Waiting is not a strategy
Monday, 15 August, 2005
Mike Carter
The importance of procurement strategies has been greatly underestimated in the wine industry, writes supply chain management expert Mike Carter. He offers three practical ‘supply-side moves' that will yield quick gains for medium and small wine producers.
Few will dispute the uncertainty of investing in the wine industry. Patience, deep pockets, and a passion for wine are the minimum entry qualifications. Business knowledge is welcome, although optional. Whilst cost pressures and a defiant currency challenge management to be innovative and ‘think out of the box’, the importance of procurement strategies has been greatly underestimated. Here are three practical ‘supply-side’ moves you can use that will yield quick gains for medium and small wine producers.
1. Exploit the power of collaboration.
Don’t see your competitors as the enemy - ‘they want something from us’, but as potential collaborators and a resource for reducing costs. By combining assets and capabilities wineries can gain the benefits of scale that they would be unable to achieve alone. Packaging, labeling, bottling, warehousing and logistics are all areas ripe for potential savings and efficiencies. In Australia eight producers and a contract bottling company have established a buying cooperative known as the Independent Winemakers Group¹, whilst in Italy, members of cluster manufacturing circles have been known to compete aggressively for contracts but to cooperate simultaneously in delivering on those contracts². These strategies are most effective when the size and market power of collaborators is modest compared with industry leaders. Bottling companies should take their expertise to the next level by seeing themselves as more than just labeling and bottling operations, and rather as supply chain management companies.
2. Operate lean and mean.
Unlike fine wine, inventory doesn’t improve with age. From an accounting perspective inventory is treated as an asset, but savvy companies now base their business models on the concept that inventory is a liability. Many managers are unaware of the costs of holding inventory. This includes damaged, lost and redundant stock, and don’t forget the warehousing, insurance, and financing costs. And who wants excess inventory when demand suddenly drops? Experience shows the wine industry spends up to 30 percent on packaging costs. The trend towards JIT purchasing brings with it the prospect of dramatic reductions in working capital and major increases in productivity. Ask yourself: How much money do I have tied up in inventory? Reduce your inventory and you will reduce debt and improve your cash flow.
3. Reign in costs.
In today’s complex business world, the rules of purchasing have changed. The knowledge economy has leveled the playing field, and value is added by intense communication and information flows. Because the wine business operates in a time sensitive and competitive environment suppliers now have to be a source of competitive advantage. Build a culture of cost control into your daily operations and leverage the brainpower of your suppliers. Research shows that wine producers that pre-screen all possible suppliers are more likely to be profitable³.
For the wine industry, with cost of sales running at between 60-70 percent, it is clear that management of inputs is a critical issue. In determining profitability, size does not have to be a determining factor, and by building strategic alliances with competitors and suppliers, medium and small wine producers can build a joint sustainable competitive advantage.
¹KPMG Wine Industry Report 2003: Shelf space…is there room for me?
²G. Lorenzoni., O. Ornati. Constellations of Firms and New Ventures. Journal of Business Venturing 3: pp. 41-57, 1998.
³J. Baldwin, S. Orr & A. Simon. Procurement Practices in the Australian Wine Industry. Journal of Wine Research, Volume 8, Issue 1, 1998.