Heineken USA: Reengineering Distribution with Hops

Heineken USA: Reengineering Distribution with HOPS

Gyeung-min Kim and John Price

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. c n I p Heineken USA: u o r G a e Reengineering Distribution d I t h g i r y with HOPS p o C Gyeung-min Kim Ewha Womans University, Korea

. c n I p u o r G a e EXECUTIVE SUMMARY d I t h g i r . y c p n I p Co u o r G a e d I t h g i r y p o C John Price Portland State University, USA

To facilitate the parent company’s push to gain market share, Heineken USA needed to be more responsive to market demand fluctuation. Because of the long lead-time between order and delivery, they found that responding to marketplace changes in a timely fashion was becoming increasingly difficult. In the meantime, major competitors such as Anheuser Busch were responding to consumer demands for fresher products by providing freshness label dating. Heineken USA launched its new Internet based system called Heineken Operational Planning System (HOPS) to allow the parent company to produce the beer closer to the time when they need to deliver it, so the customer receives a fresher product. The new system enables Heineken USA to achieve 50% reduction in the lead-time from order to delivery and 10% increase in sales.

BACKGROUND1 The brewery that would later become Heineken N. V. was founded in 1592 in Amsterdam, The Netherlands. Gerard Adriaan Heineken produced the first beer under the Heineken brand name in 1863. The company grew steadily and in 1931 they embarked upon their first international operation, a joint venture with Malaysian Breweries Limited in Singapore. That year also saw the first Heineken exported to the United States. Heineken N. V. is currently the world’s second largest brewer, trailing only U.S. based Anheuser-Busch. The company has ownership interests in more than 110 breweries and its product is available in over 170 countries worldwide. The European market, where Heineken is the leading brand, accounts for more than two-thirds of total sales. Heineken was the leading imported beer in the United States until 1998 when it lost that status to Grupo Modelo’s Corona.

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Heineken USA 89

Heineken USA began operations in January 1995 as a subsidiary of Heineken N.V. In the past, Heineken was imported to the United States through private distributors under licensing agreement. When Heineken introduced its beer to the American market, there were no more than 30 import brands present. However, by the eighties, this number has increased to more than 300. Fierce competition from the imported segment contributed to the decline in Heineken sales. Heineken N. V. bought back the distribution rights and established a wholly owned subsidiary in White Plains, N.Y. With the establishment of the subsidiary, the parent company was planning a new market push in the United States (Roberts, 1999). New York headquarters houses executive administration, finance, operations, sales and marketing personnel, and the data center. The data center is responsible for running the dayto-day operations of the U.S. business. Heineken USA has offices in Los Angeles and Atlanta as well. Since brand’s European heritage is of essential importance when it comes to the positioning of the Heineken brand in the U.S, all U.S. Heineken beers are brewed and bottled in The Netherlands and shipped via sea to various demand points in the U.S. When distributors place orders, the shipment leaves the closest demand point and is quickly trucked to the distributor. Distributors then deliver the beer to its final destination at restaurants, bars and stores2 (see Exhibit 1 for Beer Supply Chain).

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SETTING THE STAGE

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In every supply chain, demand forecasting drives other supply chain decisions such as inventory, production scheduling, and material requirements. Demand is forecasted based on order history of the immediate customers in the supply chain. When downstream member places an order, the upstream member processes that information as a signal about future product demand. Thereby the upstream member readjusts its demand forecasts and place orders to its supplier (Lee et al., 1997a; 1997b). As planning time (i.e., time taken for initial forecast and forecast adjustment) lengthens, sales forecast that guide the order no longer reflects current market condition (Stalk, 1988). The consequence of not being able to reflect market condition could be either excessive inventory or poor customer service due to unavailable products. Collecting demand data in the most effective and economical method possible and sharing that information with supply chain partners are critical for supply chain management (Smith & Wintermyer, 2000). Long lead-time from order to delivery prohibits companies from being flexible and adapting quickly to market demand fluctuation. Innovative companies in different industries improve their supply chain performance by reducing the lead-time from order to delivery. As businesses recognize the importance of the supply chain performance, the focus on business process reengineering is extended to the inter-business process reengineering (IBPR). Also called as business network redesign (Venkatraman, 1994), IBPR represents the redesign of the nature of exchange among supply chain partners through effective deployment of IT capabilities. As recently as 1996, distributors and sales representatives from Heineken USA would meet together to plan out orders three months ahead of delivery. It was a daunting task for them to predict the factors that would affect the product sales such as weather, special promotions, and local demand fluctuations in advance. This time consuming effort took up to three days per month to accomplish. Once an order was agreed upon, the district sales managers would fax the orders to Heineken USA headquarters, which in turn would send them to the brewery in Netherlands. Lead-time from order to delivery averaged 10 to 12 weeks

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90 Kim & Price

(Weston, 1997), which is unacceptable for a company looking to become more flexible and adapt more quickly to market demand fluctuations (see Exhibit 2 for Old Distribution Process).

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CASE DESCRIPTION

The Push for a New Business Model

To facilitate the parent company’s move to increase market share in the United States, Management at Heineken USA knew they had to develop a new way of doing business. They needed to find a way to reduce the lead-time between order and delivery to their distributors. The current process was very labor intensive and involved almost no central planning. Orders would arrive at all different times, which made it difficult to coordinate brewery production, raw materials purchase, shipment and delivery, especially when the production facility was located 3,500 miles away. With the new marketing push, better data on product consumption and more sophisticated data analysis would be required. As it stood, a heat wave could deplete a distributors stock before a replacement order could arrive. Alternately, new local competition such as microbreweries, which in certain parts of the country were increasing at a very rapid pace, could slow demand, leaving distributors with excess product on their hands. In short, Heineken USA needed a system that would allow them to forecast, process and deliver orders much quicker than they currently were capable of. And, because of Heineken’s relatively small market share in the U.S., it had to be inexpensive for the distributors. Management at Heineken USA soon realized that the Internet would be the key to the solution.

. c n I p u o r G a e d I tNew E-Business Model h g i r . y c p n I p Co u o r G a e d I t h g i r y p o C The goal of Heineken USA’s new business model was to reduce the time between when a distributor places an order and when it is delivered. A quicker, more efficient way to communicate with distributors and improve planning within Heineken USA was needed. Because of the long lead-time between order and delivery, they found that responding to marketplace changes in a timely fashion was becoming increasingly difficult. Reducing inventory levels, eliminating shortages and putting a fresher product on the store shelves and in the bars were the priorities for newly formed Heineken USA. Major competitors such as Anheuser Busch were responding to consumer demands for fresher products by providing freshness label dating. Heineken USA launched its new Internet based system to allow the parent company to produce the beer closer to the time when they need to deliver it, so the customer receives a fresher product. The company viewed its decision as a means of strategically changing the nature of the processes between themselves and their trading partners. Heineken USA turned to new technology as the core component of its new business model. An Internet based ordering, planning, and forecasting system dubbed HOPS (Heineken Operational Planning System) was installed in late 1996. By the end of 1998, all 450 Heineken distributors were on line. HOPS generates order and replenishment recommendations for individual Heineken distributors based on criteria such as past sales performance, seasonal trends and geography. With this system, Heineken distributors access on a monthly basis the HOPS Web site using a standard browser and Internet connection. Once they enter their ID and password, they can review their sales forecast, modify their order if desired, and submit their order by pressing a button. The approved forecast is processed by the

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Heineken USA 91

Replenishment Planning module and calculates the distributors’ inventory needs. A demand forecast can be created for the individual distributor on that distributor’s personalized Web site. When a distributor has finalized an order, the system creates an electronic purchase order. The software captures the order and makes the information immediately available to Heineken officials for analysis. And Heineken officials can use the software package to plan brewing and delivery schedules. Order submissions are available in real time at the Heineken brewery in Europe, which can, in turn, adjust its brewing and shipment schedules. The distributors can use the browsers to track their beer orders from a Web site at Heineken headquarters. In addition, the HOPS system can notify distributors of promotional events, new products or production bottlenecks.

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HOPS, Heineken USA’s Web based extranet system was developed by American Software Inc. Logility Inc., spun off by American Software in January 1997, now markets the software. Heineken USA did not have any EDI links in place when it began looking for technology to support its new e-business model. Heineken found that existing EDI technology just was not interactive enough to do what they wanted to do. Besides, when Heineken USA began operations, they found that the private company from which they had reacquired their US importing rights had few computer resources. Thus, asking distributors to install expensive EDI technology was not an option. Heineken, a company that at the time had only a 2% share of the U.S. beer market, simply did not have the leverage to require distributors to do so. Most of the distributors work mainly with the major domestic brewers, not Heineken. As a result, Heineken USA instead decided to develop a Web-based system built around supply-chain planning software. HOPS was the first example of a new kind of software called Collaborative Planning, Forecasting and Replenishment (CPFR) (Carlos, 1997). This type of software allows business partners share sales data and forecast information. The software also employs an optional Internet component called Resource Chain Voyager, which enables Heineken to deliver customized forecasting data to distributors through individual Web pages. A key feature of this program is that distributors need only Netscape Navigator to access the program. Heineken need not provide its distributors with proprietary software, equipment, or support, and it does not incur the high communications cost of a direct line from the distributor to Heineken. Voyager also provides a calendar so Heineken can notify distributors of events. E-mail can also be utilized to send out notices of problems, new products, or newsletters. HOPS uses an Oracle7 database, Secure Sockets Layer 2.0, runs on Windows NT or Unix, and supports all Windows applications.

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Since HOPS was introduced, lead-time on order delivery has been cut from 10 to 12 weeks to an average of four to six weeks (see Exhibit 3 for New Distribution Process). Inventory has been reduced from 45 to 30 days and sales have soared over the years, with more than 60 million cases shipped to the U.S. per year (see Exhibit 4 for Benefits from HOPS). Due to its accelerated growth, Heineken needed to expand its New York headquarters facility. The expansion would include physical facility as well as network cabling infrastructure to accommodate the future growth of the company. An improved relation with distributors has also been a major benefit realized by Heineken. The new order process also allows Heineken to eliminate the district management

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92 Kim & Price

duties of its sales staff. Staff will spend less time on ordering issues and more time working with distributors to sell beer. The sales force is actually increased without hiring an additional person. Human error in order taking has also been eliminated as orders are now received electronically instead of via telephone or fax. As a result, three data entry positions have been eliminated. Another benefit to the system is better inventory utilization. The collaborative process is self-regulating—giving Heineken USA management better information about sensitive changes in the market. This enables Heineken to achieve more accurate planning throughout the entire material flow process. HOPS is a unique supply chain planning system because it allows faster and easier collaboration by leveraging the Internet as a communications medium. Aside from the elimination of three data entry positions mentioned previously, Heineken USA’s new business model appears to have had very little impact on the number of employees. The new model will allow employees to learn about new technology and encourage them to think creatively about new ways to do business. Heineken’s new business model is not only a technological challenge but also a challenge of finding an innovative way to do business. New technologies require new organizational approaches, and have a large and durable impact on the strategies of the organization. Gross sales for 1998 topped US$ 7.3 billion,. Net income figures were even more impressive at US$ 522 million, a 39% increase from 1997. Heineken’s total revenues for fiscal year 1998 were over US$7.3 billion, a 10.4% increase from 1997. Total net income was $522.2 million with a net profit margin (see Exhibit 5 for Net Profit of Heineken from 1997 to 2000). For its part, Heineken USA has seen sales increase by 10% since the introduction of HOPS. The CPFR suite on which HOPS is based was priced at approximately $400,000 from American Software Inc. in 1996. Resource Chain Voyager, the Internet component of the Supply Chain Planning suite was priced at $50,000 for an unlimited number of Internet users. While the total cost of the HOPS is unknown, it paid for itself three or four time over in the first two years of operation according to Thomas Bongiovanni, Heineken USA’s Director of Operations Planning. This Web-based system provides an easy and cost-saving way to link suppliers and customers. Even non-experienced personnel can operate the system very easily. One of the most important advantages is that HOPS easily integrates into the distributors existing business operation. The only equipment required is a PC and access to a Web browser. From the perspective of the distributor, this system creates a synchronous conversation where the customers and their suppliers are looking at the same data at the same time. Distributors as well as Heineken benefit from the reduction in procurement costs, smaller inventory, and shorter cycle times. Distributors now are less anxious about running low on inventory during a heat wave or having excess inventory due to the opening of a new local microbrewery. Order planning time has been cut from three days per month to 45 minutes. Distributors are also able to track their orders via their web page and get a much more accurate forecast of their order’s arrival date. HOPS proved to be an innovative, industry-changing solution that has other beverage distributors scrambling to catch up. In fact, Heineken USA was chosen as the 1999 winner of the Voluntary Interindustry Commerce Standards (VICS) Best in Logistics Award. Retail Systems Alert Group, a leading provider of business intelligence for the retail, e-commerce, and supply-chain industries, organizes the VICS awards.

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Heineken USA 93

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION All communications between Heineken USA and its distributors via HOPS are encrypted with Secure Sockets Layer 2.0 software (Carlos, 1997). Distributors access to the WebSite Professional Web server is controlled by a password that is issued by Heineken USA. However, security is a major concern both for Heineken USA and its distributors. Concerns about confidentiality are a hindrance to both business-to-business and business to consumer Internet commerce. Heineken USA further enhances efficiencies in its distribution process by using Remote Location Filing Program. Heineken USA imports its product from the Netherlands and delivers the beer to approximately 425 distributors across the U.S. Getting the product through Customs at the port of entry was a process that Heineken needed to streamline in keeping with the introduction and success of HOPS. The Remote Location Filing Program allows import customs entries to be filed electronically from a single location. In the case of Heineken, beer is imported through 11 ports. Customs paperwork is sent electronically to BDP International, which files the entries electronically with the appropriate customs authorities using the Remote Filing Location Program. BDP International from Philadelphia handles approximately 75% of the company’s customs entries. Heineken has realized several benefits from this system. The average time to process a paperless customs entry is only one to two hours. Through the first half of 1999 an average of 666 entries per month were processed. The Remote Location Filing Program creates uniform filing in each port of entry, enhancing the streamlining effect of the process. This can have serious implications when a single violation can cost $10,000. In addition, distributors are kept better informed about the status of their order. Use of the Remote Location Filing Program has helped to enable Heineken to reduce the number of ocean carriers used from fourteen to four and the number of customs brokers from 50 to two. Today, Heineken USA faces greater challenges than ever. Its web-based supply chain edge is gradually eroding, as their competitors easily adopt the relatively inexpensive web solution. Heineken USA is looking to further enhance efficiencies in its distribution network. The company has recently signed an agreement with Miller Brewing Company through which Miller will act as a consultant to Heineken on distribution capabilities, data analysis, and logistics. Currently, 60% of Heineken’s product in the U.S. is distributed through Miller, although there is no agreement among the two that Heineken must use Miller distributors. There is a growing appreciation of quality over quantity, bringing an increase in expenditure on premium products that include Heineken. This is evidenced by the fact that slow growth in per capita consumption is outweighed by the continual rise in per capita expenditure (see Exhibit 6 and Exhibit 7). However, challenges for the future include regaining and retaining the position of number one imported beer in the U.S., which it recently lost to Grupo Modelo.

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c. n I p u o r G a e d I t h g i r y p o C ENDNOTES 1

2

Some parts of this section have been adapted from company history section at www.heineken.com. This section has been adapted from collaborative commerce success stories at www.logility.com.

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94 Kim & Price 3 4

Source: WWW.Heineken.com Source: WWW. Euromonitor.com

REFERENCES

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Carlos, J. (1997). Heineken’s HOPS Software keeps a-head on inventory. PC Week, 14 (2). Lee, H., Padmanabhan, V., & Whang, S. (1997a, Spring). The Bullwhip Effect in Supply Chains. Sloan Management Review, 93-102. Lee, H., Padmanabhan, V., & Whang, S. (1997b, April). Information Distortion in a Supply Chain: The Bullwhip Effect. Management Science, 43(4), 546-558. Roberts, B. (1999). A Better Tap for Importing Beer. Internet World, December 1. Smith, M. & Wintermyer, P. (2000). Distribution Supply Chain Management. Connector Specifier, May 24, available form http://www.csmag.com. Stalk, G. (1988, July/August). Time—The Next Source of Competitive Advantage. Harvard Business Review, 41-51. Venkatraman, N. (1994, Winter). IT-Enabled Business Transformation: From Automation to Business Scope Redefinition. Sloan Management Review, 73-87. Weston, R. (1997). Heineken Taps Online Ordering. Computerworld, 31(9), 69-73.

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Gyeung-min Kim is currently an assistant professor of Management Information Systems at Ewha Womans University in Seoul, Korea. She received her MS and PhD degrees from Texas Tech University. She earned her BS degree from Ewha Womans University in Korea. Her research interests include IT-enabled process innovation and Business Process Outsourcing. Her publications have appeared in the Journal of Organizational Computing and Electronic Commerce, Journal of Systems and Software Journal of End-user Computing, and Cycle Time Research among others. John Price received MSdegree in International Management from Portland State University. He earned his BA in Business Administration and Spanish from Southern Oregon State University.

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APPENDIX Exhibit 1. Beer Supply Chain

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Suppliers

D istributors

(H eineken N.V.)

(H eineken U .S.A)

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Individual C ustom ers D istributors

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Exhibit 2. Old Distribution Process Beer

Beer

H eineken USA H eadquarters

H eineken N.V.

Beer H eineken USA D istrict Sales O ffice

D istributors

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Order

Order

Order

10 to 12 Weeks

Exhibit 3. New Distribution Process Beer

Beer

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H eineken N.V.

D istributors

Collaborative

Order

Order

4 to 6 Weeks

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96 Kim & Price

Exhibit 4. Benefits from HOPS

Benefits

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Benefits to Supplier (Heineken U.S.A.)

Lead Time Reduction Inventory Reduction Sales Increase Error Reduction in Order Taking Relationship Improvement Organizational Learning

Benefits to Customer (Distributors)

Procurement Cost Reduction Inventory Reduction Order Planning Time Reduction Better Track on Orders

. c n I p u o r G a e d I t h g i r . y c p n I p Co u o r G a e d I t h g i r y p o C Exhibit 5. Net Profit of Heineken 1997-20003

N et P rofit

in millions of

700 600 500 400 300 200 100

0 1997

1998

1999

2000

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Exhibit 6. Per Capita Expenditure on Beer 1995-20004

P er C apita C onsum ption of B eer

Y ear

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00

20

99

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19

98 19

97 19

19

19

96

N orth Am erica

95

US$ per capi

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Exhibit 7. Per Capita Consumption of Beer 1995-20004 N orth Am erica

Litres per ca

86 85 84 83 82 81

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80 1995 1996 1997 1998 1999 2000 Y ear

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