Alltech Kegging Executive Summary

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UK MBA Project Connect 05/05/2015

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Executive Summary

Statement of the Issue The Alltech Lexington Brewing & Distilling Company (ABDC) was acquired in 1999 by Alltech Founder and CEO – Dr. Pearse Lyons. This company is differentiated from parent company, Alltech, Inc. as a segment of their Beverage Division. Home to Town Branch Distillery and Kentucky Ale (KY ALE) Craft Brewery, this company landmarks Lexington on the world-famous KY Bourbon Trail. It exists as a ‘premier barrel-aging brewery’ and is home to one of the few joint brewing and distilling operations, “brewstilleries,” in the world. The product line includes Town Branch Bourbon, KY ALE, and signature KY Bourbon Barrel Ale. It extends to over half our nation’s states including exporting products internationally. This project exclusively focuses on the ABDC brewery’s kegging management solutions. Sales growth has been tremendous every year following its inception reaching 30% (2014). Also, beer output capabilities are set to more than triple by the end of 2015. The output of beer volume is sold specifically in bottles and in bulk kegs (product split is equitably 50/50). The types of kegs utilized include a small self-owned float used locally, one-way recyclable kegs shipped over large distances, and rental kegs through keg rental company – MicroStar (MS). These types come in three sizes: half barrels, quarter barrels and sixth barrels. Our project is critical in that ABDC has been charged with the company objective of doubling total sales by the end of this year (2015). However, due to the current rental keg contract, ABDC is experiencing uncontrollable variance in their cost-of-goods-sold (COGS) and quality of kegs. Therefore, it is necessary to mitigate this problem and reduce ABDC’s COGS within a 5-year growth period. Specifically, in regards to kegging solutions, the project is to determine whether ABDC should continue using MS, whether ABDC should purchase a keg float to use and manage exclusively on their own, or outsource keg management through Kegspediter. In addition, the project includes deciding what types and sizes of kegs are appropriate for each geographic segment.

Research Methodology We began our research by meeting with ABDC executives to better understand the project and kegging process in comprehensive terms. Simultaneously, we incorporated lean thinking throughout our research using a Lean Six Sigma tool known as the DMAIC process. DMAIC stands for Define, Measure, Analyze, Improve and Control. These are phases of research that allow for project understanding, learning the extent of the problem’s circumstances, data collection, process improvement recommendations, and control plan implementation. We applied each of these stages adjunct to our discussions with key management officials at ABDC to determine the root cause of the problem. In order to determine the root cause of the problems within the kegging department our team utilized several Lean tools within the DMAIC process. The first of which is a SIPOC map (Suppliers, Inputs, Processes, Outputs and Customers map), which connects all the suppliers [MicroStar rental kegs and minimal self-owned float] to the end-consumers (Appendix 1). Next, a process map was utilized to highlight the processes from the SIPOC to expand and magnify key steps in the kegging supply chain (Appendix 2). A major phase in measuring these processes was the Failure Mode and Effects Analysis tool (FMEA) (Appendix 3). This allowed the pinpointing of possible breakdowns and failures within the


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current processes. This tool relies on the severity, rate of occurrence, and detectability of a potential failure to calculate a risk priority number. The higher the number signifies the more critical the process. Lastly, The Five Why’s tool was performed to find the root causes to these critical problems (Appendix 4).

Findings The first option pertains to ABDC continuing to utilize MicroStar (MS) for keg

supplies and management. For that reason, MS remains very beneficial in terms of alleviating ABDC from tracking and retrieving kegs; which allows them to focus on core competencies such as producing quality craft beer. Additionally, MS provides flexibility in the sense that they can provide as many kegs as needed within 30 days. This allows ABDC access to a responsive supply chain based on influxes of demand. On the other hand, COGS are continuously increasing under the current rental contractual agreements and the MS kegs are often contaminated. This contamination is coming from other breweries that are putting flavored beer into MS kegs. Due to external factors, key threats deal with disruptions in MS’s supply chain. If disruptions were to occur, ABDC could possibly be charged late delivery fees by distributors. Lastly, our team did notice one key opportunity in working with MS: as ABDC expands and slowly limits MS usage, they still have the ability to continue to utilize MS in the phasing out process specifically for the local tri-state areas (KY, IN, and OH). Although MS alleviates ABDC from distributing kegs, the partnership with them has been frustrating and ABDC has experienced difficulties in negotiations (Appendix 5).

Based upon research and third-person interviews, our team’s second alternative deals with ABDC acquiring their own float of kegs while simultaneously integrating keg management in-house. ABDC owning a float of kegs eliminates contamination issues when compared to MS. Additionally, if ABDC were to vertically integrate, their ability to reach consumers would greatly increase because ABDC would have direct contact with distributors and bars/liquor store accounts. The major weakness simply deals with ABDC’s core competencies currently not involving keg logistics. A venture into this sphere could lead them to focus less on brewing. Opportunities deal mostly with the overarching goals of the project, and external threats are attributable to the inability to respond to consumer demand. For example, an increase in demand could lead to keg shortages, contrarily, a decrease in demand could lead to underutilized inventory and holding expenses. We believe that capital expenditures are pertinent, but managing the kegs could be problematic due to low resources and expertise (e.g. managerial synergies) (Appendix 6).

Finally, our last alternative is a capital expenditure involving Kegspediter. Kegspediter is a firm owned by Satellite Logistics Group (SLG) that coordinates keg management through their network of distributors. Based out of Houston, Texas, they utilize tracking software combined with their supply chain connections to return kegs to breweries more efficiently. Unlike MicroStar, they do not provide their own float of kegs; they are simply a logistics firm that allows for companies to use their own float without worrying about supply chain efficiencies. With Kegspediter’s advanced Bluetooth scanner technology, with a smartphone or tablet ABDC could identify where each keg is, what is in it, and how long it had been in the market. This real-time visibility will help to maximize keg use, improve accountability, and minimize keg loss. Lastly, Kegspediter offers a service (EcoBev) that helps beverage companies dispose of non-salable beverages as opposed to simply pouring them out or sending them to a landfill. While there are numerous technologies included in the Kegspediter agreement, ABDC has not demonstrated a true need for all of


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them meaning they may be paying for unneeded technologies that will not benefit the company (Appendix 7).

Additionally, the team interviewed the local ABDC sales representative to gain an understanding of the size of kegs needed to be purchased going forward. Currently, ABDC provides sixth, quarter, and half barrel kegs to their customers with a small fraction being ABDC-owned quarter barrels in the local market. MS does not offer this size to customers. Quarter barrels are somewhat marketable because of their size. However, because quarter barrels are demanded in such limited quantities it would be optimal for ABDC to only further purchase sixth and half barrels and eliminate quarter barrels to the extent that no customer accounts were lost (Appendix 8).

In conducting the financial analysis the amount and cost of MS kegs was estimated first. The number of MS kegs utilized by each distributor were given and then grouped by region demonstrating ABDC utilizes 8,333 half barrel kegs and 10,350 sixth barrel kegs (Appendix 9). Utilizing the pricing given in the MS contract based on distance the kegs traveled and the annually adjusted KMPI (labor costs determined by ECI, freight cost variation determined by PPI, and keg price variations determined by the actual cost of kegs purchased by MS) the total annual cost for MS was $241,965.35 in 2014 (Appendix 10). Using historical data, it was also found that MS pricing was increasing 2.5% annually. ABDC is planning to purchase 4,292 sixth barrel kegs and 2,720 half barrel kegs if they determine this is the optimal choice for the company. The total amount of this purchase estimated from a German keg supplier would be $679,838.40 representing the capital expenditure for the project (Appendix 11). The costs for ABDC to utilize Kegspediter was determined by the given Kegspediter estimates for each distributor and the number of kegs historically sent to those distributors from MS. As of 2014, Kegspediter would cost ABDC $84,695 annually (Appendix 12).

In order to determine the financial viability of the three options, a NPV and payback period analysis was conducted. As a 30-year project relating to the purchased keg’s 30-year warranty, the initial capital expenditure, maintenance costs, Kegspediter costs for keg management, a 7.35% cost of capital, and savings on eliminating MS, the NPV was $1,916,718 with a payback period of 3.51 years. With any projection of future costs it is important to factor in fluctuations with the initial assumptions, therefore, a sensitivity analysis was performed (Appendix 13). This analysis shows that regardless of change of costs of capital, MS growth rate, maintenance costs, maintenance cost growth rate, and Kegspediter growth rate the NPV ranges from $1 million-$2.7 million with an average payback period of 3.5 years.

Recommendations The decision matrix was constructed to determine qualitatively the optimal solution for ABDC’s kegging solutions. Based on the interviews with ABDC employees and the SWOT analyses conducted, scores (1-5) with 5 being the best were given to the three alternatives per each criterion. Based on tracking, contamination, flexibility, sustainability, durability/maintenance, distributor management, and brand management, ABDC should implement the buying of ABDC-owned kegs using Kegspediter for management (Appendix 14). In addition, based on the financial analysis of a large positive NPV project and short payback period, ABDC should implement the buying of ABDC-owned kegs using Kegspediter for management. With this choice ABDC will control process inefficiencies of tainted kegs and financial variability they are currently experiencing.


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In order to implement this solution effectively, ABDC must consider a control plan, the final process map, and future contingencies. A Control plan is a guide for continued monitoring of the process and the response plan. The Lean Six Sigma control plan consists of: Fix, Minimize, Standardize, Measure and Monitor, and Communicate (Appendix 15). A final process map reveals the elimination of the need for operators to inspect for tainted kegs. It also demonstrates by eliminating MS the process remains similar to before, however, simpler (Appendix 16). Finally, ABDC must currently be aware that they must begin steps to terminate or complete the contractual agreement with MS and begin contacting Kegspediter about future partnerships. In addition, ABDC must decide what keg supplier is utilized (German or Chinese), and begin new logistic monitoring procedures to control future costs.

Conclusion Through this project the problem and existing process have been defined to ensure clear understanding. The key process steps have been analyzed that could cause crucial problems for ABDC, and the root cause of these problems has been identified. Then, it was decided how to best improve their kegging process using a decision matrix and financial analysis which determined ABDC should acquire ABDC-owned kegs and appoint Kegspediter for keg management and logistics. With ABDC expecting to double sales in the next year and expanding output capabilities, the implementation of this continuous improvement to their existing kegging process will allow for an increase in keg quality and controllable costs thereby reducing the COGS.


Don Combs, Dayna Ferguson, Joanna Foresman (Lead), Clayton Lykins & Andrew Wachs '!

Works Cited Browning, Derek. "UK Greenbelt 2015." Lean Six Sigma Training Course. Lexington. Lecture.

Damodaran, Aswath. "Cost of Capital by Sector (US)." Cost of Capital. N.p., n.d. Web. 03 May 2015.

Kumar, Sameer. "Review: Supply Chain Configuration: Concepts, Solutions, and Applications." Interfaces 38.1, 2007 Franz Edelman Award for Achievement in Operations Research and the Management Sciences (2008): 76-77. Web.

"MicroStar." MicroStar. N.p., n.d. Web. 29 Apr. 2015.

"Our Kegspediter® Service." Kegspediter® Keg Management System. N.p., n.d. Web. 03 May 2015.

"SLG Acquires Leader in Asset-Scanning Technology." - WTRF 7 News Sports Weather. N.p., n.d. Web. 03 May 2015.


Don Combs, Dayna Ferguson, Joanna Foresman (Lead), Clayton Lykins & Andrew Wachs (!

Appendices

Appendix 1. DMAIC- SIPOC


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Appendix 2. DMAIC- Current Process Map


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Appendix 3. DMAIC- FMEA


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Appendix 4. DMAIC- 5 Why’s

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Appendix 5. MicroStar SWOT


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Appendix 6. Alltech Capital Expenditure SWOT


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Appendix 7. Alltech Capital Expenditure with Kegspediter SWOT


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Appendix 8. Keg Size Location


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Appendix 9. 2014 Sales by Customer


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Appendix 10. MicorStar Pricing TOTAL FEE PER FILL

FEE CATEGORY HALF-BARREL 1/6 BARREL

LOCAL WHOLESALERS $9.52 $7.98

REGIONAL WHOLE SALERS $12.96 $10.03

EXTENDED REGIONAL WHOLESALERS $16.38 $13.03

NATIONAL WHOLESALERS $19.59 $15.76

INTERNATIONAL WHOLESALERS N/A N/A

SELF-DISTRIBUTED $9.52 $7.98

ACCOUNT MICROSTAR

1/2 MICROSTAR

1/6

LOCAL WHOLESALERS 88 320

REGIONAL WHOLE SALERS 4132 5592

EXTENDED REGIONAL WHOLESALERS 3783 3457

NATIONAL WHOLESALERS 330 981

INTERNATIONAL WHOLESALERS - -

SELF-DISTRIBUTED - -

TOTAL SALES MICROSTAR

1/2 MICROSTAR

1/6

LOCAL WHOLESALERS $837.76 $2,553.60

REGIONAL WHOLE SALERS $53,550.72 $56,087.76

EXTENDED REGIONAL WHOLESALERS $61,965.54 $45,044.71

NATIONAL WHOLESALERS $6,464.70 $15,460.56

INTERNATIONAL WHOLESALERS - -

SELF-DISTRIBUTED - -

TOTAL $122,818.72 $119,146.63

Grand Total $241,965.35


Don Combs, Dayna Ferguson, Joanna Foresman (Lead), Clayton Lykins & Andrew Wachs *(!

Appendix 11. ABDC Capital Expenditure Purchase Cost of Proposed Keg Purchases

Price of 1/6 Bbl Keg $85.20

Price of 1/2 Bbl Keg $115.50

Number of 1/6 Bbl Proposed by Alltech 4292

Number of 1/2 Bbl Proposed by Alltech 2720

Price of 1/6 Bbl $365,678.40

Price of 1/2 Bbl $314,160.00

Total Price $679,838.40


Don Combs, Dayna Ferguson, Joanna Foresman (Lead), Clayton Lykins & Andrew Wachs *)!

Appendix 12. Kegspediter Pricing ACCOUNT NUMBER ADDRESS 1/6 1/2 $1/6 $1/2

Total 1/6 Barrel Price

Total 1/2 Barrel Price

Local & Regional Wholesalers

KYEAGLE LEXINGTON, KY 72 288 $0.00 $0.00

PERRY HAZARD, KY 16 32 $2.94 $6.02 $47.04 $192.64

RIVERCITY LOUISVILLE, KY 16 94 $2.55 $5.06 $40.80 $475.64

STAGNARO ERLANGER, KY 6 65 $2.61 $5.19 $15.66 $337.35

CHASDIST WALTON, KY 10 $2.70 $5.43 $0.00 $54.30

BHD ERLANGER, KY 45 $2.61 $5.19 $0.00 $233.55

SMITH BARDSTOWN, KY $2.72 $5.48 $0.00 $0.00

EAGLE ASHLAND, KY 4 12 $5.16 $11.57 $20.64 $138.84

CAVALIER BRECKSVILLE, OH 268 950 $0.00 $0.00

CAVALIERIN INDIANAPOLIS, IN 13 121 $2.68 $5.38 $34.84 $650.98

BEECHWOOD NEW BERLIN, WI 428 727 $2.38 $4.64 $1,018.64 $3,373.28

LIPMAN NASVILLE, TN 1075 577 $2.88 $5.87 $3,096.00 $3,386.99

SUPREME BIRMINGHAM, AL 414 546 $2.87 $5.84 $1,188.18 $3,188.64

SAVANNAH SAVANNAH, GA 1056 880 $2.25 $4.30 $2,376.00 $3,784.00

SPEBEV ROCKVILLE, VA 76 170 $4.29 $9.40 $326.04 $1,598.00

WINDIS AURORA, IL 776 1395 $2.30 $4.43 $1,784.80 $6,179.85

Totals 4220 5912 $2.92 $5.99 $9,948.64 $23,594.06

Extended Wholesalers

CAVAFL LAKELAND, FL 1384 1537 $2.61 $5.21 $3,612.24 $8,007.77

CRAFT MA EVERETT, MA 729 445 $4.09 $8.89 $2,981.61 $3,956.05

GALDIS NEW KENSINGTON, PA 424 340 $4.86 $10.83 $2,060.64 $3,682.20

L KNIFE MA KINGSTON, MA 113 187 $4.04 $8.78 $456.52 $1,641.86

L KNIFE SEA DANVERS, MA 227 185 $4.07 $8.85 $923.89 $1,637.25

CRAFT RI WARWICK, RI 66 100 $4.43 $9.75 $292.38 $975.00

CRAT VT COLCHESTER, VT 4 30 $4.40 $9.68 $17.60 $290.40


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CRAFT NH PORTSMITH, NH 30 30 $4.52 $9.98 $135.60 $299.40

HUNBRE WHITE HOUSE STATION, NJ 144 340 $4.61 $10.21 $663.84 $3,471.40

LEGENDS BALTIMORE, MD 80 80 $4.07 $8.84 $325.60 $707.20

MARSEL PEORIA, IL 72 95 $2.66 $5.32 $191.52 $505.40

OMNBEV MEMPHIS, TN 24 20 $6.45 $14.79 $154.80 $295.80

UNION BROOKLYN, NY 486 68 $4.36 $9.58 $2,118.96 $651.44

Totals 3783 3457 $4.24 $9.29 $13,935.20 $26,121.17

National Wholesalers

BRODIS AUSTIN, TX 56 134 $5.58 $12.64 $312.48 $1,693.76

CRAFT CT NORTH HAVEN, CT 19 96 $4.53 $10.00 $86.07 $960.00

LFDIS MCALLEN, TX 56 397 $5.87 $13.35 $328.72 $5,299.95

ADVIS LADSON, SC 72 214 $2.25 $4.29 $162.00 $918.06

CRAFT NY NEW PALTZ, NY 95 20 $4.58 $10.13 $435.10 $202.60

GLAIOW DALLAS, TX 32 $0.00 $0.00

IPC SAINT PAUL, MN 120 $2.85 $5.81 $0.00 $697.20

Totals 330 981 $4.28 $9.37 $1,324.37 $9,771.57

International Wholesalers

ADDIRE DUNBOYNE, IRELAND

APRGO BEIJING, CHINA

ABTDNJ TAINJIN, CHINA

TAINJIN TAINJIN, CHINA

Totals $0.00 $0.00

Grand Total $25,208.21 $59,486.80

Total Kegspediter

Cost

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Appendix 13. Sensitivity Analysis Sensitivity Analysis for Cost of Capital

Growth Rate 5.00% 6.00% 7.36% 8.00%

NPV $2,770,594.67 $2,362,343 $1,916,718 $1,742,009

Payback Period (Years) 3.51 3.51 3.51 3.51

Sensitivity Analysis for MicroStar Growth Rate

Growth Rate 1.00% 2.00% 2.51% 3.00%

NPV $1,004,476 $1,692,332 $1,916,718 $2,146,612


Sensitivity Analysis for Maintenance Cost

Growth Rate 1.00% 2.00% 3.00% 4.00%

NPV $2,096,278 $2,006,498 $1,916,718 $1,826,937


Sensitivity Analysis for Maintenance Growth Rate

Growth Rate 0.00% 1.00% 2.00% 3.00%

NPV $1,941,864 $1,916,718 $1,887,416 $1,853,139


Sensitivity Analysis for Keg Mgt Growth Rate

Growth Rate 0.00% 1.00% 2.00% 3.00%

NPV $2,032,328 $1,916,718 $1,781,417 $1,622,406



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Appendix 14. DMAIC-Final Decision Matrix

•Attributes Broken Down

•Tracking: keg logistics, knowing where a keg is always with what brew

•Contamination: whether a keg is subject to a tainted flavor profile

•Flexibility: ability to ramp up keg inventory if necessary

•Sustainability: reduction in environmental footprint (e.g. carbon footprint)

•Durability/Maintenance: lifespan of a keg taking into account possible repairs, etc.

•Distributor Management: acceptance by distributors in the field

•Brand Management: represent the KY Ale brand fully


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Appendix 15. DMAIC-Control Plan

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Appendix 16. DMAIC- Final Process Map

Documents

Alltech Kegging Executive Summary