Supply chain management system of wines and liquor industry in India

Supply Chain Management in Wine and Alcoholic Drinks Industry in India* Section – B | Group - 5 Akshay Kumar

PGP/16/241

Alok Kumar Singh

PGP/16/244

Deepto Choudhary

PGP/16/256

K N Manish Chandra

PGP/16/263

Sagar Tule

PGP/16/282

Shrinwanti Banerjee

PGP/16/287

Indian Institute of Mangement, Kozhikode August 11, 2013

*This work is submitted to Dr. Sanjay Jharkharia as a term paper in the course on Supply Supply Chain Manageme Management. nt.

Supply Chain Management in Wine and Alcoholic Drinks Industry in India

Contents Introduction................................ ................................ ................................ ................................ ..... 3 Procurement ................................ ................................ ................................ ................................ .... 6 Mechanisms: ................................ ................................ ................................ ................................ 6 Local product productionion- IMFL: ................................ ................................ ................................ ............ 6 Upstream supply chain ................................ ................................ ............................... . .............. 6

Raw material linkages ................................ ................................ ................................ ..................... 7 Location of input suppliers ................................ ................................ ................................ .......... 7 Vineyards and fruit fruit growers:................................ growers:................................ ................................ ......... ....................... ...... 7 Glass makers:................................ ................................ ................................ ............................. 8

Materials Requirements Planning and Scheduling ................................ ................................ .... 8 Grapes and Vineyards:................................ ................................ ................................ ............... 8 Glass bottles and other ancillaries:................................ ................................ ............................. 9

Forecasting and Inventory Mechanisms ................................ ................................ ..................... 9 Procurement Challenges Unique to India ................................ ................................ ..................... 10 Potential for Improvements- Recommendations ................................ ................................ .......... 10 Process Automation & Improvements ................................ ................................ ...................... 10 IT systems: SRM software................................ ................................ ................................ ......... 10 Production Process ................................ ................................ ................................ ........................ 11 Beer Production Process................................ ................................ ................................ ............ 11 Scheme :................................ ................................ ................................ ................................ .. 11

Wine Production Process................................ ................................ ................................ ........... 11 Scheme :................................ ................................ ................................ ................................ .. 12

Liquor Manufacturing : ................................ ................................ ................................ ............ 12 Mashing:................................ ................................ ................................ ................................ .. 13 Bottling and Packaging:................................ ................................ ................................ ............ 13 Blending: ................................ ................................ ................................ ................................ . 13 Fermentation:. ................................ ................................ ................................ ......................... 13

Grinding: ................................ ................................ ................................ ................................ . 13 Manufacturing Strategies: ................................ ................................ ................................ ............ 13 Characteristics Table : Functional ................................ ................................ ............................ 14 Supply chain : Physically efficient................................ ................................ ............................. 14 Customer Relationship Management: ................................ ................................ .......................... 15

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Indian Institute of Management, Kozhikode

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Key features of effective CRM tools................................ ................................ .............................. 16 Distribution pattern................................ ................................ ................................ ....................... 17 Distribution Chain Specifics to Point of Sale:................................ ................................ ............... 18 Shipping: ................................ ................................ ................................ ................................ .... 18 Customs Clearance and Storage: ................................ ................................ .............................. 18 Storage, warehousing and product integrity: ................................ ................................ ........... 19 Distribution through wholesalers and retailers: ................................ ................................ ....... 19 Three-Tier Architecture:................................ ................................ ................................ ............... 19 Challenges in present distribution system: ................................ ................................ ................... 20

1. High Barrier in wine import system: ................................ ................................ ........................ 20 2. Unsynchronized and informal information sharing between different tiers............................... 21 3. Low economy of scale: ................................ ................................ ................................ ............ 21 4. Road System and Transportation:................................ ................................ ............................. 21 5. Cold Chains in India: ................................ ................................ ................................ ............... 21 Potential problem areas for Logistics in Wine Supply Chain:................................ ........................... 21 Quality ................................ ................................ ................................ ................................ ........ 23 Timeliness ................................ ................................ ................................ ................................ ... 24

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Introduction The market for wine and liquor industry in India comprises of wine, alcoholic drinks and beer. The wine market is composed of retail sales of champagne, fortified wine, sparkling and still wine and is valued per the retail selling prices (including applicable taxes). The market in India has been fast growing, accustomed andopen to western trends. Growth in the industry had seen a dip in 2008 -2010, but is expected to revive again going forward in 2014. With total reven

ue of approx.. $0.3bn, it

represents a CAGR of 5.8% between 2008 and 2012. Still wine comprises of the largest share of revenue, approximately 78.5% of the market’s overall value. Champagne contributed $34.4bn in 2011, or approximately 10.5% of overall market value. The forward looking figures suggest a robust growth of 10% CAGR from 2013-2018 and increase the market to a value of B50.8bn. Alcoholic drinks includes retail sales of spirits, ciders & FABS mostly through retails channel . It had total revenue of $30.4bn in 2011, with a CAGR of 17.9% between 2008 and 2012. Market consumption has increased with CAGR of 15.1% in the same period.

On-trade form the major bulk of distributors for wine market (60.5%), followed by specialist retailers (35.5%), super markets and hypermarkets (3.9%) and department stores (including duty free shops, 0.1%) Alcoholic drinks have a slightly varying distribution proportions. Specialist retailers handle the bulk (62.5%), followed by on trade (35.6%). Super markets and hyperma rkets (1.4%) and convenience stores (0.1%) form the last mile distribution system which is accessible most closely to consumers.

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Supply Chain Management in Wine and Alcoholic Drinks Industry in India The companies that lead the production of alcoholic drinks in India are Pernod Ricard, SAB Miller, United Spirits Limited and United Breweries Holding Limited. The leading producers of wine are Grover Vineyards, Indage Vintners, Nashik Vintners and United Spirits Limited.

The overall wine supply chain is a complex agri-cupply chain which incorporates the following: 1. Internal supply chain: It is the itnergrated flow of material and information within the winery, from supplier and towards the customer. It measures the process performance of the winery only. 2. External supply chain. It is the flow of material and information from the winery to the supplier or to the direct end consumer. It measures the winery’s supplier performance or the performance of the winery with regard to its customer performance. 3. Integrated supply chain: It is the flow of material and information within the winery and includes multiple trading across suppliers and customers. It provides mutual benefits to the entire value chain, from the initial supplier to the end consumer. The typical supply chain of wine and alcoholic drinks industry can be represented by the following diagram:

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Procurement Mechanisms:

The wine and liquor industry in India can be broadly classified as ‘imported liquor’ and ‘India Made Foreign Liquor’ (IMFL). In the imported category, popular brands of wine and liquor are directly imported and marketed, usually with a marketing and distribution arrangement with a local player with established infrastructure. In the IMFL category, the liquor is produced and marketed locally from ingredients and material usually procured from local sources. Imported category:

Some examples of imported brands of liquor being marketed in India are: ·

Pernod Ricard- Indian subsidiary

·

Howling Wolf of Western Australia- has own, established distribution channel in India

·

Smith Brooke of Margaret river; Grant Durge, St. Ha llet and Thomas Mitchell of Southern Australia- marketed in India by Echidna Wine Traders

·

Xanadu and Cape Mentelle of Western Australia - marketed in India by Fine Wines & More, Moet Hennessey

·

BRL Hardy- distribution arrangement with Sula Vineyards, Maharashtra

Local production- IMFL: Upstream supply chain

The supply chain for wine industry is linear in nature. The various categories of input supplies to the wine industry are: §

Glass and Glass bottles

§

Fruit and vegetables

§

Grapes

§

Flour and starch

§

Solid paperboard container

The corresponding suppliers and their roles in the supply chain are: §

Glass and Glass bottles suppliers:

provide glass bottles for long term storage and

transportation to markets. Since the wine/liquor is in contact with the bottle for most of its life, the quality of these are essential to preserve and maintain the quality of wine and liquor §

Fruits and Vegetable suppliers: Fruits are the key ingredient in liquor making. Also, ascorbic

acid and citric acids are also required for manufacturing certain types of wines. §

Grapes suppliers: The key ingredient to any wine, the quality of wine depends almost entirely

on the type and quality of grapes obtained from the vineyards and grape growers.

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§

Flour and starch manufacturers: These provide yeast which is used in fermentation

§

Solid paperboard container: These provide large cardboard containers which are used in the

storage and transportation From among these supplies and input raw materials, Grapes/grain sources, glass bottles and fruit and vegetable supplies are identified as critical inputs for the following reasons: o

The role in the wine-making process

o

The stage of lifecycle when they are required

o

The criticality of these inputs to maintaining the quality of wine

Raw material linkages The key raw material for the India -Made Foreign Liquor industry is molasses, a by -product of sugar. Molasses is processed, fermented and distilled to produce ethanol (technically rectified spirit). Those manufacturers with in -house processing facilities use molasses while

others buy ethanol directly.

Molasses supply depends on the production of sugarcane- a cash crop- and its production is cyclical in nature. The raw material for Beer production however, is barley, the production of which is based on the season. The cyclicality in barley and sugarcane production depends on the season, weather and other environmental conditions and lends a commodity nature to molasses. Since production of ethanol is the primary and largest use for molasses the price of ethanol and therefore t he raw materials to the IMFL industry depends on the nature of demand -supply relationship for ethanol. The market for ethanol is equally divided between production of liquor and industrial alcohol. In the long term, the demand for ethanol is poised to incr

ease due to increasing use of ethanol for

commercial blending with petrol (bio -fuels etc.). However, the supply of ethanol is also expected to increase on account of increasing number of sugar mills with integrated plants for cogeneration and distillation facilities. Location of input suppliers Vineyards and fruit growers:

The major wine producing regions in India are Maharashtra, Karnataka and Himachal Pradesh. Maharashtra with 64 wineries contributes about 94% of the total wine produced in the country. Th ese areas are suitable for growing grapes due to the suitability of weather conditions, specifically, the amount of sunlight and the relative humidity in the atmosphere. The major grape producing regions in Maharashtra are Nasik, Satara, Sangli, Ahmednagar , Pune and Osmanabad, which are located approximately 180 -300 km northeast and south of Mumbai. Thirty wineries have established production and bottling plants in the Vinchur industrial estate near Nasik.

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Supply Chain Management in Wine and Alcoholic Drinks Industry in India In addition to the location suitability of the vineyards, the primary concern for grape growers is the long term sustainability of the vineyards. The average lifetime of vineyards, producing two harvests a year, in India is around 12 -15 years, while the average lifetime of the vineyards producing a single

large

harvest a year is 20 -25 years. In addition, the productivity of the vineyards is dependent on other problems typical to agriculture such as infestation by pests, controlling the usage of pesticides and fertilizers among others. Glass makers:

The aforementioned areas of Maharashtra have been cultivating grapes for several decades. However, it is only in the past decade that the farmers have shifted to growing grapes suitable for wine -making. Owing to the burgeoning wine industry in the vicinity, encour

aged by the presence of over 65

distilleries, several supporting industries have also been established and encouraged. One such industry is the glass making industry. Approximately 20 major glass bottle makers serve as the Tier-1 suppliers for the wine and liquor distilleries in Maharashtra, in addition to numerous small, local manufacturers that constitute the downstream sub-contracts. Glass packaging industry had a retail unit volume of 14.1 billion units in 2011 and had grown at 10% volume Y -o-Y. The win e and liquor industry accounts for a major share of the market for Glass packaging. Demand for returnable glass bottle remains strong in 2011, due to the existing supply chain, lower cost of operations and environmental concerns surrounding the usage of plastics. Also, glass has a perception of vintage and serves to preserve the quality of premium wines better than plastics do. By 2015, glass packaging is expected to see a retail unit volume CAGR of 9% to reach 20.1 billion units.

Materials Requirements Planning and Scheduling Grapes and Vineyards:

The procurement of grapes and fruits for wine and liquor industry is primarily done through contract farming schemes. Under these schemes, vintners enter into contracts with local farmers to produce a certain quality and quantity of the desired variety of grapes. The number and size of these contracts depends on the size of the landholding of the farmers, the nature of the farmland and the suitability for growing the type of grapes required for a given kind of win e/liquor. In the year 2011-12, grapes were procured at Rs. 35 per kg from the contract farmers. The production (fruit harvest) is done in large quantities of one/few varieties at a time and the time taken for harvest cannot be naturally altered. Therefore, the rest of the supply chain is optimized to suit the fruit harvesting schedule. Also, the production of grapes is seasonal and hence discontinuous. The variety and quantity of the grapes that needs to be harvested are to be scheduled in such a way as to

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maintain production of

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Supply Chain Management in Wine and Alcoholic Drinks Industry in India wine/liquor in the forecasted demand quantity. Adding to this is the uncertainty from large proportion of losses incurred during cultivation, harvesting- hand picking and handling. The transportation damages and lack of automated mac

hinery are the primary concerns in Indian

vineyards. In the year 2011, these causes led to losses amounting to 21% of the total fruit produce. Indian farms employ manual picking and sorting of grapes and fruit which add to labour costs and increase the procurement lead times. Glass bottles and other ancillaries:

These inputs are not influenced by seasonality and cyclicality factors. However, the number of glass bottle suppliers being less than the number of distilleries, the capacity of their manufacturing is adjusted to supply the required quantity of glass bottles of the desired variety. Typically, these have short lead times and are reordered in small quantities frequently. Forecasting and Inventory Mechanisms

Forecasting requires gathering the right info rmation in time and analytical capability and tools to identify and predict trends. Appropriate and robust forecasting can result in many improvements in the procurement process such as: ·

buying at lower prices

·

reduced inventory

·

Shortened supply times

Distribution companies unable to forecast demand accurately are at a distinct disadvantage. In the wine and liquor industry, forecasting gains criticality due to the seasonality and cyclicality of the key input resources- grapes, sugarcane and fruits. Since little can be done to alter the natural course of their harvest, the other operations are optimized and scheduled to suit the harvest schedule so as to minimize the fruit to bottle lead times. Largely, the planning and scheduling of raw material sourcing i.e., harvest of grapes and fruits in India are based on previous year averages and are largely empirical in nature. Forecasting with such short term data leads to inaccuracies creeping in and hence varying quantity forecasts. Also, the inefficiencies in the non-automated production process lead to further distortion of the forecasts. Certain large manufacturers control significant landholding under grape cultivation so as to enable tight monitoring of the quality and quantity of produce. These large vintners outsource only about 20% of fruit production to external farmers. This is to enable flexible procurement and thereby shortened lead times and associated cost savings.

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Procurement Challenges Unique to India Wine and liquor industry in India faces certain peculiar challenges caused by the government regulation procedures, tax regime linked to the procurement of raw material and distribution of finished products. The tax regimes vary across the states. For instance, in UP, there are seven or eight types of tax es that are imposed while in some other states there are 12 types of taxes. In Maharashtra, there is an entry tax, octroi, and quantity tax. Each state has its own set of policies, rules, and regulations. Lack of mechanization and automation in the grape -growing and harvesting process in India is quite unlike similar industries elsewhere in the world. This is one of the reasons why losses due to wastage in the industry are much higher than the world averages. Also, the average life -time of a vineyard is much lower in India than in similar vineyards in other countries.

Potential for Improvements- Recommendations Process Automation & Improvements

Also, increasing the level of process automation would help reduce lead times and losses and help in retaining the quality of the raw material and thereby have a direct impact on the quality and quantity of the final wine/liquor output. IT systems: SRM software

Supplier Relationship and Procurement Management software allows procurement across a wide variety to help ac quire the right quantity and quality of inputs at the right time for the best available price. In conjunction with intelligent warehousing and inventory routines that maintain optimum safety stock levels and ensure timely restocking, the automated procurement processes help minimize the total supply costs and help avoid stocking problems. These solutions include advanced methods such as automated sourcing strategy models that also help reduce administrative overheads. Some salient features of a SRM system are: ·

Automated purchase order creation

·

Evaluation and Analysis

·

Purchase suggestion Management – inventory management

·

Supplier agreement and price negotiation

·

Advanced RFQ capabilities

·

Keeping track of various taxes and duties in the supply and distribution channels

IT applications such as mailing solutions, disaster recovery, looking for Supplier Relationship Management and Procurement Management etc. could help manage the procurement process better.

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Production Process The whole Alcohol Industry broadly divided into three groups a. Beer b. Wine c. Liquor Beer Production Process

All beers are brewed using a process based on a simple formula. Key to the beer making process is malted grain, depending on the region traditionally barley, wheat or sometimes rye. Scheme :

To make beer, brewers use water and barley to create a sweetened liquid (called the wort), which they flavor with hops, then ferment with yeast. The basic process may be simple but the execution is highly sophisticated. The stages are malting, milling, mashing, brewing, cooling and fermentation - followed by maturation (racking), filtering (finishing) and packaging. The process involves the microbial reaction so strong quality control measures are adopted.

Wine Production Process

Winemaking or vinification, is the production of wine, starting with selection of the grapes or other produce and ending with bottling the finished wine. Although most wine is made from grapes, it may

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Supply Chain Management in Wine and Alcoholic Drinks Industry in India also be made from other fruits or plants. Mead is a wine that is made wi th honey being the primary ingredient after water. Winemaking can be divided into two general categories: still wine production (nipple wine // without carbonation) and sparkling wine production (with carbonation — natural or injected). Scheme :

Liquor Manufacturing :

Liquor Manufacturing is described in the following diagram :

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Besides optimum fuel efficiency, the entire process is designed to have minimal impact on the environment. All by-products are re -used, recycled and sold to relevant industri es to minimize cost and maximize efficiency at every stage

Mashing: The Grist is mixed with hot water and the resulting mixture is fed into a mash tub. The mash tub is kept covered to retain the heat and constantly stirred. In this process enzymes act on the starch and convert it to sugar. The resultant mixture is called wort. The spent grain that remains in the tank at the end of this process is collected in separate containers and dried in a special process and sold as cattle feed

Grinding: The grain is coarsely ground in a mill and the resulting product is called grist

Distillation: The wash is made to flow into the wash charger and the actual process of distillation is initiated. The fermented wash is conveyed to the still where it is boiled. Since alcohol boils at a lower temperature than water, alcohol vapours are the first to rise to the neck of the still from where they are transferred to a worm tub where they are condensed. The spirit collected at this stage is called low wine and it goes through yet another process of distillation to yield 95% alcohol.

Fermentation: The wort is cooled to the ideal temperature and activated yeast is added to initiate fermentation. This process produces alcohol and Carbon dioxide. The fermentation process continues for 2-3 days and the resultant alcohol rich mix is called wash. The Carbon dioxide generated is purified and bottled and then sold to be used in the making of carbonated drinks.

Blending: At Globus Spirits, our master

Bottling and Packaging: Globus

blenders then take over the manufacturing process. The alcohol goes through several stages of testing, blending and tasting to create our signature brands.

Spirits has made steady progress in building key brands that are becoming increasingly popular in both the IMFL and IMIL segments

Manufacturing Strategies: The products is not innovative but functional in nature, therefore manufacturing strategy is ‘make to stock’ .

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Characteristics Table : Functional

Product Life Cycle

Indefinite ( From the Start of Human civilization to current , and will be in future )

Contribution Margin

More than 50 %

Product variety

High in general , but leverage the existing manufacturing process . one unit make few

types of

product only Average margin of error in the forecast at

Very low , since demand is stable and not affected by

the time production is committed

market economics .

Average Stock out rate

Low , below 10 %

Average forced end – of season markdown 0% as percentage of full price Lead time required for made to order

3 to 6 months

products Demand

Highly Predictable

Supply chain : Physically efficient

Primary process

Supply predictable demand efficient at the lowest possible cost

Manufacturing process

Maintain high average utilization rate

Inventory Strategy

Manufacturers generally has good chunk of inventory

Lead time focus

Shorten lead-time at the end of retailers

Approach to choosing suppliers

Select primarily based on quality , an

d

relationship based Production design strategy

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Strong quality control , maximize performance


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Supply Chain Management in Wine and Alcoholic Drinks Industry in India The Indian wine, spirits and beverages industry is facing ever regulation (tax regime, protocols) and increasing price c

-shifting demand for products, strict

ompetition. World-class companies in this

mature industry are succeeding by scaling up production, streamlining their supply chains, expanding into new geographic areas, implementing more efficient processes, cleverly marketing products, and focusing on ever closer relationships with suppliers, partners and customers. The general strategy adopted by the industry leaders focus on particular market niches and putting efforts to specialize in it, which is product innovation part of the value chain. But it has been observed that, in the Indian context, some of the lesser-known or smaller players gain advantage in the market by going-first with the innovation and putting special emphasis on marketing old products in an effective manner. he Indian wine industry is ‘image-conscious’, thus driving every market player to develop innovative ways of marketing the products. The methods are generally indigenous. Customer centric campaigns, product placement in the popular media (newspapers, TC shows and IPL sponsorship be ing the most recent example), viral marketing. All these methods along with word-of-mouth recommendation affect the sales figure significantly. Marketing to retailers is the most important activity in Indian wine industry. It can make or break a brand, especially when a new brand is being brought to market. The marketing system majorly runs on personal relation between the company S&M executive and the retailer. Keeping a tab on retailer preference, their modus operandi is critical in the marketing scheme.

Customer Relationship Management: CRM is important as keeping contact details for both existing and potential customers, and managing complex marketing campaigns happens to be important pointers for the sales and marketing team of the organization. More importantly, these details must feed back results to the demand forecasting process. Sales forces and customer relationship management (CRM) drive t he wheel of success for beverages distributors. The sales force must be able to manage complex pricing issues , provide on-the-spot product information and maintain top relations with customers. All system information is generally available to help build and maintain good customer relationships. Maintaining exhaustive details of customer interactions and detailing helps in delivering value to the customer. Such meticulous CRM exercise not only helps in maintain existing customer but also in fetching new client.

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Key features of effective CRM tools 1. Pricing flexibility: CRM tools work on built -in pricing methods to attract and keep customers but also include discount methods, customer rebates, buying groups, baskets and order summary discounts, with complete sales price visibility to let customers know exact cost details. The schemes are an integral part of the pricing for regular customers, thus maintaining proper data is critical. 2. Credit checks and payments: This is a check in the CRM module to minimize overall credit exposure. It helps in holding back the orders when credit limit is exceeded. Credit holds at order line level allow efficient management of orders per sales order line. 3. Call and contact planning: This aids the sales team of a particular geography. The planning is based on solid information collection related to customers like contact no., operation time etc. It streamlines the way sales team should operate and serves as a direct platform for placing the purchase orders. 4. Electronic catalog support: It gives customers 24 -hour access to an organization’s business through web -based product catalogs, price lis ts, product availability lists an d personalized shopping lists. 5. Substitutes and complementary products: This feature gives automatic recommendations for product substitutions to help win and maintain sales in case of inventory outage. The system provides listings of items with the same or similar characteristics, as well as complementary items. 6. Sales wake-up calls: The CRM module generally automatically reminds the customers to place sales orders when time is running short, helping to reduce lead -times, ensure re-orders, and keep customers pleased with your service.

Call planning for sales team

Electoronic Catalogue

Check on payments and credit risks

Pricing Flexibility

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Substitutes and complimentary products

CRM


Sales wake-up calls

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Distribution pattern Sales control mechanism is very much state specific. With current pattern of consumption more states are allowing easy channels like super markets. Stores selling only win e and alcohol are given license at cheaper rate in comparison with super markets which sells alcohol with other brands. The states of Karnataka, Maharashtra, Haryana, Goa and Punjab have a liberal retail policy, encouraging the continuous growth through th ese channels. Delhi government is more inclined to control distribution and retail chain still restrictive relatively. More investment friendly policies are likely to change the market trends, with the retail sector expanding during the every year. Each st

ate requires a set of

wholesalers with excise license for selling wine and alcohol. The importers and distributors must sell their products through these wholesale license holders. The state of Haryana allows retail sales through a license issued annually. Retailers must buy through wholesalers who has valid excise license. The distributors have to sell through these wholesalers, adding to the cost of distribution. With giants like UK’s Berkmann Cellars, UB, and Diageo making entry in Indian market, and dom estic producers like Champagne Indage and Sula stepping up imports, the distribution chain and hierarchy is expected to see a major change in coming years.

Major Consumption regions

Major

Major

Wine

domestic

Markets

wine growing regions

Major

Major

Warehousin

Shipme

g regions

nt Port

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Distribution Chain Specifics to Point of Sale: Here we will see how distribution c hain works to the point of sale in wine and liquor industry. There are four stages in distribution management system as follows. Shipping:

Nava Sheva port in Mumbai is the preferred port for wine shipping as Mumbai being the finance capital in India and easy access from Europe and US to the west of our country. In case of wine being imported from west coast of US, Singapore is the common transhipment point. Though if wine is being transported from east coast trade will directly arrive at Nava Sheva port. Shipment can be ordered either on full container load basis or partial container load basis. For cost efficiency refrigerated container or ‘reefer’ is not in common use for low cost alcohol shipments. With increasing demand for high end wine brands, the use

of reefer is increasing every year. For non

-

refrigerated shipments government has specific rules regarding where the shipments to be placed and it specifically mentions the storage location has to be under deck and away from engine. Primarily due to high e ntry barrier in wine import business, the new importers have not been able to make a significant impact so far and the old order remains. Brindco is the largest importer and it has maintained leadership consistently. In recent years it has seen 70% growth in sales. Sonarys is the second largest importer in indian market and owns bonded warehouse. In third place is Moet Hennessy, which has successfully promoted its Champagnes and other wines, pushing the volume to 21,000 cases. Global Tax Free Traders has been stagnating in fourth place at around 13,000 cases. Customs Clearance and Storage:

The imported alcohols and wines have to be stored in custom bonded warehouses. Sometimes public warehouses also can be used if it has custom certified facilities. Once t he bill of entry for a cargo is received the imported wines could be stored in the ware house for 90 days with 15% annual tax and no demurrage fees for that period. Now a days customs are asking for bank guarantees in case of default. There is always a cus tom officer in charge for each bonded warehouse. In case of release of wine or liquor from store requires payment for duty of the officer. For a duty free release option duty free seller’s license or ministry’s letter is required. Before the release of a s tock to a retailer, hotel or restaurants a transport permit has to be issued. In a warehouse only brands and labels registered with excise department could be stored. To avoid unlawful movements of stock different measures are taken in different states. So me states like Delhi issues a hologram to restrict unlawful trafficking of alcohol. Some state has a monopoly control over distribution. Karnataka controls all supply to retailers, hotels and restaurants through KSBCL. All supplies are made to KSBCL which

in turn releases stock to

retailers, hotels and restaurants.

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Storage, warehousing and product integrity:

The custom bonded warehouses require heavy investments in terms of infrastructure and process management and maintenance to comply with facilities defined by the excise and customs department. The warehouses are primarily located in Mumbai and Delhi. Mumbai is preferred choice because shipments are done mostly in Mumbai and have easy access to regions in our country where alcohol consumption is high. Quality control mechanisms of storage facilities throughout different warehouses vary drastically. In some warehouses high quality control measures are followed like temperature controlled atmosphere and good insulation system. Some warehouses do not follow these rules specified by excise and custom departments to reduce cost. Quality control program is essential in warehouses to reduce loss in products and keep the quality of products intact during storage time. Distribution through wholesalers and retailers:

After the materials are stocked in a warehouse importers can distribute wines and alcohols only through licensed wholesalers. In some states retailing is allowed through private parties. In some state retailing is done only through government owned retai l shops. In Delhi almost all retail shops are owned by government. Very recently 15 retail shops by private parties have been established. In Maharashtra both private and public parties are allowed to run retail shops provided necessary license is obtained. Three-Tier Architecture:

Indian wine industry follows a three tier sales and distribution system. The three players in the distribution system are importers, wholesalers and distributors. 1. Importer: Importers are responsible for successful shipments, proper maintenance during shipment period, refrigerated packaging in case of high end wine imports and finally successfully stocking materials in warehouses. Importers are not allowed to export refrigerating devices. So they have to make tie ups from domestic players who provide refrigerated packaging equipment. Requirements vary from state to state, but the importer must have a registered office in the state. 2. Wholesaler: Wholesalers are responsible for storing in bound materials in bonded warehouses. In several states, the wholesaler must apply for a foreign liquor marketing license (FL-1 license) from the state excise department. 3. Retailer: Retailers are responsible for selling the products directly to consumers. They must apply for license to sell liquor in the designated state excise department.

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Challenges in present distribution system: 1. High Barrier in wine import system: Though there have been policy changes and government have already reduced stringent rules in importing wine there are many other reasons which kept the barriers to import high comparative to the global standard. The first restriction is heavy investment in bonded warehouses which also requires significant guarantee from banks. To obtain license distributor and wholesalers had to pay hefty amount of money to renew license. These two restrictive measures set a sufficiently high barrier to new entrants, who are generally forced to use the services of existing bonders. The commission importers have to pay for these two services alone varies between 10-20% of the cost of wine. This poses high barrier for small importers. But with the increase in per capita income and alcohol consumption new importers are making a place for themselves. There are few exits every year and the number of import ers is steadily going up, even though the market is not big enough to accommodate all of these new importers.

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2. Unsynchronized and informal information sharing between different tiers of distribution system: In the current scenario the information related to sales goes informally from retailer to wholesaler and wholesaler to importer. There is no synchronized and automated system to share information in between these distribution channels. Due to differences in policies between different states, informati on from one state cannot be shared with other states which create barrier to create proper forecast and inventory management. 3. Low economy of scale: Due to differences in policies between different states the distribution operation has to be state specific which restricts economies of scale without increasing the cost of product. Replicating the business model of one state to another due to different compliances, taxes and duty fees asked by different state governments becomes more difficult to achieve economy of scale.

4. Road System and Transportation: The most vulnerable part of wine distribution system in India is its infrastructure of roads, rails, ports and airports. Absence of high speed roads, 2.4 million kilometers of paved roads and more thanmillion a kilometers of unpaved roadway pose threat to reliability for modern transportation system. India's rail network exceeds 63,000 kilometers, also has the same problem and the infrastructure is old not to the mark. 5. Cold Chains in India: Poor cold chain infrastructure is another problem for product warehousing and storing. High investment is necessary to improve the facilities of existing cold chains to comply with the requirements asked by the excise and customs department. The quality control mech

anism of insulation and controlled

temperature varies greatly over different cold chains. This issue causes high operational cost during product storage procedure and a big challenge to overcome in the coming years.

Logistics in Wine Supply Chain: A typical 3 tier distribution system has been described in the earlier section. The logistics for such a distribution system looks as follows:

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Source: Modeling and Measuring Logistics Performance in Wine Supply Chain, Garcia, Ing. Fernanda A. In order to get closer to a customer, some of the ex-cellars sell directly to final consumers by buying different kinds of wines from several wineries in small quantities. The supply chain gets consolidated as follows:

Source: Modeling and Measuring Logistics Performance in Wine Supply Chain, Garcia, Ing. Fernanda A. In any of the situations, the retail logistics providers have to provide a certain set of services and facilities. They are: 1. International freight forwarding services 2. Import and export handling 3. Optimal cellarage conditions including: a. Standard warehouse equipped with temperature and humidity control facilities b. Custom temperature controlled conditions for storage of different kinds of wines c. Stable and optimal storage conditions d. High level of security and integrity of wine storage and transporters e. Shelving system for wine cellaring 4. Domestic distribution facility, which includes: a. Proper packaging and transporatation in temperature controlled vehicles. b. Delivery of wine/alcoholic products in any market with a certainty of services

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Supply Chain Management in Wine and Alcoholic Drinks Industry in India c. B2B based platforms for booking of orders from bulk order providers. 5. Inventory management technique

Potential problems faced by End to End Logistic Service Providers 1. Bottle suppliers may have long delays due to shortage in stock. This will

result in delay in

bottling and labelling activities. In some circumstances, the deliveries may be in inappropriate condition 2. Non-integrated supply chain network due to absence of IT or inoperability between supplier and customer infrastructure. This cause s an impact on supply chain visibility and results in higher cycle times, safety stocks, costs of carrying, etc. 3. Production and consumption in geographically different markets, like overseas operations can cause risk of bullwhip effect and reduce the accuracy of forecasts. 4. Legal constraints on alcoholic drinks can cause delays in delivery. 5. Imposition of excess taxes can result in loss of accuracy in financial planning

Quality

Fig: Quality Issues in Supply Chain of Wine Industry Source: Modeling and Measuring Logistics Performance in Wine Supply Chain, Garcia, Ing. Fernanda A. Wine supply chain, being an agri

-supply chain is highly dependent on the optimal climatic

conditions like humidity, weather, environmental pollution, etc. Grapes are prone to oxidat

ion,

rendering them unsuitable for winemaking. Another area resulting in poor quality grapes is due to poor training of workers, resulting in broken grapes, though this can be resolved by training. Out of time harvest, when grapes have not reached optimal

maturity can impact the deterioration of

grapes, with a downstream impact on quality of wine. In India, there is an absence of planning and

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Supply Chain Management in Wine and Alcoholic Drinks Industry in India scheduling techniques for harvesting of vineyards since they are generally under the control of owners. The conditio n to which wines are exposed during transporation also plays an important impact on quality. High temperatures and humidity have an adverse impact. Low real estate of vineries and poor transportation infrastructure means that trucks generally block entranc

es,

resulting in deterioration of quality during transportation. Supplies form a bulk of inputs, and hence a potential source of problems. Bottles, corks, labels and cartons are generally sourced from suppliers and any improper packaging, incomplete our n

on-

delivery of items, etc can affect the packaging and conservation of wine. Poor quality corks can cause wine to come in contact with air and deteriorate rapidly. Poor delivery of final product can affect the relation with customer and market loss. The tr

ansportation vehicles are generally

temperature controlled by using refrigerated chambers, subsoil caves, etc. Any variation or fluctuation in temperature impacts quality and hence, a constantly cooled environment is preferred. Timeliness

Fig: Problems relating to Time in Supply Chain of Wine Industry Source: Modeling and Measuring Logistics Performance in Wine Supply Chain, Garcia, Ing. Fernanda A.

When using MTO strategy, suppliers may not be able to fulfil requirements during the preparation of orde rs. Bottles and labels have strict procurement requirements, i.e. specific delivery time, product specifications, etc. If supplier causes delay in delivery of these items, it can lead to long lead time in delivery of the overall order. The requirement of labels varies with the design of bottle suppliers, and could elongate the long lead time due to sequential nature of the problem. Quality testing is a critical process during the entire chain because it ensures that the quality of wine is good. It can sometime turn into a bottle neck due to the time consumed by tests. It involves lots

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Supply Chain Management in Wine and Alcoholic Drinks Industry in India of set up of machines and excess of setup can waste time during bottling process. However, this can be covered during deciding the capacity of the plant. Improper scheduling of bottling and other activities can lead to loss in efficiency in the overall supply chain, more so if integrated IT systems are not installed to track the process. Another factor which is not under the control of the exporter is bad co

-ordination among c ontainer transport

freights, inspection and certifications and slow movement of transport vehicle due to poor infrastructure. This can lead to delay in the distribution cycle and is not measurable or controllable by the company.

An overall summary of the quality, timeliness, production and capacity of the overall logistics in supply chain of wine industry can be summaried in the following table: 1. Supplier performance: Measured as the extent to which winery’s specifications are met my activities of suppliers and the quality of delivery. This can be a measure of claims made by the winery regarding the unacceptable quality of supplies like bottles, corks, labels, etc. 2. Right quality of grapes percentage: Factors like bad weather conditions, problems during harvesting, treatment of grapes during transportation, expose to extreme weather and temperature or poor storage condition on arrival at winery. 3. Production performance index: It is the percentage of units which are produced in the winery to specification. 4. Inventory performance index: It is measured as forecast accuracy, product obsolescence, inventory accuracy, stock outs, etc and is benchmarked against industry standards. 5. Warehouse performance: It includes activities like picking accuracy and shipping accuracy of finished goods. 6. Customer satisfaction index: Overall indicator of customer’s satisfaction, measured as percentage of orders that meet customer’s specifications against the claims received by the company. It is broken down into the following sub-levels: a. Perfectly purchased supplies b. Product unit perfectly bottled c. Perfectly fillable d. Perfectly picked and packed e. Perfectly delivered f.

received

7. Timeliness of the logistics can be measured as: a. New demand response time, which is the average time required by supplier to respond to new orders.

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Supply Chain Management in Wine and Alcoholic Drinks Industry in India b. Total production cycle time/production lead time, which is the average time required for performing elaboration and aging of product, quality testing followed by bottling. c. Delivery cycle time, which is the average time required for freight. d. Total logistics time: it is the average time elapsed between customer order placement and time when it is actually delivered to the customer. It includes: i. Order processing ii. Purchase cycle time iii. Bottling time iv. Warehouse processing time v. Delivery time vi. Return time vii. Backorder duration

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References: http://www.indianwineacademy.com/Comprehensive_Study_IWM_Reference_Section.pdf http://www.indianwineacademy.com/Comprehensive_Study_IWM.pdf http://www.revenue.ie/en/tax/excise/excise-licensing/retailers-licences.html http://zenithresearch.org.in/images/stories/pdf/2012/Feb/ZIJBEMR/15_ZIJBEMR_VOL2_ISSUE2_F EB2012.pdf http://www.dsd.wa.gov.au/documents/India_Wine_Report_January_2012.pdf http://science.howstuffworks.com/innovation/edible-innovations/winemaking.htm http://www.apitco.org/Profiles/Wine%20project.pdf http://finance.yahoo.com/news/research-markets-china-grape-wine-123900646.html JBC International; Aug, 2008; Indian Wine Market Report; ‘Comprehensive Survey of the Indian Wine Market’ IBS; Wine, Spirits and Beverages industry Brief; Winning su pply chain strategies for the wine, spirit and beverages industry Trade directory- Wine glass makers in India;http://dir.indiamart.com/impcat/glass-wine-bottle.html Euromonitor; March, 2012; Wine in India, Category Briefing Euromonitor; May 2012; Glass Packaging in India, Category Briefing Euromonitor; May 2012; Paper based packaging in India, Category Briefing Bohle, Carlos; Maturana, Sergio; 2008; A Robust Optimization Approach to win

e grape harvesting

scheduling Modeling and Measuring Logistics Performance in Wine Supply Chain, Garcia, Ing. Fernanda A.

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Supply chain management system of wines and liquor industry in India

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