Drinks Logistics


Date:

2014-2015 (8 months)

Company:

A wholly owned subsidiary of a Swiss based international freight forwarding and contract logistics business.

Assignment:

To redirect the company in the face of multi-year deterioration in market and profitability. To achieve: a revised path to improved cost performance; an effective approach to the ‘1970s’ industrial relations and re-establishing customer service standards reliably to contracted levels.

Role:

Interim Managing Director

Assignment Length:

8 months

Background:

In c.2006, Scottish & Newcastle Breweries made the strategic decision to outsource its drinks delivery operations by the establishment of a 50:50 JV company with an international logistics organisation in the UK. The business model was for the JV to own the relevant physical assets associated with the distribution operation (sites, warehousing and vehicles), which it leased to a wholly owned subsidiary of the logistics company who would provide the operational service and contain the people required to deliver the service. The operating company is Kuehne & Nagel Drinks Logistics (KNDL).

With the take-over of S&N by Heineken, the JV ownership also changed in parallel. Inevitably, the relationship between the 2 shareholders changed, resulting in modifications to the structure of the agreement, which included the contract being extended to 2023.

The original agreement was based on excellent personal relationships across the two shareholders and this was also reflected in a positive constructive relationship with customer service maintained at agreed levels.

Heineken as an organisation has a significantly different culture to S&N. It does not have a history of operating JV arrangements in the UK and the existing arrangement with the logistics partner changed in its nature and approach. Contractual emphases shifted with varying pressures as shareholders and customer. Conflicting desires to know cost build up without agreeing to a formal ‘open book’ became evident.

At the same time, the the operating company’s relationship with the trade union (Unite) had deteriorated over the previous 2-3 years in the secondary, on-trade, operations. Increasingly strident demands from union representatives resulted in much more difficult management with even minor issues being escalated to formal complaints or various forms of industrial action being taken, up to and including a strike in September 2013. Union negotiations were complex; wage based issues being regionally handled and other issues operating through a ‘Joint Working Party’ with national secondary representation. The primary, off-trade business benefits from a much smoother relationship, reflecting the history of the business and the individuals involved.

Originally, the operating company was a self-contained business possessing all functions directly. Over the years, this situation changed, with a number of ‘back-office’ functions being integrated into the group facilities. This included payroll, HRD&T, Finance, IT, HSEQ, Marketing & PR. Value chain functions, Procurement and Sales also became integrated in time, reflecting the heavily matrix managed group organisation.

Market conditions since the formation of the JV had deteriorated across the ‘on-trade’ side of the business, with beer and lager volumes falling 50% in 10 years. The number of ‘drops’ to pubs had also fallen but to a lesser degree, resulting in volume per drop falling but the requirement to maintain a full national distribution network remained.

The 3 national drinks distributors (the operating company, Carlsberg and DHL) had all maintained their networks but operated at well short of capacity. The situation was further exacerbated with regional distributors and wholesalers providing local drops to individual pubs. 2015 volumes will be insufficient to keep 2 national distribution networks operating at full capacity.

The distribution companies had spent some years competing to carry volume at ever lower prices, using marginal income as the ‘modus operandi’. This had reached a point where profit erosion had been sufficient to bring future operations to generating structural losses.

The operating company has 2 distinct sides to the business: ‘on-trade’ or Secondary operations described above, plus ‘off-trade’ or Primary operations. This latter activity involves movements of drinks from brewery to supermarkets, largely through a national distribution centre based in Derby but with supporting activity from 4 other warehouses in the network.

Apart from Heineken (constituting about ¾ of the business), other breweries are served by the operating company, including ABInBev, Carlsberg, Shepherd Neame and Charles Wells. During the assignment, the operating company established Diageo as a new client, operating all UK distribution for the multi-national spirits and beer company. Primary end customers included Tesco, Morrison & Sainsbury, with Secondary pub groups such as Enterprise Inns, J.D. Wetherspoon & Trust Inns being served.

The operating company employs c.2500 people on 34 sites across the UK with sales of c£220M. The secondary distribution network is based on a ‘hub and spoke’ system and the company has the benefit of a large central planning function. The present operating structure had been adopted over the previous 2-3 years, coincident with a deteriorating IR scene. This had resulted in a concentration of stock into 3 regional warehouses and a couple of stocked depots. A significant reduction in headcount also occurred at depots, including the loss of a number of site managers. A new primary National Distribution Centre was built in 2014 to facilitate the rationalisation of stock storage for Heineken, removing the burden from brewery sites.

In parallel with the operational re-structuring, secondary operations union discussions had been running in excess of a year to optimise the number of ‘draymen’ (drivers and ‘mates’) used to recognise the significant reduction in volumes carried. At the same time, service levels were increasingly poor, with the union insisting that more, not less people were required. Some voluntary redundancies (VR) had been achieved but the union subsequently had insisted that any VR offer must be removed by the company. Pressure was applied to stop people taking advantage of the generous company offer. Discussions relating to adopting more flexible working practices had also been held with no progress in over a year.

Stock losses remained stubbornly high at approximately 2x the budgeted loss values. Absence, which had always been traditionally high in the Secondary operations (at levels similar to the worst nationally quoted for public sector employees), deteriorated about 40%+ further. Little real control existed with either short term absence or ‘long term sickness’. A large proportion of the dray crews had ‘legacy’ contracts which included full pay from day 1 for absence, for up to a year.

The business ran a large number of weighty projects throughout each year, some being initiated at short notice. All required significant people resource to run to cost, to time but the organisation possessed a very stretched management structure with limited skills available to deliver the work demand successfully.

As mentioned earlier, customer service levels were under pressure. There were a number of contributing factors including an aging on and off road vehicle fleet. Warehouse vehicles were a year out of lease contract and lorries were operating well outside the industry norm of 7 years cost effective lifespan. The net effect was a maintenance budget running at over £0.75M/yr beyond expectations and extended and ‘spot’ lease costs well above budget.

The Brief:

The business had been through substantial change which had led to exacerbated industrial issues, yet had not dealt with the deteriorating financial position. Service levels were not adequate and were putting pressure on achieving contractual terms. The organisational split between assets ownership (the JV) and running costs (the operating company) had resulted in material damage to the operating company’s ability to remain ‘fit for purpose’. To return the business to a solid financial and operational footing, the assignment was undertaken to put the building blocks in place whilst the permanent MD was recruited.

The Operating Situation:

The senior management team was restructured with the previous MD remaining an integral part of the team in the newly formed position of Commercial Director. Initially, 2 external appointments were made to reinforce IR expertise and undertake detailed investigations into where significant operational cost savings could be made. At the same time, group programme management processes were more rigorously adopted and supported by the secondment of a senior programme manager. The recruitment of a company HSEQ manager was also initiated with the new job holder reporting directly to the MD rather than ’hard lined’ into the group HSEQ Head. A little later, an internal group recruitment was successfully made, appointing a new Customer Service Director.

As a result of previous difficulties in delivering budget commitments, company credibility within the group hierarchy was low. To recover this situation, two things were required:

  1. To deliver the agreed budget, and
  2. To manage agreed projects to successful conclusions.

The 2014 budget had been extremely optimistic and required a number of projects to be delivered quickly and achieve all projected cost savings. The 2015 budget was significantly more realistic and whilst resting still on a forward estimate of a very fickle market and the performance of a new significant customer (Diageo), it did not include unrealistic cost saving forecasts.

A review of required projects to deliver the budget was undertaken. 35 projects were identified as necessary to ensure budget delivery and establishing the redirected company approach. The key agreement to not embark on a project unless it was properly resourced was made with group senior management. The 17 most urgent and important projects were initiated in the new control process so that completion would be timely.

2 major elements of the work required to redirect the business were:

  1. Defining and implementing a clear IR strategy and
  2. Identifying areas for significant cost saving within the business’s operational activities.

Prior to the assignment start, the group and the business had developed an approach designed to introduce a labour cost saving plan that would deliver the necessary budget requirements and re-shape the company for future operations. The planning anticipated a negative union reaction, with industrial action variations being costed into the strategy. Early in the assignment, the approach was tested with both shareholders. Heineken were not supportive on the basis that it could risk continuity of supply to the end customer which made the strategy very difficult to drive to a successful outcome.

An alternative approach was formulated, working closely with the union representatives to establish a different, more open and constructive way of working. By its nature, this methodology would take much longer to run to a successful change. By the end of the assignment period, some progress had been made that had led to some early examples of achieving mutually acceptable outcomes to a number of long standing issues.

The ‘root and branch’ review of potential cost saving opportunities was undertaken over a 4-5 month period of detailed intensive work. This confirmed the scale of the cost saving opportunities directly linked to non-optimised labour levels, plus additional savings that could be achieved by simplifying and updating planning assumptions, routings, vehicle fleet structures and stock handling. Overall, a cost saving potential of c.£15M/yr was identified.

By the end of the assignment, work was underway to tackle a number of these areas in collaboration with the union.

Within the UK drinks market it has been understood for some time that the volume of work is insufficient to fully support 3 national distribution networks profitably. The operating company’s stated intention was to be ‘last man standing’ and part of this strategy involved holding commercial discussions with another national player to identify mutual benefit to merging the 2 distribution networks. Throughout the assignment period, these discussions continued. No final decision had been made by the conclusion of the work but the position remained positive. The scale of potential savings available was estimated at £80M.

During the assignment period, a c.15% increase in sales volumes had been achieved through the introduction of 2 new clients (Diageo and ABInBev). The ABInBev implementation was the first completed transformation project using the new programme approach. It became clear that the original resourcing for the Diageo implementation plan was insufficient. Immediately prior to the major operational new warehouse commissioning, significant additional resources were drafted in from elsewhere in the contract logistics group and from outside the company, so that rapidly changing demand from the client and the impact on the planning, warehousing and transportation needs to achieve client service levels could be met. In the face of these conditions, coupled with the sudden loss of a small number of key personnel, the commissioning team managed to deliver client peak year end demand. This work became very high profile within KN and Diageo. The client service was achieved, but at a cost (additional c.£0.75M). The learning experience was a rich one and reinforced the need to be properly resourced from the beginning of any major project.

As mentioned previously, the ownership and operating structure gave rise to a split in capital and maintenance costs. As a result, there was no incentive for the shareholders to support an efficient vehicle replacement programme. Indeed, the structure supported the converse action. Discussion regarding on-road vehicle replacement and warehouse vehicles had been continuing for about a year prior to the assignment. Agreement in principle had been reached to phase the replacement programme for the on-road fleet over a 5 year period. Unfortunately, the starting point was still being debated with shareholders requiring ever more detail to enable a final decision to be made. A similar approach was adopted with the warehouse vehicle fleet. However, this was the subject of a leasing arrangement with the equipment supplier and regular breakdowns that could not be dealt with out of ‘normal working hours’. After papers to the JV board and board meeting discussion, it was finally agreed to proceed at the end of the assignment period. The warehouse vehicles were all beyond the normal 5 years contract period (at 6 and counting), with breakdowns impacting the business’s ability to deliver to service levels. The operating company had a number of short term spot lease arrangements in place to ensure that it was possible to recover from most unexpected breakdowns but at significant cost. The business operates over 370 warehouse vehicles. The new leasing and maintenance arrangement was valued at c.£7M (5 year lease).The on-road fleet had vehicles well into their 11th year of use running with very high maintenance contract costs and being unreliable. The secondary on-road fleet required CAPEX approval to spend £9.8M on new lorries, plus £7.5M on maintenance in year 1.

The Health, Safety, Environmental and Quality (HSEQ) work of the business was re-focussed, with the newly recruited functional manager reporting to the business MD. Relevant employees were all placed into the function as direct reports to the HSEQ head. This brought a much improved approach to H&S, which proved timely. Amongst other things, the company received a number of fines for breeches of vehicle regulations (to do with load containment) from the Metropolitan Police. A meeting was held with the police to understand their concerns as changes in their approach had occurred and the business believed it was following relevant guidelines from ‘VOSA’. The updating of the fleet would resolve all outstanding differences coupled with reinforcing the need for dray crews to comply with load restraint practices at all times.

IT/IS support projects were integrated into the needs of the business and timeframes aligned with the transformation projects being undertaken. This was particularly relevant for new client introductions, in-cab technology and planning efficiency requirements.

Having undertaken extensive market research, Heineken had embarked upon a major client service improvement programme, including establishing an in-house call centre to deal with all end customer issues and enquiries. During the assignment, the operating company aligned itself with this programme and appointed a Customer Service Director (new position). This approach was extended to cover all client brewers with a view to securing much improved relationship management and client retention.

At the contractual level, service obligations with most clients were 99.25% on time in full. Achieving this target had proved elusive on occasion, with a range of factors contributing to missing potentially on a daily, weekly or monthly basis. Delivery requirements could vary in a normal week by as much as 30% from one day to another, with peak volumes about double low volumes by week. Additionally, both primary and secondary demand patterns for the Christmas 2014 period changed significantly compared with previous years, leading to enormous increases in daily demand in a very small number of days prior to the festival. Typically at busy periods, the business could receive up to about 25% ‘hot orders’ for a day (order on day, for the day) but the Christmas peak resulted in 50% on a day, with no ability to obtain contract vehicles at the busiest time of year. With enormous inventiveness and effort, all but 5 deliveries were made ‘OTIF’. Review meetings were scheduled with the client to establish a more planned and organised approach for the next Christmas peak.

Having commissioned the new National Distribution Centre by mid-2014, pressure had been removed from Heineken brewery sites to hold buffer stock. During 2015 it became clear that the brewer had developed its strategy further, consolidating production onto 2 fewer sites. This involved using existing space on the remaining sites to build more capacity, which in turn meant that space was no longer available for use by transport to clear the yards effectively during heavier production periods. This position was communicated very late in the day, resulting in operating inefficiently while trying to keep factories going and find space to store the product and empty kegs being recycled. The eventual solution required the re-opening of a warehousing site that had been agreed to be closed and then reinstate IT equipment, office facilities and sufficient security to protect the product. Heineken wanted this solution to be temporary but at the end of the assignment it remained unclear what would be an acceptable alternative.

During the assignment, a number of operational issues were addressed as management controls were fully established. Stock losses were running at almost double the budgeted allowance in the secondary business. To reduce the problem, frequent full stock checks were made in warehouses and depots; a full audit process was instigated for product from warehouse to client, with all losses in transit and returns itemised. Absence, as previously mentioned running at very high levels, was managed much more rigorously, reinforcing good attendance. Short term or ‘casual’ absence was more than halved in the period. Long term sickness was managed thoroughly, with the outsourced monitoring process regularly reviewed and all actions followed through. Both the overall number of people remaining in long term absence and the length of time people were in this situation reduced c.40% over the assignment. Insurance claims reduced consequently too, and those outstanding (over £2.25M) reduced by c.£0.5M in the period.

The assignment concluded with the recruitment of the new permanent Managing Director and a handover period.

Achievements:
Key outputs from the work were:

  • Opened fresh union dialogue, building a more constructive IR environment.
  • Identified £14.9M/yr operational cost savings
  • Established a formal Transformation Programme to obtain savings & adopt a new way of working.
  • Stabilised 99.25% ‘on time, in full’ service performance for client base.
  • Provided commercial base to win industry changing contracts at up to c. £80M.
  • Gained JV off-road fleet lease approval (370+vehicles; c. £7M full life L. & M. cost).
  • Gave platform for major on-road vehicle JV CAPEX approval (c. £9.8M + £7.5M m’tce in year1).
  • Reduced health claims bill by £0.5M
  • Delivered c.15% additional sales value through new clients; Diageo and ABInBev
  • Initiated vehicle maintenance cost savings of £0.75M/yr.
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