The supply chain can be defined as being a group of partners who collectively convert a basic commodity into a finished product that is of value to the end user. In the supply chain each partner must perform a task which adds value to the final product/service (Harrison, Van Hoek, 2008).
The supply chain is viewed as a single entity rather than a series of fragmented elements such as procurement, manufacturing and distribution.
Logistics management could be seen to include the long-term decisions and plans needed for reform, whereas the supply chain includes the more operational elements.
In a supply chain, every partner ought to add value to the finished productservice through some process or procedure (Harrison and Van Hoek, 2008).
Elements of Logistics Management:
Storage, warehousing, material handling.
Packaging and utilization.
Inventory.
Transport.
Information and control.
Source: Lecture Slide 1, Logistics strategy M32 SOR.
Aim
Research the strategic position of Diageo Plc from a logistics context in order to develop a suitable logistics strategy.
Objectives:
Research & analyse a UK based brewery’s current strategic position from a logistics perspective.
Evaluate the key strategic approaches to logistics management that could be used by a UK based brewery.
Identify the management issues caused by implementing a new logistics strategy with consideration for available capital, technical and human resources
Outline the strategic significance of new technology developments and business trends on future logistic strategies for a retailer.
Prepare and submit the report
Diageo Plc- Background
Diageo Plc is the leading beer, spirits, and wine company in the world. The company has a well diversified portfolio of alcoholic beverages and stock brands such as José Cuervo, Smirnoff, Captain Morgan, Johnnie Walker, Baileys, J&B, Tanqueray, Bushmills Irish, Beaulieu Vineyard, Sterling Vineyards wines and Guinness (www.diageo.com).
Diageo is listed both on the London Stock Exchange (DGE) as well as the New York stock Exchange (DEO). Diageo has a wide brand portfolio. The company strives to maintain its leadership position and provide value to the customer. Diageo has manufacturing plants spread across countries and continents including United Kingdom, Spain, Italy, India, Africa, Caribbean, United States of America and Australia. The company had worldwide sales worth £8.09 billion in the year 2008. It operates in 180 markets in five continents across the globe (www.diageo.com).
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Diageo Plc was created when two of the most established breweries- Guiness Plc and Grand Metropolitan Plc- merged to form the present company in 1997. The company was then reorganised in 2004 into three distinct strategic business divisions, namely, Diageo Europe, Diageo North America and Diageo International. In 2005, Diageo acquired the oldest distillery in Ireland called Bushmills Distillery. In 2006, the company expanded into Russia and got a majority stake in Smirnov vodka business (www.diageo.com).
Logistics strategy:
A logistics strategic framework is aimed at aligning the different partners of a supply chain in a manner so as to meet and match the customer’s evolving demands. The objectives of such a logistics strategic framework are:
Capital reduction: It implies increasing the returns on investments made in logistics assets.
Cost reduction: It is to minimiseoptimise the costs associated with storage and movement of goods and supplies.
Improvement in Service: it involves processes so as to achieve customer satisfaction.
Competitive Structure and Competitors
The international drinks and beverages market has players, such as Pernod Ricard, Bacardi, Brown Forman Co-operation, Moet-Hennessey (LVMH), and Fortune Brands (Beam Global). Pernod Ricard is a Paris-based multinational company which in 2008, acquired a Swedish company, V & S Group, the makers of Absolut vodka. Brown-Forman Co-operation is one of the largest USA-based manufacturers of alcoholic beverages. In 2007, it acquired a Mexican company, Tequila Herradura, to add tequila drinks to its portfolio (Business Insights, 2009)
Bacardi, headquartered in Hamilton, Bermuda is well known for its brand of rums. It is a family-owned multinational company operating in over 100 countries. Moet-Hennessey is manufacturer of spirits under the Paris-based parent company, LVMH (the largest retailer of luxury goods in the world). Fortune Brands are America-based manufacturers of wines and spirits and acquired many brands from UK-based Allied Domecq in 2005 (Business Insights, 2009).
Diageo: Strategic Positioning
An understanding of Diageo’s overall strategic positioning can help us in designing a logistics management strategy. Evaluation of the overall strategy is a precursor to develop a concurrent logistics strategy aligned with the company’s long term vision.
Generic Strategies for Diageo using Ansoff Analysis
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As is evident from the Ansoff matrix, Diageo has the following strategies:
Consolidation of its position and market penetration in mature markets such as USA and Europe where it is well established. It is doing so both by organic as well as inorganic growth strategies.
It is looking at newer territories and emerging markets such as Africa and Asia for market development of its existing products.
It is developing products in mature markets so as to increase the share of wallet of the consumer. An example is RTD or ready-to-drink beverages, such as Smirnoff Ready-to-Drink beverage.
Porter’s Five Forces Model
Michael Porter developed his Five Forces model in 1979 to help businesses understand competition in a more comprehensive manner. Diagrammatically, it can be represented as follows:
Source: Johnson & Scholes 6th ed, exhibit 3.4
The model, when applied to Diageo Plc, helps understand the company environment and competition as follows:
Bargaining Power of Suppliers: this is low as Diageo is an established company with a large market share and strong brand name. To gain advantage over its suppliers, it enters into long term contracts.
Bargaining Power of Buyers: this is low as Diageo now positions itself as a manufacturer of premium and super-premium spirits and other alcoholic beverages. The market share of premium and super-premium brands of Diageo increased by 4.5% and 11% respectively.
Threat of Competitors: it is high as it has a few international competitors in the form of Pernod Ricard, Brown-Forman and Bacardi. Major mergers and acquisitions have occurred in the alcoholic beverage industry leading to fewer players with extended brand portfolios and cross-border capabilities.
Threat of Substitutes: This is low as alcoholic beverages are a socially acceptable form of intoxication that is not acceptable with any other substance.
Threat of New Entrants: it is low as entry barriers are high in the form of increased regulation, increasing need of marketing by beverage companies to inform customers and increasing competitive nature of the industry.
Please refer to Appendix A for further reading on competitiveness.
Development of Existing Logistics Capabilities
The environment under which Diageo functions is dynamic and changing rapidly. The characteristics that define its environment that one needs to understand to develop the logistics strategy are as follows:
Expectations of service levels are increasing
Consumers are becoming more sophisticated.
Government regulations are becoming more stringent
Commodity price pressures and intense competition cause opposite effects on price, affecting margins.
Logistics can be of immense value to a company if approached in a correct and definitive manner. Its importance for various businesses has now increased from merely a cost incurring but necessary function to:
An activity to generate significant cost savings.
An activity with the potential to increase sales and customer satisfaction.
A marketing tool to gain sustainable competitive advantage.
The costs incurred by Diageo can be broadly understood as follows:
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Source: Gosnell, Investor Relations Conference, 2005
The global supply and logistics strategy also includes people and processes which Diageo classifies as ‘Partners for growth’ (Gosnell, Investro Relations Conference, 2005). These can be classified as follows:
Key Enablers: These are associated with people, processes and attitudes such as collaboration, teamwork, responsiveness and capability development.
Qualifiers: These include protecting brand as well as Diageo reputation through maintaining brand quality, brand integrity, corporate citizenship and other such means. It may also include the resolve of the company to deliver competitive service to the customer at the right value.
Winners: these include processes to reduce end-to-end supply chain costs, overall costs, driving technology and research and ability to execute the strategy as expected.
The various features of this strategy implemented by Diageo in inbound as well as outbound logistics and value creation are as follows:
Reducing the overall cost of goods sold: Diageo has set a target of 2% real cost reduction each year. The philosophy here is that savings can come from all components of the supply chain such as procurement, logistics, manufacturing and brand value, each of which will be subsequently looked into. The large scale operations of Diageo provide it with an advantage in all these areas.
Procurement: Glass and energy are two largest components of Diageo’s cost of goods. To control energy costs, it uses forward purchasing; spot purchasing as well as short term tactical purchasing. For glass supply assurance and price control, it entered a strategic relationship with Owens-Illinois and gave it the preferred supplier status. At the same time, it developed alternate supplier relations as well such as with Altajir, based in Europe, with which it entered a 3 to 5 year deal.
Also, Diageo also leveraged newer supply sources from Asia and Eastern Europe as these emerging economies are reliable on quality, pricing, service and innovation. As an example, this has led to 40%-50% cost saving on cartons, 20% on crowns and 15%-20% on casings.
Manufacturing: Diageo tries to maximise the benefits of economies of scale. It has larger but fewer manufacturing facilities, thus having high fixed costs but low variable costs. It has sold or closed 11 facilities in Europe, 5 in North America and 3 in Asia/Africa. In the rest of the manufacturing plants, it has tried to fully optimise the advantages of the Diageo scale; e.g.: Shieldhall, Scotland is the largest volume spirits packaging plant but still has only 7 lines.
Logistics: Diageo uses the ‘pilot principles’ involving a central hub warehouse that can supply to the surrounding markets. These warehouses are strategically located and use cross-border shipments to meet demand. This model also minimises costs by maximising throughput. This has led to 20% reduction in manpower requirements, 25% reduction in stock and enhanced service performance. An example of the ‘pilot principles’ model in Europe for Diageo is as follows:
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Source: Gosnell, Investor Relations Conference, 2005
Brand Value and Value Engineering: An example of value engineering would be the Guinness can size that was reduced by 7%, weight reduced by 1% without loss of volume held. JW bottles’ glass weight was reduced by 22% as another example. This has led to reduction in packaging, hauling and shipping costs.
Also, Diageo intends to create value for its customers while preserving its brand image. It intends to do so through
Improving existing quality standards
Implementing environmental management systems
Crisis management simulations for business resilience
Optimise supply flexibility
Strategic Approaches to Logistics Management
There are two motivations suggested for designing a logistics strategy (Whittington 1993). These included the goals of setting the logistics strategy and how deliberate the processes were of setting the logistics strategy. A matrix was hence developed and helped firms evaluate the logistics strategy.
Benchmarking
Diageo can utilise benchmarking to evaluate its logistics performance in comparison to its competitors or companies from different industries altogether. Benchmarking can be defined as a process of continuously measuring and comparing one’s business performance against comparable processes in leading organizations to obtain information that will help the organization identify and implement improvements (Benson 1998). Benchmarking can also be understood as a process for identification of ‘best’ practices by comparing key performance indicators for a specific activity across organisations and using these performance levels as inputs for corporate goal setting (Gourdin, 2001) Diageo can utilise this to compare its practices with respect to other companies, industries or markets. Benchmarking can be used in a variety of logistic processes such as warehouse operations, mode and carrier selection, order processing, forecasting and packaging. However, certain steps need to be ensured before embarking on benchmarking (Gourdin, 2001). These are as follows:
Defining the present performance level of the benchmarked activity.
Determining the level of performance desired in this activity to be benchmarked.
Determining what improvements can be made and to be made
Determining how to make the desired improvements to achieve desired performance levels.
Estimate and set a time frame for the completion of the process.
Collaboration/Co-operation
Collaboration is the most sophisticated form of electronic integration. If electronic integration occurs at all levels, namely strategic, tactical and operational, it is called as collaboration. It helps the supply chain members to come together so as to better forecast future demand and to design plans and implement them to meet these demands. The members can collaborate on new product planning, demand forecasting and replenishment planning. Collaboration allows information to be rapidly exchanged and hence, all participants of the collaboration have access to updated and latest information. It can also help to reduce costs and the data fed into the system can be used for monitoring and feedback activities. The co-operative approach simply refers to the degree of external and internal collaboration among the supply chain members.
Partnerships/Alliances
Companies now realise the concept of strategic long term relationship with suppliers. The underlying reason for this realisation is the need to improve customer service or add value to the finished product. An alliance is said to be strategic when it is strategic in focus and also directly supports one of the partner’s distinctive core competencies (Grant et al, 2006). Partnerships not only help the members in sharing information, knowledge and experience but also aid in lowering the risks for any one player.
Diageo, as motioned previously, has a long term partnership with Owen-Illinois, a USA-based glass manufacturing company. It has been accorded special supplier status and given a contract for 3 years. It has also increased the scale of Owen-Illinois. Diageo can forge similar partnerships with various other members of its supply chain.
Just in time (JIT)
A JIT-based program aims at ensuring that the right quantities are produced at the right time and reach the consumer at the right moment of need so that there is no waste. Waste has been defined in JIT programs as anything that does not add value to the end product. One unit more or less than needed is considered as waste. Total Quality Management is a concept whose principle is concurrent with those of JIT and both may need to be implemented simultaneously so as to add value to company’s operations. A successful and functional JIT program, however, needs the following to be achieved by the company:
Steady production
Flexible resources
No machine breakdowns
Reliable suppliers
High quality product/service
Rapid machine set-ups
Discipline to maintain every of the above functions running over a continuum
Implementation of JIT
For JIT to be successful in Diageo, adaptation of the JIT concepts in its environmental set up is essential. The main concepts of eliminating waste, quick changeovers, flexibility in resources and partnering with suppliers have to be realised and has been described as a two-stage process (Gourdin, 2001).
Establish foundations (this refers to quality, low cost, minimum lead times, flexibility: these can be achieved through Total Quality Management, flexible and trained workforce, reduction in setup time and focus on design).
Core Techniques (pull scheduling, multi-functional workforce, JIT purchasing).
JIT is a volume and demand driven program. It requires a certain level of stable demand for it to be successful. It cannot be implemented in a business that has unique orders or low volumes of operation. Moreover, companies should strive to improve JIT systems as technology advances.
Lean Management
First introduced by Toyota Production Systems, lean management is a concept of reducing waste and non-value adding activities from the value chain. The main elements of lean management are small batch size production, ‘pull’ creation and reduction in variability. It says that a ‘pull’ is created when a customer demands a product and only that should lead to production, thus reducing stock wastes and large inventories or batch sizes. Two very important principles associated with lean management are kaizen (continuous improvement) and kaikaku (radical improvement). This encourages improvement in the processes on incremental as well as radical levels. Lean management helps in reducing lead times and reduce variability in demand, supply and manufacturing by standardisation of procedures.
Value Chain Analysis:
Source: Johnson et al, 2008
The concept of a value chain was developed by Michael Porter. He suggested that the functions in an organisation can be split into primary activities concerned with creation and delivery of product and service and supporting activities (Johnson et al, 2008).
The value chain analysis helps the company identify its various components of the value chain and what are the activities at which value added can be increased. A fundamental value chain for Diageo can look like this:
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Issues relevant to the development of strategies
Integration of logistics strategy with corporate and business level strategies is essential for success of all these strategic outlooks. Diageo has integrated logistics strategy with the overall corporate strategy to streamline procurement, manufacturing and delivery operations (Gosnell, 2005). It has helped Diageo become the largest player in the international alcohol beverage market. However, scope for further improvement always exists. A Step Model can be used by Diageo to develop and assess its logistics strategy and identify its strengths and loopholes.
What Diageo must realise is that there are certain factors in the supply chain that are beyond the control of the company. Trying to manage such factors by the management can lead to waste creation and loss of value. These can include increased competitive pricing and product pressures, unanticipated actions by competitors that can dent Diageo’s market share or size, legal and regulatory changes and many others.
Management Issues Caused by Implementing Newer Strategies
New strategy implementation can directly affect the capital, technical and human resources of a company. Good leadership during change as well as effective communication can help implement the change in an efficient manner. During implementation and modification of logistics strategy, due importance should be given to HR management and other organisational issues. Ignorance of HR issues is the most common, yet often ignored cause of failure to implement changes in strategy, even when they denote improvement over previous processes. These issues such as recruitment, training and appraisal, autonomy, flexibility and reward systems are important factors to be taken into consideration to enable smoother transitions. Specific to logistics, the management should review the current staffing and skills, allocation and training of staff, as well as current recruitment criteria and procedures. It should also consider the impact of market pull and technological push on the strategy design and plan. Likewise, operational issues have to be monitored and requirements in terms of people, capital and equipment resources have to be met. These are necessary for any new tactically significant operations the company plans to undertake.
Force field analysis can also be used to help stakeholders accept the change and understand the requirements, implications and resistances to the change in strategy. The model also suggests that there are two forces primarily in the business field, namely, driving force and resistance force. The management should strive to increase the strength of the former and reduce that of the latter while implementing change.
Collaboration can play a significant role in the implementation of change. This is so because the company’s suppliers and customers are also stakeholders in the company and can resist change. Internal collaboration, intercompany collaboration and electronic collaboration should be implemented while keeping in mind the ECR (efficient consumer response).
New Technology Implementation and Future Trends in Logistics Strategy
Diageo, due to its international and cross border supply chain should now focus on localised supply chains and distribution systems. This can help reduce haulage and shipping costs. Employment of low cost communications and cost computing technologies can aid in this endeavour and also help in increasing capability to extend product variety. Diageo has to be agile and flexible to incorporate these and any such positive technological advances. This can lead to increased pressure on cost-efficient, strategically beneficial logistics management due to increasing competition. As a result, increased pressures may be felt on supply chain networks viz. replenishment ordering, continuous ordering and supply flows, cross docking and stockless warehousing with product tracking (Harrison, Van Hoek, 2008).
Scenario planning is a simulation attempt to generate realistic and plausible situations of the industry. Diageo can use it to simulate various market conditions, future situations and competitor capabilities. Such an uncertainty-based scenario matrix is highle effective in evaluation-based planning over the medium and long term.
RFID
Radio frequency Identification is used by Diageo wherever plausible. However, Diageo should try and implement the technology in all markets for more efficient product tracking, demand tracking and supply chain flexibility. It also helps in rapidly collecting data about demand levels and consumption patterns in various markets.
RFID is a wireless technology that uses radio signalling for electronic identification and object labelling (Harrison, Von Hoek, 2008). This system works in alignment to the organisation’s information systems. This helps in improving business processes such as supply chain management while relaying significant market data.
RFID systems primarily consist of three components:
Transponders: These are also called as contactless data carriers or ‘Tags’. They can carry information data feeded into them and identify objects to which they are attached.
Readers: These devices communicate with the RFID tags and read the information stored in them.
Software Applications: These are the applications that feed and retrieve the data from a tag via the readers.
RFID vs. Barcodes
RFID are a technological advancement over barcode. The RFID tags can store as much information as a barcode can and sometimes more. Information carried by barcodes cannot be edited. In case of RFID tags information can be edited or updated. Moreover, this function can be repeatedly performed without any loss of data or damage to tag’s memory. The security systems inbuilt in the RFID systems are also better as it uses tags uses authentication and encrypted data transfer methods.
ERP
Baheshti, 2006 defined an ERP system as a collection of business applications, which links various business units of an organisation such as financial, accounting, manufacturing, sales and marketing and human resources into a tightly integrated single system with a common platform for streamlined flow of information across the entire business.
Reengineering of companies is facilitated through ERP systems so that they are in a better position to empower employees, satisfy needs and demands of the customers and create better business value (Willis and Willis-Brown, 2002)
ERP systems helps create reenergized companies that are in a position to better serve customers, empower employees, and drive greater business value (Willis and Willis-Brown, 2002).
Since Diageo has three separate business units catering to different geographical regions, the task of collecting and analysing data is a daunting one at Diageo. ERP system can integrate these data flows across all the business units and their various divisions so as to better understand the industry events and design and/or modify strategy accordingly. It can thus act as a competitive advantage to the company in the long run by better understanding of the international market place and varied needs and requirements of the consumers across borders. This can thus help in driving Diageo’s overall operational efficiency and functional effectiveness.
References:
Presentation by David Gosnell, Managing Director, Diageo Global Supply, Investor Relations Conference, November 2005
Business Insights, ‘The Top 10 Spirits Companies: Industry Trends and Growth Strategies of Leading Players’, April 2009
Presentation by Stuart Fletcher, President, Diageo International, April 2009
Baheshti, H. M. (2006) What Managers Should Know About ERP/ERPII: Management Research News. Vol. 29(4) [online] available from
Fenn, D. (2005) 10 edn. Key Note. Hampton: Key Note Ltd
Gourdin, k. (2001) Global Logistics Management. Oxford: Blackwell
Grant, D., Lambert, D., Stock, J., Ellram, L. (2006) Fundamentals of logistics Management. Berkshire: McGraw Hill Education
Harrison, A., Van Hoek, A. (2008) 3 edn. Logistics Management and Strategy. Essex: Pearson Education
Johnson, G., Scholes, K. and Whittington, R. (2008) 8th edn. Exploring Corporate Strategy. England: Pearson Education
Rushton, A., Croucher, P., Baker, P. (2006) 3 edn. The Handbook of Logistics and Distribution Management. London: Kogan
Willis, H. & Willis-Brown, H. A. (2002) Extending the value of ERP: Journal of Industrial Management & Data Systems, [online] Available from
www.diageo.com.
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