Diageo Attacks Global Supply Issues

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It was less than a year ago, 8 June 2012 to be exact, that Diageo (LSE:DGE) announced that would invest £1 billion to expand its production by as much as 40%.  The share price of the world’s largest distiller at that time was 1,581.0  Today the Diageo share price is 2003.5, up 26.7% from the 8th of June.

Today Diageo announced that it would be spending an additional £100 million to restructure its supply chain.  That is to say that the estimated cost of the needed restructuring was included in the announcement which hyped a potential annual cost savings of some £60 million.

The global growth of the company’s distribution system into new geographic areas is the stimulus for revising the ways Diageo gets its product to its 21 key markets.  Operations responsibilities will be localized, with the Global Supply division holding responsibility for “ensuring excellence” across all operations.  Which is to say that Global Supply will maintain quality control of the product offering.

The delivery and supply issue has become more complicated as the company has expanded.  The company has to deal with different regulations in each new country into which it ventures.  That, however, is not unexpected and is problematic compared to other distribution issues.

Because Diageo’s expansion includes local products as well as premium international brands, the company’s distribution effort now looks more like a fish-bone chart than a flow-chart.  Whilst the company provides multiple products from multiple sources, the one thing that cannot change is that Scotch whiskey must be manufactured in Scotland.

A company spokesperson said, “A couple of years ago one big supply chain worked because we were selling mainly our premiums brands and had a straightforward portfolio.  With the emerging markets getting bigger and acquiring companies with big local footprints, including their own supply base, it makes more sense to be operated where the demand side is.”

The company said that it has not yet mapped out a plan for implementation of the strategy.  The estimates for implementation and savings are projections based on a corporate supply review.  The company does not expect the savings to become fully realized for three years.

Diageo’s share price was up 10.0 pence to 2004.0 by 1:00 pm today.  Whether any or all of that was attributable to today’s announcement is only speculation because this stock has continued to grow so steadily.

The one worrisome core problem is that implementation of such massive changes typically costs more than projected and the full savings, if any, is seldom fully realized or reported.  Having said that, Diageo is well structured and strong enough to pull it off successfully.

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