How They Did It: Diageo NA’s Innovation Supply Chain

Over the last six years, a global leader in beverage alcohol has transformed its supply chain to be more agile, responsive, and attuned to growth. The result is a supply chain geared to out-innovate the competition.

In November of 2014, Diageo North America introduced Regal Apple, a new flavored Canadian whisky with the premium taste of Crown Royal that is infused with natural apple flavors. While any new product is a roll of the dice, this one hit the jackpot. By the end of June 2015, it was the top selling innovation in the US for the year, driving a 12 percent growth in Crown Royal sales.

More importantly, it was one of more than 250 product innovations—Diageo NA’s term for new products, brand changes, and renovations of existing products—managed in fiscal 2015. Across all of Diageo’s regions innovations accounted for over £500 million in sales for the year.

Rolling out new SKUs at an average pace of approximately three to four per week, Diageo NA’s innovations were as varied as Guinness Blonde American Lager, a single grain scotch called Haig Club developed with soccer star David Beckham and Simon Fuller of American Idol fame, and the Orphan Barrel Whiskey Distilling Co., which locates and bottles forgotten barrels of premium aged whiskey.

Getting all of these new products onto retail shelves is made possible by an ongoing supply chain transformation journey fine-tuned for agility, responsiveness, and growth. Diageo’s efforts have been recognized by Gartner, which named it to the consumer products Top 10 list for 2015. Supply chain and the supply base are involved in the innovation process from the start, not after the fact.

“We want our supply chain to be a competitive advantage,” says Paul Gallagher, president of North American Supply at Diageo. “By involving Supply early in the innovation process, we enable Diageo to have first mover advantage.”

That’s no small feat, when you consider that delivering 250 new product innovations involves the planning and sourcing for up to 5,000 components. In a promotion-driven industry where timing is everything, some products have gone from concept to shelf in as little as 8 weeks. To that end, Diageo NA has developed a rigorous and repeatable six step process (see sidebar) that turns innovation into a best practice. The result is a company, and supply chain, ready to out-innovate the competition.

Supply Chain Transformation

With fiscal year 2015 net sales of £10.81 billion and a presence in 180 markets, Diageo is a global leader in beverage alcohol. Its portfolio includes Johnnie Walker, Crown Royal, J&B, Windsor and Buchanan’s whiskies; Smirnoff, Cîroc and Ketel One vodkas; Baileys, Captain Morgan, Tanqueray, and Guinness; and Beaulieu Vineyard and Sterling Vineyards wines.

Diageo NA, its largest and most profitable region, delivered 32 percent of Diageo’s total sales and around 45 percent of its global operating profit for the year ending June 30, 2015. The North American business produces approximately 50 million cases annually while managing over 4,000 SKUs. Diageo NA’s operating environment will sound familiar to any CPG manufacturer or distributor.

SKUs are proliferating; there is more segmentation of products to target ever more specific consumer groups; personalization, such as the ability to custom-engrave a consumer’s name onto a bottle of Johnnie Walker Blue, is a competitive advantage; speed to market and the pressure to claim first mover advantage are essential to success; and finding the right balance between inventory and working capital is a constant struggle.

All of this happens in an industry that is highly regulated at the state and federal level. And then there is the constant drumbeat to innovate. Consumers, especially consumers of high-end wines and spirits, are looking for more than a beverage; they’re looking for the experience that comes from the discovery of something new.

“Some consumers are looking for good quality but accessible spirits,” says Gallagher. “For others, the value is in the exclusivity of a product.” For that reason, the Diageo NA supply chain has to deliver on high-volume products that can run for days on the same bottling line. At the same time, it must also be able to produce unique, exclusive products like the Cîroc Ten ultra-premium brand extension of Cîroc vodka, which was presented to award nominees at the Grammys last March as part of Diageo’s awards partnership.

“Our supply chain needs the competencies to deliver effectively on all of them,” Gallagher says. To that end, supply chain at Diageo NA has been evolving into a demand driven value network that propels top and bottom line growth.

Technology updates, internal process and operations improvements, and cost containments have come together with a culture shift that is enabling Diageo NA to deliver an aggressive innovation agenda, especially in the whiskey category. It hasn’t always been so. Roll back the calendar to 2009, and the organization looked very different (see Exhibit 1). Brands acquired over the years brought with them their own supply chains and networks of facilities.

Seven siloed planning and ordering systems led to a lack of visibility. Manufacturing and logistics assets were under-utilized. More importantly, there was a one-size-fits-all mentality in production: Every line was geared to do everything, from a lengthy run of Smirnoff to a small batch run of a new product. Changeovers were frequent, disruptive, and inefficient. Something had to change if Diageo NA was going to grow in the innovation space.

“There was an inflection point where we realized that running Captain Morgan for three days on end wasn’t going to suffice,” says Rob Moore, senior vice president of supply for Diageo North America. “Innovation was a way of life, and we needed to become flexible and agile to deal with the complexity that innovation brings.”

The goal of the transformation project launched in response was to create a world-class supply chain that was not just the best in the beverage alcohol industry, but in the CPG industry. While Gallagher, Moore, and their teams undertook a number of initiatives, several speak directly to innovation.
These include a change in the cultural mindset around supply chain management; a Design to Value approach to innovation; differentiated supply chains to manage existing products with predictable demand and to deliver on new products with volatile demand; and a differentiated approach to S&OP.

Change the Culture

Most supply chain professionals are tacticians. They focus on how to take costs out of the supply chain as they get their product from Point A to Point B—and then cut some more. Diageo NA turned that idea on its head: Sometimes, they realized, the push for the lowest possible cost can slow the innovation process and create bottlenecks to getting a new product on the shelf as expeditiously as possible.

In this new model, members of the supply chain team are business leaders first, supply chain experts second. More importantly, supply chain, marketing, sales, R&D, and other functional areas no longer work independently of one another. They work together, aligned with the company’s goals. Gallagher describes these as the 3 Es:

  1. Enhance margins rather than merely reduce costs.
  2. Enable growth through speed to market or speed to decision making that makes things happen in a cohesive manner.
  3. Engage people so that they are aligned and realize the difference they make to the organization.

“There is no longer a supply chain silo, a marketing silo, and a sales silo,” he says. “We work as one business with one objective, which is to enhance margin and enable growth.” Monthly S&OP meetings are the bridge between functional areas and the key tool to keeping everyone on the same page (more on that later in the article).
Of course, cost ultimately matters, especially for existing products. But if it’s a choice between driving growth and saving a nickel during the innovation process, Diageo NA will go with margin and growth.

Six Steps To Innovation: How Diageo’s Supply Chain Brings New Products to Market

Hitting the shelves in time for the 2014 holiday season, Crown Royal Regal Apple was one of Diageo NA’s most successful new product launches. In fact, demand for the apple-flavored Canadian whisky caught the company by surprise. “We knew we wanted a fall launch and we got that,” says Rob Moore, senior vice president of supply chain for North America.
“What we got wrong was the forecast. We thought we would do 190,000 cases in the first 90 days and we ended up doing 315,000 cases.” The launch was the culmination of a six-step innovation process Diageo deploys for new products or extensions of existing brands. What follows is a look at
how the six steps are put into practice, compiled with Steve Harris, senior vice president for technical operations and one of the executives on the team that brought Crown Royal Regal Apple to store shelves.
Step 1: The Opportunity. The first step for any innovation is to identify a new opportunity. Most new concepts originate in the marketing department, where the innovation team is tasked with creating a new product pipeline with a three-year horizon. During this step, the innovation team
will conduct research, including consumer surveys, to come up with ideas such as an apple-flavored whisky.
The team then creates a proposal describing why the concept is in line with Diageo’s strategy for that base brand. Once the concept is approved, it moves into the innovation center for development. Although early in the process, supply chain is brought into the loop.
Step 2: Developing the Concept. In the case of whisky, the development team works with Diageo’s skilled distillers and blenders to set about creating a new liquid. Once a concept is ready for further development, the branding team begins to work on a name, a bottle, packaging, and a label.
Meanwhile, the North American whisky blenders are engaged to begin creating different blends—in this case, different blends of Crown Royal—or the innovation center to experiment with flavor. At this stage, the cost of the ingredients takes a back seat to coming up with “a gold standard liquid” ready for commercial development.
Step 3: Commercial Development. Commercial development is all about scaling up a new product for production. During this step, supply chain rolls up its sleeves and begins the Design to Value process. Suppliers are invited to join the design table, along with representatives from other functional teams, to develop a commercially viable product that delivers the best margin at the price point targeted for the market.
During this step, all of the processes and materials that go into production are put under the microscope: That’s because it’s easier to design value into a product up front than to take cost out later. The commercialization leader coordinates that activity and passes along project plans, timelines, and regular updates to the supply chain planning and procurement team.Simultaneously, the Innovation S&OP gets underway. This team runs different what-if scenarios to tweak the forecast volumes.
Step 4: Test Market. The test market step is typically reserved for products that are brand new to the market. Sometimes, as in this instance, the consumer research and testing done during the first three steps is sufficient.
Step 5: Product Launch. Once an innovation has passed through the first four steps, it is ready to launch. The supply chain team brings in the materials needed to get the lines rolling—in this case, to get the product bottled, packaged, and on the shelves for the holiday season. After a quality hold, trucks begin to roll and product is shipped.
Step 6: Post Launch Review. The final step in the innovation process is a post launch review. This is done for select products—not every new product warrants a post launch review—and can happen at any time up to six months after the product launch. “Some products are straight forward,” says Harris. “With others, there’s an opportunity to learn something that might help us improve the next launch.”

Design to Value

Diageo NA’s Design to Value approach to innovation illustrates this cultural shift. In a traditional new product design, R&D creates the specifications for a new product and then turns those over to supply chain to make it happen. Procurement tries to get the lowest price for the materials and components in the spec.

In Design to Value, Diageo NA brings its suppliers and commercial development team around the table to take a concept developed in the innovation center through manufacturing and logistics and onto the retail shelf as expeditiously as possible. “No one has a monopoly on good ideas and not all ideas need to come from within our organization,” Gallagher says.

At this stage, business growth and speed to market trump cost. “If we looked solely at costs during innovation, we would be searching for the lowest cost bottle or packaging,” Gallagher says. “But if we have to wait for delivery from China rather than pay a little more to get it quickly from a local supplier, we will go with speed.”

For that reason, Diageo NA is not just asking its suppliers for unique ideas; it is also asking them to look at their contribution through a lens of agility and speed. What’s more, Diageo NA works to get people with decision-making authority at the Design to Value table. That way, everyone from the supply base to marketing knows their part.
“The mindset has to be: How do we make this happen, rather than list all the reasons it can’t be done,” Gallagher says.

Create a Differentiated Supply Chain

A shift in culture was accompanied by a shift in the approach to production. “Our production lines were becoming all things to all SKUs,” says Moore. “We were running 750 milliliter bottles of Captain Morgan on the same line as we were running a variant of Godiva Chocolate liquor that sells 3,000 cases on Valentine’s Day. We had a lot of changeovers that didn’t make sense.” What was needed? A differentiated supply chain.

Diageo NA invested an estimated $250 million in its plants and IT infrastructure to create a network of assets that could support innovation. These include a new $115 million distillery in Kentucky that will be operational in late 2016 and standardizing on SAP’s APO for production planning and SmartOps for inventory planning by SKU.
The result, Moore says, is a North American footprint realigned to meet the needs of the business, or “a supply chain that is fit for a purpose.” (See Exhibit 2.) In this model, highly-automated lines are devoted to high volume brands with predictable forecasts, like Smirnoff, that can run the same product for days. Innovation lines, meanwhile, are designed to make a few thousand cases of one product before changing over to make
something else.

At the George Dickel distillery in Tullahoma, Tenn. for instance, associates hand-bottle small batches of aged whiskies on a semi-automated line for the Orphan Barrel program. “Many of these are one-time bottlings,” says Gallagher. “The people working in the distillery will stop what they’re doing to bottle as orders come in.”

The same facility also fills orders for the George Dickel barrel program, which ships a limited number of cases from a hand-selected barrel along with the actual numbered barrel on a pallet to retailers. “Tullahoma is designed to react quickly because we don’t make to stock and we don’t have a lot of forecast accuracy,” Gallagher says.

Innovation S&OP

In Diageo NA’s new supply chain, S&OP acts as “the key instrument to drive the business forward and keep us aligned to the goals we want to achieve,” according to Gallagher. Just as it differentiated its supply chain, about 18 months ago, it launched a differentiated approach to S&OP.

Products with a long history, like Smirnoff or Crown Royal, are handled in a conventional monthly S&OP meeting. “The forecast accuracy is in the high 90s, the interaction with suppliers is primarily through EDI, and most shipments are full truckloads,” Gallagher says.

“That’s a pretty lean supply chain.” Innovation is a different animal. Demand is volatile—a new product can take the market by surprise, requiring everyone to step up their game in a hurry, or disappoint to the downside, leading to a quick change in production plans. The Innovation S&OP is designed to respond to that volatility.

A typical meeting is divided into thirds, according to Moore. One part is devoted to SKUs that are about to launch: Any changes in assumptions are communicated across the supply chain to make sure that suppliers and Diageo have the right amount of capacity for the upcoming launch.
A second part deals with products in the first 90 days of a launch. The S&OP teams stays close to sales, depletion rates, and consumption trends to determine whether to increase or decrease procurement and production or distribution plans. The third part of the meeting reviews innovations that have been in the market for up to one year to determine whether they can move from the innovation to the regular supply chain.

Diageo at a Glance

  • – Global leader in beverage alcohol
  • – Presence in some 180 markets worldwide
  • – Diageo North America produces approximately 50 million cases each year
  • – Laid end-to-end, those bottles would circle the globe 4 times
  • – 1,500 people employed in Diageo NA supply organization—encompassing distilling, maturing, bottling, procurement planning, logistics, customer service, and distribution

Pulling it All Together

How then do the pieces fit together? Roughly six years into the supply chain transformation, Diageo NA believes its transformed network is fit for the future. (See Exhibit 3.) So does Gartner, which placed Diageo at No. 9 on the Top 10 consumer products supply chains, and No. 27 overall. The analyst firm noted that Diageo’s segmented approach to supply chain management “delivers cost savings and supports innovation and growth.”

The approach delivered on a number of key metrics across its supply chain operations: Overall equipment effectiveness has improved by 48 percent, lost time to accidents improved by 98 percent, and quality, as measured by parts per million defects, improved by 99.7 percent. And—to prove that cost still matters—the cost per case improved by up to 50 percent in some manufacturing locations.

As Gallagher and Moore point out, supply chain is driving innovation, satisfying the need for mass scale to custom made, and prepared for future growth and continued expansion. The innovation numbers are even more striking: Fiscal 2015 was the biggest innovation year yet for Diageo NA, which leads all other suppliers in dollar share of innovation with 70 percent of the top 100 new products that have been in the market one year or less, according to Nielsen.

It similarly leads its competitors in the North American market. “We believe the differentiated process model we’re putting in place is the future of supply chain,” says Gallagher. “In the future, getting insights from our consumer base and bringing them to the table as quickly as possible will no longer be managing change. It will be the norm.”