Courage to Focus on Supply Chain

Reminiscent of Victor Kiam whose television ads once stated, "I liked [ Remington shavers] so much I bought the company," U.K.-based brewer Scottish & Newcastle (Edinburgh, Scotland ) might announce, "Our supply chain was so important we decided to own it."

Scottish & Newcastle (S&N, www.scottish-newcastle.com) took the long road to supply chain improvement and ended up owning half of the third-party-logistics company providing its distribution services. It all started with consulting work that went awry.

S&N is currently pursuing a suit against PricewaterhouseCoopers (PwC, New York, www.pwc.com) before the High Court of London alleging deficiencies in the supply chain consulting work. PwC was retained in 1998 to advise on a strategic review of S&N's Courage group's supply chain. By 2003 the failed supply chain reorganization had led to massive costs, disruptions and delays, and reduced market demand. When the company publicly announced it would incur costs of £15 million ($29.5 million) to correct distribution problems, its share price fell 7% to a two-year low.

Today, not only has S&N fixed its supply chain, it is now co-owner of the logistics company that manages that supply chain. It's a surprising twist considering that when PwC initially recommended a radical restructuring, it was suggesting "lean supply chain" practices, not becoming a third-party logistics provider.

Based on the PwC consultants' original recommendations, S&N announced the complete overhaul of its supply chain operations in January 2001. Everything— warehousing, distribution and planning— would be organized into one function. On-trade distribution (to bars, restaurants and "trade" accounts) would be moved from its 39-warehouse network to three regional distribution centers (RDCs) and 30 satellite warehouses, some of which would be stockless. Those same RDCs would serve the off-trade or retail sales channel. Because executives believed that direct customer contact is a key value-adding activity, Courage draymen continued to deliver to customers. Primary distribution would remain with Hays, the logistics company that was already performing this function for Courage.

The company entered the transition optimistic, saying it would ultimately see a reduction of more than 40% in average stockholding and an attendant reduction in working capital. Over the four-year phase in, employment at Courage was expected to drop by 1,300 jobs. Exceptional costs of £116 million ($228 million) in the period would be replaced by a logistics network that would begin generating £46 million ($90.5 million) in annual savings once the transition was complete.

After 12 months of planning, the transition got underway and it became clear by late 2002 that the revamp of the Courage distribution system was taking longer than anticipated and it was costing much more than expected. The three £15 million ($29.5 million) RDCs were not being managed efficiently and, instead of reducing stock levels, both the new and old distribution systems were operating side by side, increasing stock levels, causing disruptions and leading S&N to add another two years to its implementation schedule. S&N also reported £15 million ($29.5 million) in added costs.

The significance of the mistakes made in the revamp of the Courage supply chain had many dimensions. Part of the recommendation to shift to an RDC-based network meant changing delivery dates for customers, to which customer reaction was strongly negative.

By late 2006 new thinking was driving S&N's supply chain decisions. During this period of turmoil, Hays, the company providing logistics support to Courage since 1995, had been acquired by Platinum Equity Group (2004) and was then sold to Kuehne + Nagel (late 2005). In 2006 S&N and Kuehne + Nagel formed a joint venture, Kuehne + Nagel Drinksflow Logistics (KNDL), which will provide S&N U.K.'s primary and secondary distribution activities for a contracted10 years.

KNDL has now taken over distribution services on behalf of the joint venture, absorbing Kuehne + Nagel's existing contacts with S&N. In the process, S&N will transfer operation of 22 U.K. warehouses and 700 vehicles to the joint venture, along with five major regional distribution centers. The joint venture will be free to pursue new business in the drinks business.

S&N expects annual cost savings of £5 million ($9.8 million) in 2007and will receive a net consideration of £30 million ($58.8 million) from the joint venture.

Though the core of Scottish & Newcastle's focus will remain on its drinks brands, the company has clearly learned a powerful lesson about the importance of its supply chain. This may have been one of the more radical overhauls of a supply chain in terms of the process that change took, but looking at the results, S&N has finally reached the point where it is reducing stock levels while maintaining or improving costs and cash flow. It wasn't a straight line, but the company appears to have reached its original goal.

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