South African wine producers have been dealt a cruel blow. A global over-supply of wine coupled with the Rand hanging precariously in the six rand to the US dollar range makes trading in this deflationary environment challenging. One powerful method to counter this threat, and leverage South Africa’s competitive advantage, is to look for innovative ways of streamlining the supply chain and reducing packaging costs. Packaging accounts for between 30-40% of input costs, compared to 12-17% in Australia. Surprisingly, packaging remains a relatively unexplored area for potential cost cutting. Because purchasing impacts directly on the bottom line, even minor savings can make a measurable difference to a company’s cash flow and return on investment. Traditionally, the wine industry remains conservative. Innovations such as composite corks and screw caps are gradually gaining acceptance – both with producers and consumers. Two major exceptions are the bag in the box and self-adhesive labels. The latter now represent 27% of global usage, although the proportion of self-adhesive usage in New World wine countries is rapidly increasing and will be in the majority by 2008.Strategically, I believe that the South African wine producer has three options. The first is to compete head to head as global suppliers, taking advantage of economies of scale. With this option, price, delivery and service are the key success factors. The down side is the low return on investment. Option two is targeting niche markets, selling lower volumes of premium wine at higher prices. The strategy chosen will determine the packaging strategy. Global suppliers are continuously seeking to reduce packaging costs and make the supply chain more cost efficient. Because packaging is part of the marketing budget, niche market players tend to spend more on packaging, which is ultimately recovered in the selling price. · Packaging efficiencies begin at the front end of the supply chain - the concept and design stage. Ask yourself: is the cost of the packaging relative to the selling price of the wine? It’s madness to spend R7 for packaging, on a R14 bottle of wine. Conversely, a higher priced wine can carry the cost of added value packaging. Brief your designer and talk to your customers. If necessary, reverse-engineer to bring costs in line with expectations.· Look at the cost advantages of standardization throughout your range. Capsules, boxes and labels come into play here. A while ago, a local wine company had 26 different back labels for one range of wine! · How often, and when did you last benchmark and evaluate your packaging suppliers? Do you have a service level agreement (SLA) in place? The wine business relies heavily on relationships and trust. Don’t let your supplier abuse this!· Global best practice is shifting towards ‘single sourcing’. In this environment collaboration and partnerships with suppliers work to the benefit of both parties. For the customer this should mean better prices and service, for the supplier guaranteed business and a barrier to entry for competitors. Supplier relationships are often a complex mix of collaboration and competition, which needs to be managed. The third option is to change the rules of the game by shifting competitive advantage from price to innovation and knowledge. Use the power of clustering and collaboration to develop the industry. A change of mind-set towards collaboration and partnerships is necessary, bearing in mind that our real competition is the global, not local wine market. The recent formation of the SA Wine Routes’ Forum to grow local wine tourism is a welcome innovation. The key challenge for the South African wine supply chain for the future is to maintain the traditional values of the past whilst innovating and exceeding consumer and retailer expectations. To do this the wine industry needs to shift from being producer focused to marketing driven. Collaborative planning is a visionary process, out of which a strategy is developed. Brand Australia used this approach effectively to give international buyers added confidence in their industry, and shift demand towards premium segments. We can learn from their success.By: Mike Carter Mobile: +27 (0) 82 706 5599 Email: mikecarter@ananzi.co.za