- June 2, 2006
Whisky Deep Dive
The whisky industry is an example of a process industry where it is impossible to predict what consumer demand will be when the product is ready for delivery. It is also an industry where companies must meticulously account for goods stocked as intermediates (partially finished) and as bulk goods (both finished and partially finished).
A good example of how an enterprise applications vendor addresses this microvertical is Strategic Systems International (SSI) (http://www.ssi-world.com). SSI's knowledge of the Scotch whisky industry is an intriguing mix of the traditional and the modern: whisky is the world's top-selling spirit, produced largely in remote, out-of-the-way locations, and is marketed by stressing its close ties to the soil and the elements. But at the same time, most whisky producers are part of large companies—often multinational giants—which have a highly sophisticated and savvy approach to their businesses.
For a discussion of the requirements of the consumer packaged goods (CPG) industry in general, see Yes, We Have No Bananas: Consumer Goods Manufacturers Serve Demanding Customers.
A Long-range Production Process
Whisky production typically involves fermentation, distillation, maturation, vatting, blending, and bottling activities. After distillation, the new spirit is casked in oak for at least the three years necessary for it to earn the "whisky" designation, and distillers will have an inventory of maturing spirit worth several dozens of millions of a hard currency. The management of bulk spirit stocks, from distillation, through the long maturation process, to bottling, represents the biggest single challenge for whisky producers. And much longer maturation is common: many up-market single malts stay in cask for upwards of 20 years. Holding such vast quantities of inventory for this length of time is a major source of cost for producers. Even with the best market intelligence, it is impossible to predict market demand that far ahead. For example, during the early 1980s, there was a consistent excess of whisky, which resulted in the closure of many fine distilleries.
As whisky matures, its value increases as a result of aging and the costs incurred in storing it—mainly stemming from casks and warehouse space. The government recognizes that long-term storage is a cost unique to the whisky business, so distilleries are allowed to accrue storage, rent, and transport costs against each parcel of whisky, thus reducing the impact of these costs on profit until they are sold. Maturing whisky results in losses, since not only is there the famous "angels' share" (the proportion of spirit lost to evaporation during each year of the maturation process), but there are also losses incurred during the subsequent blending process. And with the strict British controls over alcohol imposed by the Department of Her Majesty's Customs and Excise (HM C&E), these losses have to be accounted for (typically up to 2 percent per year is allowable for the angels' share, although 4 percent is more common in the spirit's first year). In other words, the value basically continues to be calculated on the original volume casked. To that end, the SSI TROPOS enterprise resource planning (ERP) suite tracks whisky stored in individual "parcels"—in other words, in a number of consecutively numbered casks containing spirit of the same make, bond year, and filling location. The product records the changing value of each parcel, and manages the casks to ensure an average "wood cost" (the cost of the spirit inventoried in wooden casks), via the functionality that supports the storage of parcels, cost accrual management, and wood inventory management.
Inter-distillery Trade Adds to the Challenges
Moreover, blends can be produced by combining up to 30 different malts of varying age, strength, and origin (Highland, Lowland, or the islands). These blends represent more than 80 percent of Scotch whisky production. Most of these are produced (and probably also aged) by companies other than the one creating the blend, since there is massive inter-distillery trade in different whiskies for blending purposes. The whisky industry has a thriving trade in bulk spirit, and a process of "reciprocals and exchanges," which enables blenders to supplement their own distillery's output with whiskies from other producers—with an eye to balancing the cost equation as closely as possible.
The blender's primary challenge, then, is to achieve a consistent output by manipulating blends according to available malts. Another challenge is to achieve the blend at the lowest possible cost, especially for the extremely price-sensitive supermarket sector. If the enterprise system is able to allow users to monitor the cost of a blend from a very early stage, the blenders can make more informed decisions. For example, there may be a cost advantage if they buy in a particular whisky rather than draw from their own inventory, although, on the other hand, this may be offset by the cash advantage of using their own whisky.
As a result, many producers' warehouses contain maturing spirit that they will use for their own blends, as well as casks with content that is either presold or for sale to other blenders. Similarly, some of the malts that a producer needs for blending are maturing at other distilleries and warehouses, which means that the process of stock management and control in the whisky industry is particularly complex. The master blender defines a recipe for each blend (a standard bill of material [BOM], but quantified as percentages of single whiskies or vatted whiskies rather than in absolute units of measure [UOMs]). The TROPOS Whisky Workbench module (developed jointly with its G&J Greenall customer a while ago, and which has since been commercialized) provides all the information on the bulk stocks available and, significantly, the standard cost of the blend. Therefore, if the actual cost is a bit high, the blender can try various alternatives to lower the cost without compromising quality.
This module handles not only the blend recipes, but also the bulk finished product and the large number of accompanying invoices and shipping documents generated in the blending process as it is shipped out to the user enterprise's own bottling plant, or to other blenders or bottlers. Because the Workbench is part of the TROPOS ERP package, it offers inherent and uninterrupted traceability (this is necessary to ensure accurate reporting for HMCE purposes), from the receiving vats at the distillery, through warehouse maturation, further vatting, bottling, and dispatch to the customer. The product manages the entire process of reduction, filtration, mixing, and tinting (the only legal additive in whisky is caramel coloring), through to the bulk finished product. It can then track the spirit in "bulk liters" (the physical volume) and in liters of alcohol (which is unfixed because of varying strengths). When vatting or some other operation is complete, the TROPOS Active workflow management system can be set up to e-mail or otherwise alert the relevant department with details of the outturn and strength readings, for example. The time taken to generate filtration schedules can thus be dramatically reduced, allowing casks to be brought in ready for blend-dumping in a more timely manner.
To recap, the TROPOS Bulk Whisky Workbench aims at helping distillers and blenders improve their efficiency in various areas:
- Blend optimization
The factors to consider in this complex domain include online blend creation and optimization (based on cost, quality, lead times, wood policy, and cork warehouse picking logic) across multiple locations, and the automated provision of age of youngest spirit (AYS) information through the blending process. The rule-based tool calculates the quantity of alcohol in each ingredient, and supports standard Scotch Whisky Association classifications, such as First Class Highland Malt. It calculates losses, and converts density and temperature to alcohol strength, while also preventing under-aged whiskies from being used by mistake.
- HM C&E documentation
Distilling is a specialized and highly regulated business, and is also unusual in that the larger part of its product price to the end consumer is not accounted for by manufacturing costs, nor by distribution and retail, but rather by government-imposed levies of excise duty.
- The ability to track and control the automatic billing of warehouse rents
As mentioned above, basically all whisky companies hold some reciprocal stocks, and the Workbench generates automated cost calculations and associated invoices for these stocks and transactions.
- The management of both liquid inventory and casks
This means controlling the movement of casks and parcels, as well as wood management and filling (including automatic alcohol content calculations from density and temperature recordings). Empty wood is also managed as casks are filled and emptied, and the module even automatically increments the "number of fills" record per cask.
More on Customs and Excise Functionality
HM C&E requires that distillers account for all movements of bulk spirit, including in or out of bonded warehouses (secure facilities that allow firms to store spirits without incurring ruinous amounts of duty). Any producer of alcohol must account for both the incoming and outgoing goods that contain alcohol, and is also responsible for paying duty on any alcohol content which is unaccounted for. Maintaining absolute accuracy regarding these stocks is thus essential, since one has to track purchases, movements during storage and production, and sales of finished goods.
The functionality of TROPOS Customs and Excise has been designed as an integral part of the TROPOS Resources, Products, and Processes, TROPOS Warehousing and Inventory, TROPOS Purchasing, and TROPOS Sales and Distribution modules. It is specifically designed to cater to the needs of businesses producing dutiable goods, ensuring that the rigorous C&E legislative and audit requirements are met with the minimum effort required. To that end, date-effective customs tables can be defined by commodity code, nation group or nation, and (optionally) quota number, detailing the latest strength and volume rates. Also, date-effective excise tables are defined by tax code, while the dutiable nature of all raw materials, intermediates, and finished products can also be defined, with TROPOS automatically calculating the duty which is due to be paid based on the status of the supplied materials and the status of the intended customer. All movements of alcohol and hydrocarbon oils are tracked, taking account of temperature correction factors, to ensure that all activities can be accounted for, and widespread analysis reports are available to show movements, customer duty analysis, and duty-free analysis. TROPOS automatically produces monthly excise return reports, while (in conjunction with the TROPOS Export Documentation module) it also produces the necessary export documentation for the sale and movement of dutiable goods.
The product calculates the customs and excise duty payable, and generates postings in the ledger systems to maintain the visibility of the duty liability. As for the whisky industry, it produces the necessary excise documents, including W1 warehouse returns and W8 warehouse dispatch warrants. The module includes integrated electronic thermal alcohol correction tables, and stores value-added tax (VAT) calibration data online, thus helping whisky producers to reduce the amount of time they have to spend negotiating with (and providing documentation to) HM C&E.
Although it may be impossible to accurately predict consumer demand in the case of a 20-year (or longer) product lifecycle, that certainly doesn't mean that the entire process has to be reduced to alchemy. In fact, the more finely honed the process, the better able companies will be to adjust to rises and falls in demand. Thus, most successful companies will not necessarily subscribe to Lord Dunsany's theory that "logic, like whiskey, loses its beneficial effect when taken in too large quantities." Rather, they may be champions of W. C. Fields, a very early proponent of Lean philosophy: "Always carry a flagon of whiskey in case of snakebite. And furthermore, always carry a small snake."