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Essay: Diageo’s operations management of their alcoholic beverages

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  • Subject area(s): Management essays
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  • Published: September 15, 2019*
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  • Diageo’s operations management of their alcoholic beverages
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This report provides an analysis and evaluation into Diageo’s operations management of their alcoholic beverages. The report investigates Diageo’s supply chain and how they can keep costs to a minimum, whilst remaining a strong competitor. Also reported is their commitment to sustainability and how that affects their raw materials operations. This social and ethical concern reflects well on their brand image which creates a loyal customer base and consequently high demand for Diageo’s product range. I have found that Diageo streamlines production yet encourage an entrepreneurial atmosphere which enables them to forecast market conditions and adapt to demand changes. I have also discovered that Diageo heavily incorporates philanthropy and responsibility into their operations. Conclusively Diageo is in a positive position with very little improvement recommendations.

Operations is an abundantly studied area of business and are key to the deliverance of products and services. Organizations require operations functions, although sometimes named differently such as ‘operations’ as all of them will deliver some type of product or service. Operations management encompasses many different responsibilities found in the numerous functions of a business, such as the marketing function, information system and product and service development function (Nigel Slack, 2011). In this essay, I will be exploring and evaluating the operations management of the multinational beverage company Diageo, a parent company to over 200 brands including Smirnoff, Cîroc, Baileys and Guinness (Diageo, 2019).

Diageo has a market- based business model that according to Bartlett and Ghoshal is transnational (Riley, n.d.). Diageo is in this position as they apply country-specific strategies but have a need for shared information and processes (Diageo, 2017). In addition to this, globalization has created a need for increased cost-based competition. Diageo keeps costs down by sharing efficiency information and outsourcing some of its operations, such as its IT systems in order to improve its supply chain operations (Angalich, 2013). This new system will allow them to cut costs across the supply chain as it will increase stock visibility globally. Due to even small-to-medium sized organizations trading internationally and even globally, it has created pressures for higher quality expectations and a wider variety of products and services. Diageo has strict quality assurance procedures to ensure a standard is met across all its products in over 180 countries (Diageo, 2014). It is crucial for an organization to produce quality products and services as this will create a loyal consumer base and ultimately customers are willing to pay more for quality. Diageo has a very large product portfolio, so it is important for them to delegate responsibility for quality to everyone as this will ensure that a certain quality standard is met, even with the products that they label as ‘value’ products (Diageo, 2019).
Diageo’s mission is to ‘create one of the best performing, most trusted and respected consumer products companies in the world’ (Diageo, 2017) and this begins with the input-transformation-output process. There are several elements that undergo a transformation process with

Diageo’s products. Those that are transformed are the alcoholic beverages and the customers; transforming them are the facilities such as the machines used to process the alcohol and the employees from around the world that farm the raw materials. The customers are transformed as usually alcohol is associated with social occasions and can relate to changing your psychological state. Diageo promotes their product as both a mix of products and services as alcohol can be both entities. Diageo promotes social drinking events such as their new Scotch whiskey tasting experience, therefore the consumer is both transformed by the product and the experience of trying the product, for example at a cocktail bar (Diageo, 2018).

In terms of the product, Diageo’s beverages go through numerous processes in order to become a finished good. Firstly, the raw materials are sustainably sourced from over 100 countries across 28,000 suppliers (Diageo, 2016). These primary materials, such as barley, maize, agave, sugar and aniseed are all harvested and used to create most products that Diageo manufactures. For example, Cîroc is made from grapes. The grapes are fermented, distilled and adapted, such as filtering the vodka through charcoal to remove impurities and refine the taste. Throughout this process, we can analyse Diageo in terms of volume, variety, variation and the degree of visibility (Nigel Slack, 2011).
The United States operations alone make, handle and ship over 90 million cases of alcohol a year (Putre, 2015). The volume is extremely high as it caters for high consumer demand. The tasks within the production line will be repetitive, specialized and require synchronization. Although, there are a vast number of different supply chains, with the president of the company stating that at one location, one person will be consistently working on a line of $20 Captain Morgan’s rum, and across the room will be a production line working on entrepreneurial ventures in order to prepare for future changes (Putre, 2015). By standardizing the equipment, it means that Diageo is able to be more flexible, such as being able to change production quickly in order to fulfil consumer demand, if there is excess capacity. Ultimately, through creating systemized production lines with standardized equipment and staff that are specialized it drives down unit costs and contributes towards Diageo’s profits – their operating profits were recorded at £3,559 in 2017 (Diageo, 2017).

In terms of variety, Diageo has a very large product portfolio across spirits and beers. They provide these products and services across the world and they are able to do this as they have standardized their equipment and streamlined production which enables them to be able to move their production closer to where their product is manufactured. There were over 150 new innovations in 2015 which helped the process design in their warehouses (Putre, 2015). The flexibility of being able to move products from plant to plant and switch production of different products at the same plant enables Diageo to meet consumer demand and keep costs down.

Reports show that there isn’t a large variation in seasonal demand for Diageo’s products, although there are new seasonal products such as Spiced Pumpkin Baileys, there is a stable supply chain which is predictable, and Diageo is able to utilize their production spaces (Menenez, n.d.). Finally, Diageo seems to have a mixed high and low visibility process. This is due to a section of their business model being to provide a alcohol making/serving experience. For example, their whiskey tasting facilities, where the consumer can see part of the process of making the whiskey, however, the customers do not see initial processes such as fermenting the raw materials. Nevertheless, their main operations consist of low visibility of processes as they harvest, manufacture and then sell their products to wholesalers and retailers without the customer seeing these processes. Diageo is also a web-based retailer, which means, conversely to staff at the whiskey tasting experience locations, that they will need a few customer contact skills, and will there will be high utilization. Whereas customers in Diageo’s shops or tasting facilities can ask for a product and expect it in minutes, there is a delay in the customer receiving the product when ordering online as it needs to be made, packaged and delivered.

Diageo has covered many bases as they offer both a wide variety of products to appeal to a large consumer base across different markets. They also offer services such as alcoholic tasting experiences and an opportunity to see how some of their products are made (Diageo, 2018). This has the potential of making customers trust the brand as they can see the different stages of production. Diageo is also a web-based organization which means that the vast majority have access to their products. Moreover, the high volume, low variety, and majorly low customer contact means that Diageo can keep manufacturing costs down which enables them to invest in sustainable resources and innovative processes in order to remain a global leader in beverage alcohol.

According to Hayes and Wheelwright’s four stages of operations contribution, it seems that Diageo is at stage 4 of their model; internally supportive (Nigel Slack, 2011, pp. 27-29). Diageo is striving to be the best and has set out clear strategies in order to remain the most competitive. For example, a broad mission is to create value for customers and shareholder whilst remaining socially and environmentally responsible. Diageo’s spent 1.88 million in marketing in 2018 in order to identify customer trends and deliver products and services quickly and accurately, recently Diageo have predicted an increase in the use of virtual reality for social occasions and have innovated an app for you to blend their whiskey on a tablet (Statista, 2018) (Diageo, 2018). Diageo also has a large product portfolio which enables flexibility in selecting what products to invest in, in order to exploit growth opportunities in existing or emerging markets. Their operations also extend to help services, such as alcohol misuse programs of which there are around 298 (Diageo, 2017, p. 44). In addition to marketing and innovation, it is evident how much Diageo value its earlier operations processes. Diageo is dedicated to creating sustainable resources across the 6 continents it relies on. Targets include expanding sustainable resources to the entirety of its raw materials and going beyond compliance to make sure that human rights are met. Diageo uses three pillars: sustainable economic growth, thriving communities and reducing their environmental impact in order to acquire a sustainable source of raw materials (Diageo, 2016, p. 7). It seems that Diageo is dedicated to looking forward to the future and values its operations greatly. Diageo is proactive about creating a sustainable future and innovates across the supply chain in order to meet potential future market conditions.

Moreover, Diageo is competitive in terms of the five basic performance indicators: Quality, speed, dependability, flexibility and cost. The quality of their product begins where it is harvested as Diageo is dedicated to sustainable resources and facilitating local communities. Due to the investment in emergent economies such as Africa and Asia and the close work with over 200,000 suppliers, it means that Diageo can build better ecosystems, therefore lower variations in crop yield and a reduction in fluctuation of product price, moreover creating dependability (Diageo, 2016, p. 10). The standardization of equipment in different plants across the world means that Diageo can be flexible with production and adapt to consumer demand quickly and efficiently.

Diageo’s commitment towards combatting climate change is notable. We can evaluate Diageo’s work towards a more sustainable future using Elkington’s Triple Bottom Line (Coats, 2015). This consists of Planet, Profit and People. If we first consider planet, Diageo has proposed several strategies addressing the issues surrounding climate change amongst other problems. Diageo has outlined strategies and goals in order to combat these issues, such as decreasing greenhouse gasses by 30% by 2020 across their entire supply chain (Diageo, 2016, p. 7). In addition to this, they aim to increase biodiversity, avoid soil erosion and use water and carbon more efficiently in order to produce their product line. In order to do this, Diageo has set out initiatives such as training the farmers and providing resources to them and source the materials from the farms in that province so that transportation costs are reduced and their carbon footprint is lessened (Diageo, 2016).
Later on in the value-adding stages, Diageo has streamlined production by eliminating write-offs and reducing unnecessary inventory (Putre, 2015). This will also reduce their carbon footprint and waste. If we also apply Carroll’s CSR pyramid to Diageo’s operations, we can analyse it at 4 levels: economic, legal, ethical and philanthropic. Diageo ensures their obdurate economic well-being by building a sustainable future, ensuring that the company will be able to make and produce alcoholic beverages in the future (Carroll, 1991). The organization exceeds legal requirements in the countries it operated in, such as providing education to communities and providing them with an opportunity to acquire qualifications. Diageo does not exploit farmers but instead creates initiatives such as increasing capacity in order to increase farmer’s incomes, which in the last few years it has seen 6000 local farmers increase their yield by over 50% (Diageo, 2016, p. 10). Finally, Diageo goes beyond philanthropy, as philanthropy means giving back to the community, but Diageo enables communities to provide for themselves through continuous development.

Diageo is dedicated to ensuring the wellbeing of the communities that it works with. The organization goes beyond what is expected of them in order to set a standard of what sustainable agriculture should be. For example, Diageo works with a supplier that offers private health care for labour workers in Brazil – going beyond compliance with Brazilian laws (Diageo, 2016, p. 9). It seems that Diageo also has an innovative culture with over 150 innovations being implemented, which perhaps reflects that employee ideas are valued and accepted (Putre, 2015). In addition to the entrepreneurial culture, Diageo is also recognized for organisational diversity, equal rights and LGBQ awareness. Diageo is ranked fourth for global diversity and inclusion in the Thompson Reuters index, on their executive committee, women makeup 40% and are a member of Open For Business which advocates for the LGBQ community in business (Diageo, 2018). If one applies Kohlberg’s stages of moral development, Diageo is at the final stage as it seems, due to the extensive work that goes beyond compliance with laws and own economic gain, the organization shows a genuine interest in the welfare of the communities it works in and Diageo employees (Northouse, 2016). These are reflected in targets such as sourcing 80% of its sustainable resources in Africa by 2020 and by their programs providing education and vocational skills for women to set up new enterprises. By 2020, Diageo forecasts that £200 million will go to over 200,000 people across the supply chain in Africa alone which will enable communities to develop (Diageo, 2016). Ultimately, Diageo does not exploit workers in developing countries but sees them as the future of sustainable operations.

It seems that Diageo has little to improve on. However, it seems that Diageo has not taken full advantage of supply chain efficiency. A recent initiative is to implement a quicker reporting system for four geographical locations that are fed into one report (Lightwell, 2018). This will enable Diageo to make further cuts and see in which sectors improvements can be made to the supply chain, according to the market conditions in each geographical sector, such as the weakening of sterling to the euro in Europe (Diageo, 2017). It seems that Diageo has systems with IBM that allow them to track real-time supply chain visibility which enables Diageo to reduce procurement risks. In the future, I would suggest that Diageo continue to streamline production and cautious of costs associated with production after Brexit (Lightwell, 2018).

Overall, I believe that Diageo handles their operations activities very well. This is not only evident at their financial reports, but by their reputation and brand image. At the beginning of their operations, they strive to create a sustainable future and support local communities across the world and not just for their own economic gain as Diageo go beyond what is required by the laws of the country they operate in. The organization realizes the importance of their operations activities at the raw material stages in terms of future production and survival of the company through sustainable resources, in addition, due to globalization the company’s activities are more transparent to stakeholders such as the customers, and the customer will want to identify with a brand with ethical practices. In the later stages of operations, Diageo has streamlined production, reduced waste and standardized equipment, therefore, cutting costs. Although streamlining production perhaps sounds rather like scientific management, it seems that the company has an innovative culture also which means that the employee’s ideas are valued. Moreover, operations across the supply chain enable Diageo to be the global leader it is today, through innovation, strategic relationships and core competencies.

7.1.2019

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