Needing to reduce working capital bottled up in the many SKUs of wine and liquor held in inventory before distribution to its state-owned stores, the Pennsylvania Liquor Control Board implemented a vendor-managed inventory model called bailment.

PLCB's customized solution, worked out with partner Deloitte Consulting, brought 28 vendors into a single web-based portal that supports collaborative planning based on shared forecasts and historic sales information. In addition, the merchandizing system was customized to enable a hybrid inventory management model that allowed the PLCB to store vendor-owned merchandise and PLCB-owned stock in the same physical warehouse location without changing the existing warehouse management system.

The impact? The project, which enables collaborative planning, forecasting and replenishment within integrated enterprise architecture of closely interfaced Oracle applications and Robocom's warehouse management system, reduced PLCB's working capital by approximately $100m in fiscal year 2012. Moreover, it has left the alcoholic-beverage entity with the money needed to run its business smoothly, says John Metzger, PLCB director of supply chain.

An independent government agency, the Pennsylvania Liquor Control Board is responsible for wholesale and retail sales and distribution of wine and spirits in the Commonwealth of Pennsylvania. With annual sales of nearly $2bn, it claims to be the second-largest distributor of wines and spirits in the world.

It operates more than 600 retail and wholesale stores, plus online consumer and wholesale sales channels, through which it offers an assortment of more than 30,000 SKUs to its customers. These products are obtained from a complex network of more than 100 suppliers across five continents.

Prior to its partnership with Deloitte, the PLCB followed a traditional distribution model, buying product based on sales forecasts, officially took ownership of it, and then stored it in warehouses. However, this model was costly, causing the agency to hold between $120m and $200m in warehouse inventory, dependent on time of year, which far exceeded industry benchmarks.

The goal was to reduce its warehouse working capital cost by 80 percent - or $100m -  but in order to move to the VMI bailment model, the PLCB first needed to address several challenges related to process, technology and, of course, people.

As for process, the PLCB would need to transition procurement functions, such as planning and forecasting of inbound logistics for PLCB-owned warehouses, to the vendors themselves. However, says Doug Hitz, director of the PLCB's Bureau of Planning and Procurement, the agency still needed to manage vendor behavior and ensure efficient inventory management.

A common medium was required to communicate and work with vendors who would be participating in the bailment model. The agency's existing Oracle-based integrated enterprise solution, including merchandising and inventory management packages and their inherent interfaces, had to be customized.

Another challenge faced by the PLCB was to customize its current enterprise

architecture that integrates Oracle-EBS, Oracle-RMS, Robocom Inventory Management System and Manugistics. The PLCB needed technology to manage vendors' operating efficiencies while the vendors accept a part of PLCB's responsibilities such as inventory planning and inbound logistics to PLCB-owned warehouses.

The all-important ingredient of personnel had to be trained so they could support an operating model that allowed third-party vendors to carry out procurement functions previously handled in-house. The vendors too would need help in learning the new system.

The opportunity to convert to a bailment model was made possible by the agency's Oracle ERP implementation, for which Deloitte also served as the implementation services provider, says Tzarni Mangosong, senior manager for Deloitte Consulting LLP. Deloitte assisted the PLCB to design and implement a solution that leveraged existing Oracle Retail and Oracle EBS applications by modifying interfaces and extensions.

Particular controls were implemented to authenticate users and to protect proprietary vendor information that could be potentially used by competitors. Among other capabilities, the portal allows vendors to track daily stock levels of products and redistribute the merchandise within and between the warehouses by an efficient use of reverse logistics.

In devising and implementing the solution, the PLCB and Deloitte engagement team reengineered six business processes (vendor collaboration, inventory planning and warehouse replenishment, inbound logistics, inventory management, store replenishment, inventory returns and bailment penalties) to incorporate a 100-percent vendor-managed inventory model in three distribution centers for goods supplied by 28 large vendors. The team also assisted nine of the 28 vendors in purchasing back their existing inventories in third-party warehouses. Of course, they transitioned such functions as inventory planning, warehouse replenishment, and inbound transportation to the respective vendors.

Customized control mechanisms had to be set up. Penalties were established to enforce vendor performance and accountability, which is defined through service-level agreements for replenishing PLCB-owned liquor stores.

As for business process flows, the bailment supplier notifies the PLCB of an incoming shipment using and advanced shipment notice. As it happens, the bailment supplier can send bailment and non-bailment merchandise on the same truck. Bailment merchandise is received using ASN information and non-bailment merchandise is received based on the Permit-PO information.

When it comes to returns, the vendor initiates a merchandise return request using the shared portal. The Oracle RMS uses information in the return request to create pick instructions for the warehouse implementing supply chain collaboration and vendor-managed inventory in the public sector.

The PLCB says it achieved more than 100 percent of its target working capital reduction earlier than planned; the $100m in savings was reportedly realized only six months after go-live.

In addition to devising an innovative technical solution, the PLCB-Deloitte engagement team also supported the agency through the change management process. Change management was particularly critical because the bailment model greatly expanded vendor responsibilities related to managing inbound supply planning and warehouse replenishments. This included providing vendors with real-time planning data, making them responsible for warehouse replenishment decisions, and holding them accountable for their performance. The bailment model also transformed the responsibilities of PLCB procurement personnel from mainly purchasing products to primarily collaborative planning and managing vendor relationships.

Says Metzger, "This same concept can be made to work just about anywhere."

Resource Links:
Pa. Liquor Control Board
Deloitte Consulting

Keywords: alcoholic beverages, retail supply chain, inventory management, inventory control, inventory management IT, supply chain management, supply chain IT