B2BPartnerships_2015CSCMP_092715_vff

B2B Partnerships in

Operations

Operations Partnership in the US

Wine Sector

2015 Global CSCMP Conference

San Diego

September 2015

Agenda

• Context & Approach

• Benefit Opportunities Identified

• Partnership Models Explored

• Key Success Factors / Learnings

• Q&A (10 mins.)

Based on the experience of a Global Leading Wine Brand Company (“company”)

Overview

•Business Overview: A global company whose key activities are grape growing and sourcing, wine production and packaging, and wine marketing and distribution

•Locations:Europe, Americas, Asia and Middle East and Africa

Locations

•Vineyards & Wineries: Over 100 vineyards and 20 wineries globally

•Planted Hectares: Over 10,000 hectares

•Regional Sales Offices: North America, Asia Pacific, Europe

Strategic Initiatives

•Realigning of the Company’s portfolio with an increasing focus on Luxury segments

• Investing in on-the-ground presence and sales and marketing capabilities across Emerging Markets

• Introducing new business models and potentially changing supporting infrastructure

• Increasing consumer marketing investment across priority brand/market combinations, funded by a reduction in overheads and costs

• Under-utilized winery assets

• High processing costs – Winery assets built for Luxury versus Value product processing

• Sub-scale relative to competition – scale gap between the company and its competitors is widening

• Declining sales – flat growth in Luxury and declining sales of Value brands

• Gap in product portfolio –company didn’t have solid brands in certain price segments

1. The company will be placed in a different competitive set requiring less scale enabled by –

– Outsourcing Value wine processing

– Better sourcing grape/bulk wine via the Partner

2. Acquisition of a complementary portfolio of brands will help –

– Make company assets fit-for-purpose – right type of product utilizing each of the assets optimally

– Round-out company’s portfolio across all Luxury price segments

Key challenge was a lack of scale to reduce winery manufacturing costs

Key Challenges......How Could Partnerships Address these Challenges?

Commercial Costs Above Industry Standard

Under-performing & Incomplete Product Portfolio

Company was looking to partner with a Wine Crushing & Packaging Services Provider to address these challenges

• Size potential synergies from a network partnership with a wine crushing/packaging services provider to obtain

– Cost synergies

– Growth synergies

• Flesh-out the key elements of a sustainable partnership model

– Governance of the partnership model

– Value sharing mechanism

– Asset ownership and valuation

• Develop a preliminary implementation plan to pursue synergies – timeline, milestones, resource requirements etc.

• Joint baseline of Partner and Company networks – wine-making plants, packaging plants, warehousing, freight moves

• Cost synergies – redistribution of product volume across joint asset base, joint procurement, overhead reduction

• Growth potential – ability to grow the wine-crushing service offering

• Investment requirements – capex requirements to capture benefits

• Partnership operating model – governance, benefit tracking, value sharing

• Identification or potential risks and necessary mitigation plans

Key Objectives Outputs of Effort

• Grow wine crushing and packaging services business by leveraging a consolidated and in turn larger and efficient infrastructure

• Provide a “full service” capability for Luxury and Value wines

• Partner’s winery operations cost structure will improve driven by scale benefits from managing company’s entire Value wine volume

• Company will be able to utilize free capacity at some of its plants to handle more Luxury volume from Partner and 3rd parties

• Partner has an opportunity to upgrade its commercial packaging infrastructure via the partnership and bringing additional Value wine volume

• Company will gain packaging efficiencies by making only Luxury products at its packaging plant or opening a new plant focused on Luxury or outsourcing packaging

• Company would be able to reduce its external storage costs by leveraging Partner’s warehousing footprint

• Company’s inter-facility freight costs will reduce due to efficiencies from consolidation of winery and warehousing locations

• Partner and company will be able to reduce cost of dry goods, freight, 3rd party storage and other services by leveraging combined capabilities and scale

• Partnership will allow pooling of IT resources and potentially overhead (packaging) to obtain cost savings

Joint benefit opportunities were identified in advance

Opportunity Area Benefit Levers

Growth

Winery Operations

Packaging Operations

Warehousing & Freight

Procurement & Overhead

• Align on criteria for a successful partnership

• Baseline network infrastructure for Company and partner(s) – wine operations, packaging, storage, freight

• Conduct interviews to validate opportunity hypotheses and validate baseline

A rapid 7-week assessment was conducted

Ac

tiv

itie

sO

utp

uts

Weeks 2-6 Week 7Week 1

• Conduct analyses to test cost synergies

– Consolidating packaging operations

– Combining winery operations

– Joint procurement of dry goods and freight

– Elimination of external storage

– Operations overhead reduction

• Evaluate growth opportunities, e.g. partnership provides wine crushing services to 3rd parties in Value wine segment

• Evaluate increase in operating costs and/or capital investments

• Estimate time series of cash flows – cost benefits, top-line growth and capex

• Identify business risks and mitigation plans

• Evaluate structure of partnership, e.g. –JV, M&A, “New Co”, Outsource / Co-pack arrangements

• Select the partner(s) and partnership structure for conducting a valuation exercise

• Conduct workshop to share sanitized findings with select Company and potential stakeholders

• Finalize financial business case

• Develop preliminary operating model for the partnership

– Terms for value sharing

– Ownership of assets

Baseline Joint

Network

Conduct Valuation of Partnership Options

Compare Partnership Structure Options

Finalize Synergies

& Preliminary

Operating Model

• Baseline of combined supply chain network

• Expected cost and growth synergies resulting from the potential partnership

• Required capex investments and expected increase in operating expenses

• Comparison of partnership options and recommended partner(s)

• Partnership risks and mitigation plan

• Final financial business case for the partnership

• Preliminary operating model for the partnership

Agenda





• Q&A (10 mins.)

1st Step: Strategize on the optimized joint operations infrastructure

Facility Today

...

Tomorrow

Winery

Winery 1 Company Wineries

• Produces Luxury and Value wines from crush to finished wine

• Also finishes & stores bulk wine from other sources

• Will be emptied and operated at bare-minimum level to allow for expansion of Luxury programs

Winery 2• Will be the consolidated point of bulk

wine storage still in network

Winery 3 • Becomes a focused Luxury winery

Winery 4• Potential Partner Winery: Value

wines winery• Will grow to handle incremental Value

wine crush volume for both companies

Pkging

Plant 1• Company Plant: 4 lines and running

an average of 4-5 days/ week• Close plant in 2-3 year timeframe

Plant 2• Potential Partner Plant: 2 lines and

running 5 days/week• Grow plant to handle most of the Value

wine volume

Plant 3 • Does not yet exist • New plant to bottle Luxury volume

Whsing

DC 1 • Current Company Warehouse • Will cease to exist

DC 2 • Current Potential Partner Warehouse• Use to store all finished goods (Company

& Potential Partner)

• Volume Shift

• ExternalStorage

• Buy Grapes v.Bulk

• Fully UtilizedEquipment

• OperationalImprovements

• Reduced Inter-Facility Shpmnts

• Buy Grapes vs.Bulk

• Improved Rates

• Location-basedPricing

• Efficient StorageUtilization

• Best-Price • Lean IT

2nd Step: Quantify “Steady State” benefits for the joint operations infrastructure

TotalIT & Shared Services

PackagingWinery Operations

Warehousing ProcurementTransportation

Annualized & Steady State Opex Benefits(% of Total Opex Benefits Identified)

100%4%10%

8%8%

15%

55%

WO1

WO2

WO3

P1

P2

T1

T2

T2

WH1

WH2

Pr1 IT1

3rd Step: Select a realistic future growth scenario

How will volume growth over time?

High Growth

Medium Growth

Declining Growth

Se

lec

ted

Organic growth scenarios

2524232221201918171615

2524232221201918171615

1716 241918 232220 252115

Organic Growth Current volume

4th Step: Arrive on implementation speed across combined networks

How quickly can we transition volume from Company to Partner’s facilities?

Scenario 1

Fast transition

Scenario 2

Medium transition

Scenario 3

Slow transition

• All Value wine volume of Company transferred by ‘18



Se

lec

ted

Speed of implementation scenarios

MG

al

2524232221201918171615

MG

al

2524232221201918171615

252322 24

MG

al

21201918171615

Company Potential Partner

5th Step: Estimate net cash flows for a 10-year horizon

Net Savings

20252021 2022 2023 2024202020192018201720162015

Savings NPV

Win/Pkg/Whsnet OpEx DCF

Net CapEx DCF

Procurement/IT OpEx DCF

Partnership – Financial Value Creation(in $M)

Agenda





• Q&A (10 mins.)

• Which Partner and Company business functions will be executed under partnership (e.g. winery, packaging etc.) versus which ones will remain separate (e.g. sales, marketing, corporate overhead)

• How will Company and Partner fund the capex requirements for forming the partnership (e.g. new bottling lines, building warehouse etc.)

• How will the assets be owned between the Company and Partner?

• How will Partner continue to make it’s current margin levels on its production volume which will now be allocated to the partnership?

• How will the value generated be shared between the Company and Partner?

• What with be the governing body that will run the partnership?• What representation will Partner and Company have in the management

structure of the partnership if any?

• How soon can Partner and Company arrive on an agreement to start the formation of the partnership?

• How long will take for partnership to reach its steady state?

Company laid out key questions which would drive the partnership model with its potential partner

What Business Functions Will Reside Under Partnership?

What will be the Source of Funds for Capex?

Who will Own Partnership’s Assets?

How will Value Generated by Partnership be Shared?

What will be Partnership’s Management Structure?

How Quickly can Partnership Start and Ramp-up?

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2

3

4

5

6

Key strategic benefits for both Company and its potential Partner resulting from the partnership were identified

Benefits for Company and its Potential Partner

• Improve utilization of winery assets by

partnership growth

• Maintain access to luxury winery network and gain access to value wine sourcing and

processing

• Rationalize and spread out IT and overhead

burden

• Deleverage balance sheet by reducing owned assets

• Capture fixed cost leverage on existing

asset base – winery, packaging equipment, warehouse

• Gain access to packaging expertise and

procurement scale

• Gain access to luxury wine market

• Opportunity to develop an end-to-end operation and vertically integrate in the wine industry

Company Benefits Benefits for Potential Partner

Both parties discussed which business functions will be included in partnership

Business FunctionWhere Functions Reside in Future

Company Covered under Partnership Potential Partner

Corporate Overhead (shared services (SS) model)

Sales & Marketing

IT

Procurement Grapes

Dry Goods (shared services (SS) model)

Winery Distilled Spirits

Luxury Wine

Value Wine

Packaging Distilled Spirits

Luxury Wine

Value Wine

Freight Inbound (Domestic)

Inbound (Imports)

Outbound (to Distributors) (Company to subcontract)

Warehousing Operations

Other?

Company considered several cost-plus models for the partnership

Firm Fixed Price (FFP)

Cost Plus % of Cost (CPPOC)

Cost Plus Award Fee (CPAF)

Cost Plus Incentive Fee (CPIF)

Fixed Price Incentive Fee (FPIF)

A variant of this was finally proposed to the partner

Cost-plus Contract Type Highlights of Contractual Terms

• Traditional fixed-price contract – Buyer pays a fixed fee to cover service provider’s costs and fee. Contract bears all cost and profit risk/benefit

• Buyer pays service provider’s all costs and a pre-determined fee (marked up based on costs)

• Little incentive for service provider to keep costs down

• Buyer pays service provider’s costs

• Service provider’s fee is variable: contract will dictate percentage of fee at risk

– CP Award Fee – Earned fee is determined by score on subjective criteria

– CP Incentive Fee – Earned fee is determined by an incentive formula. Ceiling Price may limit costs paid by buyer

• Buyer pays a service provider’s cost up to a predetermined limit

– Cost overruns – costs divided based on predetermined ratio up to a predetermined amount

– Cost under-runs – a predetermined ratio of under-run becomes the service provider’s profit

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5

Agenda



• “Partnership Models Explored


• Q&A (10 mins.)

Success factors vary depending on where you are in the Collaboration journey

Design of Collaboration Initiatives

Governance, Value Sharing, & Execution

Diagnosis and Prioritization of Opportunities

• Strategic Partners, Transactional Mind-set

• Asymmetry of Objectives

• Contract Parameters

• Status Quo Bias

• Internal Challenges

• Define Success Upfront

• Marriage of “Equals”

• Think “Virtually Vertical”

• Net Win

• Value Sharing

• Test, Pilot, Rollout

• Focused Resources

• Clear Accountability

• Adherence to Milestones

• ‘Aggressive’ Mindset

• Timely Reporting of Metrics

• Coordination Across Workstreams

• Test, Pilot, Rollout

Focus for Company in this Example

Collaboration Value Chain

B CA

• Find opportunities to signal change – build trust early

• Execute on a portfolio of opportunities, not on single issues

• Align incentives to drive common goals

• Test good ideas – Do not be bound by contract parameters

• Signal long-term commitment to address long term opportunities

• Intermediate goals and leading indicators, not only the number

• Recognize there are additional benefits beyond the horizon

• Pursue internal challenges in parallel with collaboration efforts

Diagnosis and Prioritization of Opportunities

Embrace

Interdependency

Program Focus, Common Goals

Visualize the Potential

Parallel Processing

Adopt a“Test & Learn” Mindset

Strategic Partners, Transactional Mind-set

Asymmetry of Objectives

Contract Parameters

Status Quo Bias

Internal Challenges

Typical Challenges Key Success Factors

Thank You! – Please Don’t Hesitate to Contact Us

Arun KocharA.T. Kearney – [email protected]

Sean MonahanA.T. Kearney – [email protected]

Documents

B2BPartnerships_2015CSCMP_092715_vff