The current economic situation is weighing heavily on everyone's minds, from consumer to restaurant owner to wine club member. Because people are now buying differently, with more frequent but smaller or less expensive orders, it is affecting the supply chain: those people between the customers and the winery.

Consumer caution is forcing distributors, warehouses and fulfillment houses to re-examine their strategies. Increasingly, the wine industry is being required to adjust to what manufacturing sectors have practiced for a long time: just-in-time inventory.

More than ever, those in the supply chain have to improve their ability to move product quickly yet contain costs at the same time. All links in the delivery chain must react together. As distributors move to keep pace with the changing marketplace (consumers), they affect everyone else upstream in the chain--and none more so than the winery.

Distributor Purchasing

"The consumer and restaurants are definitely shopping for price," said one warehouse owner, and it dramatically impacts the warehousing business.

"Now instead of fewer and larger orders from distributors, we are seeing the same number of orders, but they are smaller," said Bill Kreck, owner of Mill Creek Winery in Dry Creek Valley, California. "The distributors are sitting on less inventory because they do not know what will sell. Distributors are still making the same number of inventory turns but with less product."

Instead of purchasing entire pallets of one product, distributors are buying single layers of 14 cases or building layers of three and four cases at a time. "Distributors, like the restaurants, are hedging their bets," continued Kreck, "and if they run out of something, they usually just blame the winery."

Melissa Prospero of Oak Hollow Winery in Pleasantville, New York agrees. "Distributors are not sitting on any inventory. Even our people in Florida are only buying 14 cases at a time and building pallets. And there has been a big drop in wine sales over $20," she said.

By purchasing with the "just-in-time" mentality, distributors are forcing the warehouses to consolidate shipments of smaller orders of individual cases on pallets. At the same time, they have to make sure semi-rigs leave the storage facilities with complete pallets.

While this may save money for distributors, it adds more time and labor to the warehouses' operating expenses by having to customize loads of random product. Increased costs to the warehouse in turn increase costs for the winery. In the supply chain, all costs roll downhill.

Warehousing

The general consensus around the U.S. is that inventories can vary for any number of reasons. Every year there are more wineries, and regional crop loads may grow, resulting in increased production.

The current issue, however, is that product is not flowing through the system as it once did. Because product flow is slowing, this results in storage problems for the warehouse, and again, the winery.

Warehouse manager Lana Kelly at Abbey Wine Warehouse in McMinnville, Oregon noted, "The local distributors who once bought complete pallets are buying seven or eight cases at a time. This means we have to inventory wine longer, and space becomes a premium. Just-in-time also affects scheduling due to more frequent loads which also add to labor costs."

"Distributors and warehouses are both in a cash squeeze," said Stephen Schwitalla, CEO of Sonoma County Vintners Co-op in Windsor, California, "because just-in-time inventory is more radical and strict. It takes more labor to process more individual orders to fill the same truck. This filters back to the winery."

The manager of another storage facility in Oregon said that traditional inventory levels for the first quarter of the year, normally around 65 to 70 percent, are currently pushing almost 90 percent. The manager of another facility outside of Portland with 170,000-square-feet of storage space said he's seen 39 percent growth in one year. As more wine continues to arrive from wineries, the problem begins to compound.

Schwitalla continued, "If the warehouse is a cooperative rather than a public storage facility, they are usually able to hold storage prices. Co-ops are typically break-even operations. Public storage, however, is under profit pressure, and there are no guarantees for the winery that storage rates will remain the same."

One alternative is for the winery to inventory its own wine. For most small facilities, however, this is as difficult as being your own fulfillment house.

Fulfillment Houses Also Feel the Squeeze

The same changes in buying habits between restaurant and distributor are also evident between the fulfillment houses, wine clubs and tasting rooms. Many are reporting that wine club "pick-and-pack" sales are stagnant and that club growth and winery tasting room sales are also down.

An even more ominous trend, as reported by a pick-and-pack facility in Sonoma County, is that club members are becoming more discretionary in their spending. Instead of purchasing and storing a case of wine, they are buying three bottles, four times a year, or buying only what they need for that particular time frame.

This adds to costs at the warehouse level because more frequent "pulls" from inventory add labor and paperwork. Instead of one purchase order, there may be four for the same amount of wine. This again adds to growing backlogs and less space for new arrivals of wine.

At the same time, freight charges have climbed, particularly within the faster overnight or two-day service. As a result, fulfillment houses report more ground delivery with UPS.

Multiple shipments of smaller lots, however, also increase the "handling charges," which may offset the savings with less expensive freight. In addition, just-in-time shopping may cause issues for those needing to restock their cellars in the heat of the summer. When it comes to shipping wine, surface freight cross-country to Texas in September is never a good idea.

Optimizing Shipping Costs

With everyone trying to cut costs in the face of timely ordering, warehouses report more direct national shipments of entirely full trucks. Meanwhile, all those in the supply chain are trying to optimize their loads in the face of increased fuel and labor costs and high "across the dock" fees charged between holding facilities.

One sector that has benefited from these issues is rail service, particularly for coast-to-coast shipment (see WBM news story, November 2008). Without a doubt, direct, dedicated, non-stop refrigerated rail cars are the most consistent form of transportation. Since each step of the transport is global positioning system (GPS)-monitored, distributors know the progress and location of the trains as they cross the country. Knowing the trains' exact arrival times helps coordinate and schedule pickup and delivery.

Conclusion

Just-in-time delivery works well in manufacturing as long as raw materials are available in a timely manner. Fabrication can then be scheduled to coincide with demand so lead times can become very precise. This is called "demand forward."

The wine industry is a "supply forward" industry. As an annual agricultural event, a winery's production is based on total available resources (the crush), and everything happens at once. Thereafter, stockpiles of finished inventory must be depleted because another wave will soon follow. Any interruptions in demand have serious consequences and immediately affect all stages in the supply chain.

A warehouse, however, will continue to charge storage for unsold products, and distributors will only buy what they can sell.

If the economy does not improve in time to help alleviate inventory problems, wineries might do well to consider implementing other marketing options, including Direct to Consumer strategies (See WBM "Direct to Consumer" section, April 2009). Building wine club membership, increasing traffic in the tasting room and enhancing websites are all directions to pursue.

Revisiting current marketing programs might also require adjustments in price points in light of the current "shopping" mentality of the consumer. While discounting is not a happy alternative, it does offer the potential to reach larger markets. Offering "deals" for larger orders would also help deplete inventory.

Finally, it is also advisable to consider securing a long-term contract with local warehouses to help lock in prices. Naturally this assumes the winery will be producing the same amount of wine each year--which is another option: make less wine. wbm

Bill Pregler has worked in the winery equipment industry for many years and is a staff writer for Wine Business Monthly.