Raise a Glass to Inventory Savings
Deloitte assists the PLCB in its efforts to reduce inventory costs by $100M in six months.
The Pennsylvania Liquor Control Board (PLCB) is an
independent government agency responsible for retail
sales, wholesale sales and distribution of wine and spirits
in the Commonwealth of Pennsylvania. With annual sales
of nearly $2 billion, it is the second largest distributor of
wines and spirits in the world. The PLCB 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
Could the PLCB find a way to
reduce its inventory investment
without lowering selection and
quality?
100+ suppliers across five continents. Until recently, the
PLCB followed a traditional distribution model wherein the
agency purchased merchandise 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 $120 - 200 million in warehouse inventory,
dependent on time of year, which far exceeded industry
benchmarks. Could the PLCB find a way to reduce its
inventory investment without lowering selection and
quality?
Client
Pennsylvania Liquor Control Board
Key services provided by Deloitte
• Overall Program Management
• Business Process Redesign
• Organizational Change Management
• System Integration of an Oracle based
solution that includes:
− Oracle Retail Merchandising System (RMS)
− Oracle Retail Demand Forecasting (RDF)
− Oracle EBS Financials (AP, AR, GL)
− Oracle Application Framework (OAF)
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description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to
attest clients under the rules and regulations of public accounting.
The Challenge: Free up working capital
The PLCB sought to reduce its warehouse working capital
cost by over 80% or $100 million by implementing a
vendor-managed inventory model. This model, termed
as bailment, is a legal arrangement that allows the PLCB
to maintain physical possession of the merchandise
owned by its liquor suppliers. This enormous shift would
fundamentally alter how the PLCB did business. In order
to successfully make this transition, the agency first needed
to address several challenges related to:
The customized solution ultimately brought 28 vendors
into one web-based portal that supports collaborative
planning based on shared forecasts and historic sales
information. 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.
Process
Bailment would require the PLCB to delay ownership of
merchandise until it became essential to replenish its
stores, even though in many instances it would have
physical possession of the merchandise in its warehouses.
To make this model work, 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, the
PLCB still needed to manage vendor behavior and ensure
efficient inventory management.
In devising and implementing the solution, the
engagement team:
Technology
The PLCB required a common medium to communicate
and work with its vendors who would be participating
in the bailment model. This meant that PLCB’s existing
Oracle-based integrated enterprise solution, including
merchandising and inventory management packages and
their inherent interfaces, would need to be customized.
• Implemented customizations in 15 interfaces, 12
extensions and 11 reports used within PLCB’s existing
technology infrastructure, which is built on Oracle
Applications, including Retail Merchandising System,
E-Business Suite, and Retail Invoice Matching
People
Training of PLCB personnel would be required so they
could support an operating model that allowed third-party
vendors to carry out procurement functions that were
previously handled in-house. The vendors too would need
help in learning the new system.
The Solution: Enable vendor-managed inventory
The opportunity to convert to a bailment model was
first identified during the agency’s initial Oracle ERP
implementation, for which Deloitte also served as the
implementation services provider. Through this model,
most wine and spirit suppliers would completely own
all of their products stocked within PLCB warehouses.
Bailment was viewed as one of the programs that would
be enabled by the Oracle ERP solution in order to reap the
primary benefits of reducing working capital and improving
vendor collaboration.
In order to enable the bailment model, Deloitte assisted
the PLCB in its efforts to design and implement a solution
that leveraged existing Oracle Retail and Oracle EBS
applications by modifying interfaces and extensions.
• Enabled a hybrid inventory management model that
allowed the PLCB to store vendor-owned merchandise
and PLCB-owned stock in the same physical warehouse
location
• Reengineered six business processes to incorporate
a 100% vendor-managed inventory model in three
distribution centers for goods supplied by 28 large
vendors
• Used Oracle Applications Framework (OAF) to develop
a web-based portal for vendors to access forecasts,
prior sales, inventory stock levels, advanced shipment
notices, invoices and reports, and also to submit
requests for returning vendor-owned merchandise
• Worked with the PLCB to develop training materials,
delivered 15 training sessions for PLCB employees and
developed web-based training materials using Oracle
User Productivity Kit (UPK)
• Helped the PLCB develop procedures for 28 vendors
to own the wine and spirits inventory in third-party
warehouses
• Assisted nine of the 28 vendors in purchasing back their
existing inventories in third-party warehouses
• Supported the PLCB in transitioning planning functions
such as forecasting, inventory management,
replenishment, and inbound transportation to the
respective vendors
• Established customized control mechanisms in the
form of penalties to enforce vendor performance and
accountability, which is defined through service-level
agreements for replenishing PLCB-owned liquor stores
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The result: Cheers to a better balance sheet!
The PLCB achieved over 100% of its target inventory
reduction earlier than planned, with an overall inventory
reduction of USD $100 million being realized only six
months after go live. This was accomplished by shifting
the point of purchase for products and by transferring
title of the inventory through the bailment model, which
was enabled by a customized Oracle-based system
that was designed specifically to meet PLCB’s business
requirements. Other benefits included reduced stock-outs
and enhanced supply-chain efficiencies through electronic
document exchange and the automation of processes
such as forecasting and planning, and purchase orders and
payables.
For more information, please contact:
Scott Rosenberger
Principal
Deloitte and Touche
+1 404 942 6535
srosenberger@deloitte.com
Tzarni Mangosong
Senior Manager
Deloitte & Touche
+1 610 657 9164
tmangosong@deloitte.com
In addition to devising an innovative technical solution,
the engagement team also supported the PLCB through
change management to help smoothly transition vendors
and internal PLCB personnel to the new system. 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.
This project is a great example of Collaborative Planning
and Forecasting Replenishment (CPFR) being used “live!”
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Copyright © 2012 Deloitte Development LLC. All rights reserved.
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