The drinks giant has been refocusing its supply chain to enable it to take advantage of the rapid growth it is seeing in its markets. Gerry O’Hagan, operational excellence director – spirits & wine, explains the strategy to Malory Davies.
It takes 15 years of hard work and patience to make a bottle of Dalwhinnie single malt whisky. But with some 200 countries to serve around the world, Diageo, which owns the brand, has to be a bit more fleet of foot in its supply chain.
Dalwhinnie is just one of 100 whisky brands in the Diageo portfolio. The company is also responsible for the world’s biggest scotch whisky brand, Johnnie Walker, one of the great names in beer, Guinness, and a host of other wines, beers and spirits brands.
Every market has its own top brands: Johnnie Walker is particularly strong in the United States while J&B is favoured in Spain and France. The second largest market in the world for Guinness is Nigeria.
To meet the demands of these different global markets, Diageo has been moving towards a more market focused structure.
“The change was to put more resources at the market level and reduce the global level in the belief that growth takes place in the markets,” says Gerry O’Hagan, operational excellence director – spirits & wine, who is responsible for leading performance improvement for Diageo’s core supply chain processes.
Diageo has 21 key markets, each one typically an agglomeration of countries, which became the focus of operations under a model change in 2011. For years before that supply had been separate from the demand side of the business.
Last year the group launched a project to realign the supply chain to the new market structure under a programme called “Supply Excellence” with the new structure live from 1st July.
“We changed the organisational construct for the organisation,” says O’Hagan. “It went from a global organisation with line reporting for the vast majority of assets across the business into global supply and global procurement through a series of what we called ‘supply centres’ to an organisation where markets took responsibility for their indigenous supply chains.”
The global export supply chain largely based in Europe was formed into a new supply centre called “International Supply Centre”.
O’Hagan says: “So from a supply chain perspective, if you are in East Africa say, previously in manufacturing, or logistics, or distribution, or procurement, you reported into a local organisation which in turn reported into a supply centre which was called Africa Supply which reported into David Gosnell [president of global supply and procurement]. Now, you report directly into the general manager of the local business.”
The international supply centre incorporates scotch whisky, the rest of the spirits, along with beer assets in Europe, and some wine assets.
Procurement is another element of the organisation that remains reporting into the global supply structure – procurement of everything.
“We have our global category team based largely in London, which has responsibility for decision-making on categories of spend. About 80 per cent of spend will be directly controlled by that category team.”
The implementation of that will be supported by procurement teams that report into the individual market supply chain organisations.
“If I am a supply chain director in East Africa, I will have a procurement team reporting into me that covers all aspects of procurement delivery into that market and that will respond to the global category team based in London,” he says.
The relationships between the local market organisations and the International Supply Centre vary depending on the market.
East Africa, for example, is predominantly a beer market and much of the product is produced locally. To make Guinness, Diageo supplies a concentrate which is combined with locally brewed beer. So the focus is mainly on the local supply chain.
In Europe, the market organisation has no supply chain assets – everything comes from the International Supply Centre. So there is a close relationship between the president Europe and the International Supply Centre.
O’Hagan points out that the centre is purely a cost-focused, high performing supply group that has been put together “because we distribute to 182 countries around the world. There is not a natural place for that to be disaggregated to in terms of reporting. And it would be silly to do that as there are scale benefits to be had.”
The third element of the structure is the Operational Excellence teams. There are two – one focusing on the wines and spirits supply chain lead by O’Hagan. The other, focusing on beer, is run by John Council, operational excellence director, beer.
O’Hagan leads a team of functional experts who are responsible for developing the core supply chain processes of ‘Plan’, ‘Make’, ‘Move’ and ‘Technical’. Teams focusing on each area draw on external and internal best practice to develop standards which specify minimum levels of performance and world class practices for their area.
He describes the operational excellence teams as the glue to hold the strategy and performance improvement processes for the supply chain whole, as Diageo goes from a global organisation to a market based, and global, organisation.
Devolving supply chain responsibility to the market organisations means that the market general managers have to be aware of the supply chain requirements.
“We are just about to launch a programme to support the general managers to ensure that they are all comfortable having a supply chain organisation reporting into them and know what to do with that from a strategic perspective,” says O’Hagan.
“But having said that, a lot of the general managers come from other industries where that has been common, so a lot of them have supply chain expertise. Most of them are sales and marketing specialists, but a lot of them have had supply chain responsibilities in their career.
“We are putting in place a capability development programme to enable them to understand the possibilities you can get by managing and influencing supply chain effectively, and helping them understand the governance requirements of that,” he says.
But he points out that a core focus will be on the supply chain directors themselves, to ensure that they are capable enough as functional experts in their own right, and also big enough as leaders in the organisation, to provide the level of focus and influence required at the general manager’s table as part of an overall business strategy.
Diageo has adapted the SCOR model to its own requirement to give the five core processes – ‘Plan’, ‘Source’, ‘Make’, ‘Move’, and ‘Technical’. The ‘Technical’ organisations manage product and process innovation – an example is the recent redesign for Baileys.
O’Hagan says: “I have four teams of functional experts whose job it is to understand what best in class processes are, both inside and outside the organisation. They define what constitute minimum standards and best in class. As part of this process we have defined standards for all our processes across the supply chain.
“As part of the organisational redesign we have had standards in place for the ‘Technical’ but we have now done it for ‘Plan’, ‘Source’, ‘Make’, and ‘Move’. We are launching those across the organisation now.
“We have capability development programmes right across the processes at all levels. And we have a range of programmes to build best practice.
“In the manufacturing space we run a programme called the Perfect Plant Programme – it is lean-based moving towards 6-Sigma. We have been running it for seven years and it has delivered enormous benefits.”
In the ‘Plan’ space, Diageo has been rolling out SAP-based Advanced Planner and Optimiser (APO), replacing Manugistics as well as some spread-sheet based work. “We have gone live in Europe with that. We are halfway through America and Asia Pacific.” There are also plans to roll it out into other parts of the business.
Diageo last year shipped a record 20 million cases of Johnnie Walker. While the home market is fairly mature there is strong growth in Latin America, Asia and even Africa. Spirits grew by eight per cent in North America last year – and the market has been moving towards premium brands – a powerful combination. O’Hagan points out that there has been a significant shift towards the emerging markets, which are now 42 per cent of Diageo’s sales, are growing at five to six per cent per year.
Diageo has been working on performance improvements in all areas of the supply chain but, as it makes progress on areas such as manufacturing and planning, it is increasingly looking at physical logistics.
“People start working on performance in manufacturing then move on the planning – S&OP – because there are always opportunities to improve,” says O’Hagan. “There is usually a strong focus on health and safety in the technical area.
“Then you get to the ‘Move’ part of the supply chain, which is the most difficult because it is the most disaggregated and the most local,” he says, highlighting the problems of putting in place a development programme in this area. “But that’s where our attention is at the moment.”
He points out that the company will continue to focus heavily on the ‘Make’ process, as well as the ‘Plan’ process with the role out of the APO programme. There is a whole initiative on procurement.
‘Move’ is a new part, he says, “as we look to change the routes we use to our customers and consumers in our individual markets. We will be supporting that through changes in logistics, shipping and transport – coupled with changes you need in ‘Plan’ to enable that.
“We are just starting out on the journey now but it is a big focus going forward,” says O’Hagan.
Gerry O’Hagan has seen massive changes in the way supply chains are organised in the drinks industry. He started his career in the spirits industry in Scotland in a company that became part of today’s Diageo.
In those days, he says, every single brand company had its own supply chain. As the organisation grew, it became necessary to streamline that structure. So 20 years ago, those separate supply chains were replaced by a regional structure with organisations for North America, Europe and Rest of the World. That went on to become a global supply chain organisation.
Diageo was created from the merger of Guinness and Grand Metropolitan in 1997 and a few years later it acquired part of the Seagrams business leading to substantial growth in the scale of the supply chain. O’Hagan played a key role in pulling together the staff teams – creating a procurement team, a supply chain development team, and an engineering and technical team to manage these assets as they came in. “I was in the Europe organisation – then I got the job doing that in the global organisation.”
He then went on to run manufacturing assets including all the Guinness assets in Ireland and Baileys as well as assets in Italy before moving on to his current role.