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.

New E-Business Model

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 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.

Technological Infrastructure

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.

Benefits

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 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.