Chapter 14, Problem 2.4ASC

Supply and Demand in the Spirits Industry

A beverage retailer in the spirits industry often sells products from around the world, each with its own unique supply chain. Beverages for mass consumption (beers and most wines) have a limited shelf life; fine wines and spirits have an extended life but, at a $100 to $3000 per bottle, can tie up needed cash in inventory. Stocking the latest trendy or seasonal beverage can be difficult because of lengthy lead times and the sheer number of SKUs (stock keeping units) available (see photo). A shipment of wine from Argentina, for example, takes an average of 60 days to arrive stateside. Craft beers may be produced in limited quantities and are marketed for specific seasons, so a single order placed a year in advance may be the only opportunity to guarantee supply.

Weight is another problem in the spirits supply chain. A typical 20-foot shipping container packed with bottled product will hit weight restrictions long before reaching FTL (full truck load) by volume. And different countries have different weight restrictions. Several solutions have been proposed. One is transporting mixed loads by partnering with a company whose product follows a similar geographic path but is lightweight. Another is transporting the product in bulk for the longest portion of the trip and bottling it nearer to major markets. Flexible plastic containers (called KN blue tanks) designed to fill a twenty-foot shipping container are more commonly used by producers in Australia and South America. Multiple bottling facilities, however, can add cost, and errors in estimating demand can mean a product needs to be transported further than anticipated to find a receptive market. Finally, the finished product itself can be sold in bags, boxes, or pouches instead of bottles. Astro pouches with colorful designs have become quite popular for some types of alcoholic beverages.

Climate controlled transport is expensive, too, especially for ocean routes; so much so that shippers of wine and beer to northern markets may travel to less accessible warm weather ports and then use heated trucks for transport to final destinations in colder climes. Some companies only ship product during the more temperate months of the year, further restricting supply.

Fine wines present their own special problems. Most wines travel from vineyard to producer to distributor to retailer within a year. However, fine wines may not be ready to drink for 10 years and may have a shelf life of 50 years. Ownership can change many times from production to consumption, and inventory must be carefully stored. Transporting these wines often or over long distances can damage them and expose the owner to fraud and theft. A pallet of Chateau Lafite-Rothschild Bordeaux, for example, may be valued at half a million dollars. So a new industry has emerged that keeps fine wines in climate controlled storage and transfers ownership (in a database), instead of product, when sales are made.

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We often don’t think of transportation as being a major cost of production. Is it appropriate to include the cost of logistics in the retail price of an item? How would you do that? Give an example.