KPIs should be established. When overproduction is considered, a good way of measuring the outcome of promotional activities could be stock turnover and customer satisfaction levels. The performance measures for the solution to the unnecessary inventory levels could again include the stock turnover as well as the % of total space consumed within the warehouse (Eldridge, 2011). The initiatives of re-organising work, fool-proofing of the processed and improved ergonomics, can all be measured through using qualitative and quantitative KPIs such as: employee and customer satisfaction, or % error-reduction. In terms of engaging 3rd party logistics providers to minimise the costs and effects of the excessive transportation, the measurement of their performance could be based on the typical categories of performance objectives, i.e. cost, dependability, flexibility, quality and speed of the provided service (Moxham, 2010). 4. Conclusion

Single malt whiskies are well known internationally as a luxury product. These attributes can only be achieved due to the lengthy process of production, which has been described in detail in section 1, Figure 1 (based on Glenmorangie, 2011). The rarity factor is achieved through whisky being not always available, and therefore the demand is not always matched by the suppliers (Burt, 2006). The product, unlike most of the others, improves with age, which constitutes to the supply chain robustness and resilience. These factors make the whisky supply chain interesting to study. Due to these characteristics, this work has focused on the supply chain of a single malt whisky. Firstly, the design of such supply chain has been proposed and explained in detail. Later, the most appropriate strategy for management of the whisky supply chain has been chosen. Lastly, the improvements in terms of efficiency and effectiveness have been proposed, together with the appropriate measurement techniques. 5. References (in Order of Appearance): 1. Whittam, G. and Danson, M. (2001). Power and the Spirit of Clustering, European Planning Studies, 9(8), 949-963. 2. Glenmorangie website available at: www.glenmorangie.com, assessed: 26/04/2011. 3. Burt, G. (2006). Pre-determined elements in the business environment: Reflecting on the legacy of Pierre Wack, Futures, 38(1), 830-840. 4. Wagner, S. M. (2008). Innovation Management in the German Transportation Industry, Innovation of Business Logistics, 29(2), 215-231. 5. Wadhwa, S., Mishra, M., Chan, F. T. S. and Ducq, Y. (2010). Effects of information transparency and cooperation on supply chain performance: a simulation study, International Journal of Production Research, 48(1), 145-166. 6. Van der Vorst, J. G. A. J., Tromp, S. O. and Van der Zee. D. J. (2009). Simulation modelling for food supply chain redesign: integrated decision making on product quality, sustainability and logistics, International Journal of Production Research, 47(23), 66116631. 7. Wishart, D. (2009). The flavour of whisky, Significance, 6(1), 20-26. 8. Fisher, M. L. (1997), What Is the Right Supply Chain for Your Product? Harvard Business Review, March-April, 105-116. 9. Harris, G. A., Componation, P. J. and Farrington, P. A. (2010). An Exploration of Fishers Framework for the Alignment of Supply Chain Strategy With Product Characteristics, Engineering Management Journal, 22(4), 31-42. 10. Towill, D. R. (2005). Decoupling of Supply Chain Competitiveness, Manufacturing Engineer, 84(1), 36-39.

11. Boschi, A. A., Raymundo, J. C. and Fusco, J. P. A. (2010), symposium proceedings, available at: http://www.ifm.eng.cam.ac.uk/cim/symposium2010/proceedings/11_boschi.pdf, assessed 01/05/2011. 12. Lamming, R. (1996). Squaring lean supply with supply chain management, International Journal of Operations & Production Management, 16(2), 183-196. 13. Christopher, M. (2000). The Agile Supply Chain: Competing in Volatile Markets, Industrial Marketing Management, 29(1), 37-44. 14. The Whisky Shop, available at: www.whiskyshop.com, assessed 04/05/2011. 15. Sullivan, W. G., McDonald, T. N. and Van Aken, E. M. (2002). Equipment replacement decisions and lean manufacturing, Robotics and Computer-Integrated Manufacturing, 18(3-4), 255-265. 16. Eldridge, S. (2011), Lecture Slides for Managing Global Supply Chains, Manchester Business School. 17. Moxham, C. (2010), Lecture Slides for Global Operations Management, Manchester Busines School. -------------------------------------------[ 1 ]. The decoupling point may be defined as: The DCP signifies the boundary between push tasks -where we respond to forecast and pull tasks - where we respond directly to customer orders. Defining where the decoupling point should be hest located is a strategic decision that will greatly impact on our business competency. Typically the push tasks then substantially benefit from economies of scale via level scheduling since the upstream processes are thereby buffered from marketplace volatility. (Towill, 2005, p.37) [ 2 ]. There are seven wastes that can occur in a system (7 wastes of Lean): 1. Overproduction, 2. Defects, 3. Unnecessary inventory, 4. Inappropriate processing, 5. Excessive transportation, 6. Waiting and 7. Unnecessary motion (Sullivan et al, 2002)