July 10, 2019
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In comparison with other industries, the wine industry has an incredibly complex supply chain that creates many daily challenges for wine distributors. And, if anything, the complexity of wine distribution is increasing, not decreasing. With that in mind, here’s a closer look at the Top 10 challenges faced by wine distributors today.
Within the wine industry, every lot or batch number is known as a “rotation.” And every rotation consists of a series of important dates, including the “use by” date and the “best by” date. For rare or vintage wines, it might also include a “not before” date. A wine distributor must be able to track all of these dates so that all wine in inventory can be issued to customers in the proper date order.
Moreover, distributors must also create a record of which customers received which rotation, when. In the event of a recall of any kind, distributors must know which rotations are affected. Without the right records and tracking in place, all wines – not just the affected wine – might need to be recalled. The important point to keep in mind here is that wine is a perishable item, and all inventory management approaches must take this into account.
While every industry requires a certain amount of pricing flexibility, the wine industry stands alone for the amount of customer-specific pricing that is involved. This includes special promotional offers and discounted pricing, as well as special “quantity break” pricing that is required when a customer “breaks” a case to order just a few bottles instead of a full case. Most traditional accounting systems simply can’t handle all of the pricing adjustments, and as a result, many wine distributors need the ability to add extended pricing enhancements to their accounting systems.
For example, let’s say that a customer requests a case break and each case has 6 bottles in it. Instead of 6 bottles, the customer only requests 4. Most traditional inventory systems would record this as an order size of 0.6666 (i.e. four divided by six). However, this is not practical for the wine industry, and it is better to record this as a sale of 4 bottles. This requires what is known as “unit of measure flexibility,” so that you can specify any sale in the unit of measure that makes the most sense for the way that you run your business.
For some wine distributors, the pressure is so great to close on a new sale that they are willing to offer especially favourable payment terms for the purchase. Instead of making immediate payment, for example, they might be allowed to pay in 30 days. The problem, however, is that these types of payment arrangements very often become a “public secret” in the broader retail community.
If Buyer B knows that Buyer A is getting special extended payment terms for a shipment of wine, then it’s only natural that Buyer B will also ask for those payment terms. And, in turn, Buyer C will find out that both Buyer A and Buyer B received those payment terms, and by then, it is already too late. What once was a very orderly stream of accounts receivable is no longer. And that will inevitably put a strain on the cash flow of any wine distributor.
Within the wine trade, the term “supersession” refers to a new vintage that supersedes an older vintage. This is mostly used to describe fine wines that are continually being replenished. The challenge here is that the inventory forecasting and buying function in wine management software must take into account that these two wine vintages are going to have a unique relationship: if a buyer has been buying an older vintage, but that older vintage is no longer available, then it is quite likely that the buyer will opt for the next available vintage. In other words, there needs to be some way to link products, so that a new product can “inherit” some or all of the demand from a previous vintage. In other industries, this is not necessarily the case, since once a product runs out, it is quite likely that a buyer will move on to a different brand, product or type.
Since the wine industry is such a relationship-driven business, it perhaps only makes sense that wine distributors must bend over backwards to keep their customers happy. One way to do this is via customer reserves. This refers to a situation where the availability of wine from a certain supplier (usually, a smaller boutique winery) is restricted or limited. Since there is a limited amount of wine, steps need to be taken to ration or reserve this wine. Naturally, the best customers get the first opportunity to state their preferred demand, and this process naturally follows with other customers, until all the wine has been allocated.
But that’s only the beginning of the process because now the customer must “draw down” the amount of wine over time. If a customer does not fulfil this obligation, then this raises all sorts of issues for the distributor. Do you simply change your payment forecasts to reflect a slower drawdown process, or do you reallocate and redistribute the wine to someone else? The guiding principle here is that wine distributors must do everything possible to keep their best customers happy – even if it carries financial implications for the way they run their business.
There are two ways to think about customer orders – from the perspective of the customer, or from the perspective of the wine distributor. Most customers, of course, will simply order wines the way everyone else does – they will see what’s in inventory at the distributor, make their selection, and transmit the order using the inventory numbers used by the distributor. Easy, right? But what happens if a distributor supplies the entire wine list for a customer? In this case, it’s more helpful to take a customer-centric view of the matter. A customer is used to thinking in terms of their own wine lists and their own bin numbers, so it is quite likely that they will want to place orders using this system. As a result, wine distributors need to be flexible enough so that customers can reference their own bin numbers rather than the distributor’s inventory codes.
As a wine distributor, you might encounter customers that are not looking for a specific product per se, but rather, a certain type of product. So, instead of typing the name of a certain producer, certain wine varietal or certain vintage into your search functionality, you need to have much more flexible search terms. Maybe a customer is looking for a French wine, preferably made with one or more of the red grapes used in the classic Bordeaux blend (Cabernet Sauvignon, Merlot, Malbec, Cabernet Franc, Petit Verdot), and priced between $10 and $20. For the customer, maybe it doesn’t matter so much if the wine is from Bordeaux, Burgundy or even Languedoc, just as long as it is from a French appellation. Your search criteria need to be flexible enough to take these broad parameters into account.
It’s perhaps natural to assume that, as long as you provide your sales team some great wines to sell, they will remain happy. However, you can’t always make that assumption. You need to make sure that they are hitting their numbers, or else they will leave for someone else. As long as a large component of their overall compensation is tied up in commissions and incentives, they will be laser-focused on hitting their sales goals. If they find that these goals are not realizable – possibly because your smaller boutique wine brands are not being snapped up by customers – then they will eventually need to find some other way to make things work.
Along the same way of thinking, you will also have to make sure that your drivers and delivery team is also performing as expected. They are at the front lines of ensuring that the right wine is delivered to the right place at the right time. And, moreover, that they are delivering the wine the way the customer wants it delivered. This might require some re-thinking of the delivery schedules, as well as the most cost-effective way to get the product out of your warehouse or storage centre and to retail stores and on-premise establishments.
There is a lot that wine distributors can learn from beer distributors. When these distributors drop off shipments, they also provide extensive merchandising support to the buyer. In other words, they aren’t just dropping off cases of beer and walking away – they are also helping with the display of that beer within the retail environment. One way to support and merchandise wine is by holding tastings within the store. This is one way to show buyers that you have their best interests in mind. It also is important to look at shelf displays, including the presentation of shelf talkers.
And, of course, wine distributors need to take into account any relevant taxation or regulatory issues involved in the shipment and distribution of alcohol beverages from foreign countries. Taken together, you can see the broad set of challenges facing wine distributors. In a business where margins are always under pressure, there can be a lot of tradeoffs involved in giving customers what they want and also guaranteeing the fundamental profitability of your business. So you need to be proactive in addressing these challenges and then finding ways to overcome them.