How Diageo’s Supply Chain Delivers Growth-Driving Innovation

Last month I wrote a Logistics Viewpoints article titled “A Maturity Model for Supply Chain Progression?” In this article, I contended that the World Economic Forum’s Global Competitiveness Index (CGI), which measures national economic competitiveness, can also serve as a maturity model for supply chain progression. The CGI framework outlines 12 pillars of competitiveness and categorizes economies into three progressive stages of economic development. The three stages are 1. Basic, Factor Driven; 2. Efficiency Enhancers; and 3. Innovation-Driven. The most sophisticated stage, Innovation-Driven, is heavily reliant upon the pillars of Business Sophistication and Innovation.

I attended a session at CSCMP where a Diageo executive discussed the ongoing transformation of his company’s supply chain. This initiative is focused on enabling more efficient and effective processes in support of Diageo’s product innovation and new product introductions. I see Diageo’s transformation as an example of how business sophistication, in the form of supply chain alignment and advanced operations, and an innovation culture can support a company’s competitive progression.

Diageo’s Context
Diageo is a leading global provider of alcoholic beverages. The company owns numerous internationally recognized brands and produces about 4,000 different SKUs. Diageo’s extensive market share and product line has grown through acquisitions and from organic growth. Historically, the company’s supply chain was focused on cost-containment and took a conservative, low-risk approach to its operations.  But this focus was no longer ideally aligned with the changing market profile or the characteristics of their business.

Diageo realized it was operating in a North American market characterized by diversifying consumer tastes and increasingly granular market segmentations. In addition, the alcoholic beverage market offers high margins, making product availability particularly important to profitability.  As a result of these factors, the company’s supply chain was dealing with increased complexity and pressures to improve speed-to-market. Diageo responded with an approach involving an inherently agile supply chain that would properly align its processes with the current market dynamics and allow it to maximize profitability. Furthermore, the business transformation allowed the supply chain team to serve as an important enabler of this change.

Realigning the Diageo Supply Chain
Diageo spent over $250 million on its transformation that included a production network redesign, internal process enhancements, technology standardization, and a fundamental shift in focus from cost savings to product delivery and revenue growth. The company began by analyzing its markets and anticipating future growth patterns. From this process, it determined the optimal locations for its facilities. Once the desired locations were determined, Diageo purchased assets, upgraded facilities, and enhanced internal processes. They reduced the number of disparate planning systems down to two, and also standardized PLCs. Demand forecasting has improved as a result, providing better supply/demand alignment.

Investments were made on high-speed lines so they could bring in-house some production that had previously been sent out to partners. Perhaps more importantly, the company developed dedicated lines for agility and responsiveness. The ability to switch over lines so quickly is a critical element to the project’s success, as optimized production locations and the ability to quickly switch over lines provide quicker routes to market. This supports new product introductions and enables Diageo to be “first to shelf” and ultimately increases revenues from new products. In fact, Diageo stated that new products have been responsible for 28 percent of growth over the last few years.

Diageo continues to enhance its processes and systems. For example, an advanced planning and scheduling system is currently being rolled out. The Diageo speaker asserted that the region-wide project has been a success, measured by a 48 percent increase in overall equipment effectiveness (OEE) and a 30 percent increase in productivity.