Liquor warehousing and distribution in Alberta : supply chain analysis : final report

2007·7.3 MB·English

by  PricewaterhouseCoopers LLP

Alberta
Gaming and Liquor Commission
-
Liquor Warehousing and Distribution in Alberta
Supply Chain Analysis
FINAL Report
March 1,2007
Prepared by:
PricewaterhouseCoopers LLP
Suite 1501, TD Tower
10088-102 Ave NW
Edmonton, Alberta T5J 3N5
@
PriwaTerhouseQopers
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Table of Contents
EXECUTIVE SUMMARY
1 1
2 INTRODUCTION 7
3 OVERVIEW OF SUPPLY CHAIN MANAGEMENT 8
4 APPROACH 10
4.1 Stakeholder Meetings 1
4.2 Consolidation ofWritten Responses 1
5 RESEARCH 12
5.1 Best Practices 1
5.2 Review ofOtherJurisdictions 1
5.2. The IowaAlcoholicBeverage Division (ABD) 13
5.2.2 The GovernmentofOntario BeverageAlcoholSystem Review(BASR) 14
5.2.3 Lessons Learned 16
6 FINDINGS ...17
6.1 Alberta’s LiquorSupply Chain 17
6.2 Upstream Association Responses 18
6.2. Spirits Canada 19
6.2.2 Canada’s NationalBrewers 19
6.2.3 BeverageAlcoholImporters CouncilofAlberta (BAICA) 20
6.3 Downstream Association Responses 21
6.3.1 Alberta LiquorStoreAssociation (ALSA) 27
6.3.2 Canadian CouncilofGroceryDistributors (CCGD) 22
6.3.3 Canadian RestaurantandFoodservicesAssociation (CRFA) 23
6.3.4 Alberta Hotel& LodgingAssociation (AHLA) 24
6.3.5 Alberta IndependentLiquorRetailers (AILR) 25
6.4 Discussion Paper- Responses to Questions 27
6.4.1 The External Context 27
6.4.2 The SupplyChain 31
6.4.3 Issues Surrounding LiquorSupply Chain Management 36
7 CONCLUSIONS 64
8 ALTERNATIVES 68
9 RECOMMENDATIONS 71
APPENDIXA- LIST OF RESPONDENTS 74
APPENDIX B - ALBERTA’S LIQUOR SUPPLY CHAIN DISCUSSION PAPER 75
Q
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LiquorWarehousingand Distribution inAlberta
Final Report
Executive Summary
1
Overview
l! A simple, expedient solution to Alberta’s current liquorsupply chain challenges does not exist.
I The alternatives thatwe analyzed would likely have a negative impact on costs, service levels,
!
product delivery (speed and reliability), and/or product selection.
A numberofrelatively simple, short-term/interim solutions have been proposed. These include:
• Appointing additional warehousing vendors; and
• Allowing the domestic brewers to distribute the import brands thatthey represent.
While superficially attractive, it is probable thatthese interim solutions will fundamentally
enhance the positions ofcertain interests, namelythe supplier/ agent community, to the
j potential disadvantage ofretailers and consumers. As well, attempting to establish a new
service delivery model atthis time increases the risk of not being able to meetthe 2007 peak.
The Alberta liquor industry supply model is predicated on balancing the interests ofall
j stakeholders. Altering that balance will need careful consideration.
Recognizing the needs, priorities and balance above, we have worked with the AGLC to
develop a proposed multi-track approach, which is geared to:
1. Ensuring that stability and predictability are returned to the supply chain in the nearterm
(the next one to two years)working within the existing delivery model. Mandatory
j supply chain planning and forecasting, underthe direction ofthe AGLC, would be
required;
2. Evaluating the costs, benefits, risks and policy implications ofdifferent supply chain
I
models; and
3. Identifying the best long-term alternative, based on balancing AGLC’s needs and
priorities, and help AGLC to develop a transition strategyto move from the current
model to the future model.
Background
Until recently, the privatized model for liquordistribution in Alberta has worked reasonablywell.
! • Consumers have seen an almost 300% increase in the numberofproducts they can
choose from; they can now purchase liquorfrom over 1,100 retailers in communities
throughoutAlberta; liquor retail prices have remained relatively stable.
• Retailers have had reliable, predictable delivery ofliquorthroughoutthe province at a
I standardized cost.
• Agents have been able to introduce new products to the marketwith a minimum amount
of“red-tape”.
• The Government ofAlberta has met its policy objectives as established atthetime of
privatization.
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Current Situation
Alberta’s provincial alcoholic beverage operating environment has undergone significant change
since the introduction of private sectorcontrol ofthe delivery mechanism in 1993.
• Consumers expectthe increased availability and selection ofproducts.
• The numberofretailers and licensees has increased significantly: larger retailers and
retail chains have become more established.
• More recently, some larger retailers have started to use their buying powerto negotiate
volume discounts with suppliers through the existing LTO (Limited Time Offer) process.
• The complexity ofwarehousing and distribution has increased significantlywith the
numberofproducts that must be brought in, unloaded, stocked, picked, packed and
shipped.
• The charges percase to stock, pick and ship fast moving, high volume products is
identical to the charges forslow moving products in spite ofthe potentially huge disparity
in work effort involved. This has created the situation where high-volume products are
effectively“cross-subsidizing” a growing numberofslow moving products.
• The willingness ofthe existing warehouserto make anything buttactical investments is
hampered by the factthatthey have not operated with a long term contractwith the
AGLC. Connect Logistics Services (CLS) has operated with several inefficient “satellite”
warehouses and retailers have been permitted “storage facilities”.
• The lack ofa formalized planning and forecasting process involving all stakeholders
(suppliers, agents, freightforwarders, warehouserand retailers) greatly reduces the
abilityto predict potential bottlenecks in the supply chain. Ultimately, the warehouser is
forced to make prioritization decisions (due to finite capacity)that may be inconsistent
with the desires ofeitherthe suppliers or retailers.
• The available capacity in the existing warehouse at key moments during peak seasons
has been exceeded given thatthe flow is not managed against a formalized plan.
• No incentives ordisincentives existforgood / poor performance orcooperation to
ensure efficiency by suppliers, agents orthe warehouser. The implications ofthis are
that poor performance by one stakeholder in the supply chain can cause significant pain
atother points in the supply chain.
• The “hands-off’ approach taken bythe AGLC in establishing formal performance
measures and monitoring performance againstthese indicators has resulted in tactical
decisions to issues as they arise instead ofproactively planning and recognizing
problems before they occur.
In preparation for2007, CLS is making significant investments to enhance current capabilities.
These include:
• A newWarehouse Management System (WMS);
• Dividing slow moving items into theirown specialized warehouse (mixing centre) with
consolidation at St. Albert. St. Albertwill then be primarily used as a distribution centre
ratherthan a mixed storage and distribution facility (all ofthis enabled bythe new WMS);
• Improved racking layouts and automation at St. Albert commensurate with St. Albert’s
revised role as primarily a distribution centre; and
m
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• Furtherdevelopment ofthe labour plansto ensure staffretention and availability
including preparing forthe importation oflabourfrom outside Canada. It should be
noted that stafftraining lead times mean thatthere are delays of up to 3 months between
an employee starting and being fully productive.
However, CIS has made limited or no quantitative analysis to date ofthe actual impacts these
investments will have in terms ofimproved efficiency and capacity. Indeed the working details
such as the timing offlows (with consequent impact on orderto delivery lead times) between St.
Albert and the “mixing centre” are being designed while this report is being prepared. In
addition the proposed moves will need to be phased as the new mixing facility is brought on
WMS
line, the implemented, and existing facilities rationalized. This workwill likely continue
until the fall of2007.
The Challenge
• Suppliers, agents and retailers have expressed thatthey have lost confidence in the
current model ofliquordistribution in Alberta.
• The conceptof“open, free market” as defined bythe suppliers/agents and some large
retailers is incongruentwith “fairand level playing field” as originally defined bythe
Alberta model and understood by most retailers.
• No one is "managing" the flow ofgoods in the supply chain.
• Industry stakeholders are looking forthe problem to be fixed yetthey cannot agree on
the bestalternative forsolving the problem. Not surprisinglythe solutions proposed
reflecttheircommercial interests and do not point outthe implications forthe other
players in the chain oron consumers.
• Any solution implemented in the short-term can only be a stop-gap solution.
Conclusions
• The existing system makes it difficultto define who is responsible forservice failures.
During the review, each segment ofthe industry soughtto “pointfingers” atthe others
without recognizing the limitations each playerwas working under.
• The existing system does not require the players in the supply chain to cooperate in any
meaningful sense.
• Based on observation and the qualitative information supplied, it is unlikelythatthe
currentwarehouse operation is sustainable without a significant increase in capacity or
the better use ofthe existing capacity.
• Processes and systems to support sensible business planning and execution are
inadequate.
• The allocation/communication/agreementofindustry roles, responsibilities and
accountabilities to makethe system run smoothly is inadequate; and
• The lack ofa performance managementframework creates little or no incentive for CLS
to be responsive to changing business requirements.
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Recommendations
The recommendations made are based on the assumption thatfundamental market shifts have
occurred that require the development ofnew liquordistribution model forthe Province of
Alberta. This new industry model will require clearallocation ofroles, responsibilities and
accountabilities ofkey industry players throughoutthe supply chain.
These recommendations are tiered into short, medium and long term actions.
ShortTerm
Shortterm is defined as beginning March 2007 with the initial analysis completed bythe end of
May 2007, implementation and monitoring through the balance of2007; to be repeated in 2008.
• The AGLC musttake a more active role in managing elements ofthe industry-
particularly in the supply chain -to ensure that service levels and stakeholder
confidence are returned to the industry.
• Retain CLS as the sole warehouser/distributorforthe distribution ofliquor in the
province ofAlberta atthis time, butwith a more rigorous contractual regime. Do not
make shortterm changes such as changing the beerdistribution arrangements or
introducing newwarehousing vendors. Such changes are likely high risk as theywill
add complexity and set precedents in advance ofthe developmentofa longerterm
strategy.
• Formalize the “service provider” relationship by defining, negotiating and signing a
contractwith CLS to provide services that includes conditions ifperformance is / is not
met.
• Establish and implementformal performance measures againstwhich CLS performance
will be monitored; indicators need to include:
o On-time delivery;
o Accuracyofshipment; and
o Customerservice.
• Workwith CLS to develop a new, expanded, rate structure to better reflectthe relative
costs ofordering, handling and storing fast moving items as compared to slow moving
items. Implementthis new rate structure in the summerof2007 so that it is aligned with
the move to the “mixing centre”.
• Require all upstream and downstream stakeholders to provide volume and timing
forecasts for2007 (and 2008) to CLS so that properforward planning can be performed.
Ensure thatthe plan is quantified and tested.
• Establish “rules ofengagement” forthe suppliers/agents and retailers based on the
forecasts used for planning 2007 and subsequently 2008. These ruleswill be used to
regulate productflows and responsibilities and will include consequences ifrules are
broken.
• Retain the services ofa qualified supply chain specialistto supporttheAGLC including
reviewing the plans and monitoring implementation/operation on, at minimum, a monthly
basis.
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• In the eventthat supply and/ordemand spikes unreasonably at some point, the AGLC
would reserve the shortterm rightto impose limits on supply orordering during certain
periods.
• Short listoptions for refining the LTO system; forexample, remove anomalies such as
small retailers being forced to wait until theirorderday before they can order LTOs.
Changes such as this will be complex at a detailed level and will require careful
consultation with all the parties involved. This project should be completed, however, by
June 2007.
• Subjectto any legal considerations, give notice to CLS that, as a consequence ofthe
changes described above, the existing “appointment” arrangementwill revertto a more
typical “services contract” arrangementwith an expected term to coincide with a
transition period following the possible re-tendering ofthe contract in approximatelytwo
years from now. The duration ofthe transition period would likely be determined during
the development ofthe RFP documents in late 2008.
Medium term
Medium term is defined as beginning in March 2007 with the analysis and policy options ready
fordiscussion/decision byAugust 2007. Target Implementation beginning in 2008 or2009
depending on the final policy decisions.
Develop an operational and financial business case that considers fouroptions forthe physical
network:
1. Recreate an environmentwhere the supply network is sized to be largerthan the
expected peak volume fora numberofyears to come (essentiallythe situation at
privatization). This option will be capital intensive and likelywasteful as itwill involve the
building or leasing offacilities which will be underutilized otherthan at exceptional
activity peaks. As consumption grows this solution will at some point again run out of
capacity provoking another“crisis”. Anotherversion ofthis strategy has warehouses
(and warehousers) being added. This approach will also add to the work ofthe AGLC,
especially in its capacity as “first receiver”. Maintaining a uniform service forall products
and a uniform price structure forall retailers will increasingly not be feasible as more and
more locations are added decreasing the efficiency ofthe system. The likely result is
thatAgents/Suppliers will seekto favoura limited range ofretailers and “neglect” the
rest.
2. Act more proactively asthe regulatoreitherdirectly, through a third party orthrough the
warehouse operatorand dictate the priorities at peaktimes to the suppliers and retailers
based on projections thatthe suppliers and retailers would be required to provide for
planning purposes. In principle this goes againstthe “free market” principles thatAlberta
has espoused since privatization. It requires theAGLC to “re-engage” as a regulator (at
least in the last resort) ofoperations as well as its ongoing fiscal and social responsibility
role.
As structured todaythe AGLC does not have the skills orthe resources to undertake this
role otherthan in whatwould likely be an arbitraryfashion. The current privatization
model is structured to offera “level playing field”to all retailers which in turn has meant
an operating constructthat does not allow a “free” marketforservices such as
warehousing to develop (as itwould have been complexto achieve while ensuring level
pricing and deliveryto all retailers and would have required, forexample, a detailed
regulated wholesale pricing regime). In this situation, the AGLC is nowfaced with either
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maintaining the current principles, which would in turn mean the AGLC returning to a
more interventionist role in “managing” the operations ofthe service providers similarto
a utility model, orofchanging the privatization model with the core options being
described below.
3. Adjustthe principles ofprivatization to enable the suppliers to take control openly ofthe
supply chain and to manage it. This option is one that is rarely seen in the consumer
goods market. The state of Iowa evaluated this model for liquordistribution a numberof
years ago and concluded that itwas not in the best interest ofthe state (see section 4.3).
However, it is still an option that needs to be carefully considered.
4. Adjustthe principles ofprivatization to enable the retailers totake control ofthe supply
chain and manage it. This model is the one which has evolved as the most common
model forconsumergoods globally, particularly in the last 30 to 40 years. The retailers
are closestto the consumer. Adoption ofthis model would however require care to
ensure thatthe interests ofall groups are considered.
Selecting amongstthese choices will be difficult. Each onewill have significant
consequences forall the parties involved. The decision making process forthis long-term
strategic direction will require significantly more in-depth analysis. The reviewwould
considerthefinancial, operating and consumer implications ofthe options and would lead to
recommendations on which approach should be adopted and whatoperating principles /
policies would be needed. In making this reviewthe following key priorities would be
followed:
• Compliance with Federal requirements;
• Maintaining social responsibility:
• Ensuring a diversity ofproducts;
• Ensuring service and price competitiveness to all Albertans;
• Supporting employment and enterprise in the retail sector; and
• Securing the revenue flowto the Province ofAlberta.
Long term (2009 onwards)
Based on the results ofthe in-depth review, issue an RFP forone or more warehousers to
deliverwarehousing and distribution services fora defined contractterm (forexample, 5 years).
The transition to any newvendor, orto the terms ofany new agreement, would take place over
a time period to be defined during the RFP process. The time required fortransition would in
part depend on whetherthere would be a requirementthat any successful bidder(s) continue to
operate from St. Albert or iftheywould be free to create a new network (or use parts ofthe
existing system). Analysis ofthis question should form a part ofthe business case analysis
described above.
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2 Introduction
The receiptofliquor productfrom suppliers and agents, and the distribution ofliquor productto
licensees from the Connect Logistics Services (CLS) warehouse in St. Albert have encountered
a numberofsignificant supply chain issues overthe last year. These supply chain factors have
caused issues forsuppliers, agents, and liquor licensees, and attracted licensee and media
attention.
PricewaterhouseCoopers LLP (PwC) has been contracted bythe AGLC to conducta review of
the liquorwarehousing and distribution supply chain in Alberta, with a viewto proposing
resolutions to the supplychain issues facing the provision ofspirits, wine, coolers and imported
beer in Alberta.
The scope ofthis review specifically excluded “finding fault” related to the events ofthe past
year. Rather, its purpose was to bring an independent perspective to the process as the AGLC
and its stakeholders look ahead to the future.
This document is divided up into thefollowing sections.
• Section 3- provides an overview ofthe basic elements ofSupply Chain Management
(SCM).
• Section 4-describesthe approach thatwas used to completethis review and includes
summary information aboutthe data gathering phase.
• Section 5-describes some “best practices” that one would expectto see in highly efficient
supply chain operations and provides a review oftwo other liquordistributionjurisdictions.
• Section 6- provides a summary ofthe feedbackfrom the stakeholders. It also includes
PwC comments on this feedback.
• Section 7- summarizes the conclusions that PwC has drawn from analyzing the feedback
based on our industry expertise and knowledge ofbest practices.
• Section 8-describes the alternatives thatAGLC has forgoing forward.
• Section 9-outlines our recommendations forgoing forward.
• AppendixA- provides a list ofrespondents.
• Appendix B - is a copy ofthe AGLC LiquorSupply Chain Discussion Paper.
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3 Overview of Supply Chain Management
This section provides an overview ofSupply Chain Management (SCM) so asto ensure thatthe
findings and recommendations are provided within the context ofan overall SCM Framework.
In its simplestform, a Supply Chain refers to the distribution channel ofa product, from its
sourcing, to its deliveryto the end consumer (see Figure 1).
Consumers
Product
Figure1 -SupplyChain
Supply chain management (SCM) involves the coordination and integration ofproductflow,
information flowand finance flow both within and among companies (see Figure 2).
• The productflow- includes the movement ofgoods from a supplierto a customer
• The information flow- involves communicating information aboutthe product as it passes
through the supply chain (e.g., purchase orders, shipping notices, delivery status).
• The financeflow- includes payment schedules, and consignment and title ownership
arrangements.
Orders L- Orders
^
Payment i Payment Payment
Suppliers Product Distributors 1 product Retailers Product Consumers
Information H Information
Figure2-SupplyChainFlows
The primary objective ofsupply chain management is to have the right products, in the right
quantities (atthe right place) atthe righttime at an acceptable cost. Key questions that need to
be answered with this in mind are:
• Right products - how many different products should be carried? Should different sizes of
the same product be carried?
• Right quantities - how much ofa particular product needs to be ordered? Are there
minimum orderquantities (eitherfrom the supplierorfrom retailers)?
• Righttime - howfast does the product need to be delivered? Flow reliable is the delivery?
Flow accurate is the delivery?
• Acceptable cost-what are the costs ofcarrying inventory? Flow much will it costto get a
certain numberofproducts within a certain timeframe? What is the change in cost ifa
different quantity is ordered? Ifa different product is ordered? Ifa different deliverytime is
required?
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