Friday, April 11, 2008

LCBO and Organizational Change

Umm...don't know if anyone's interested. But for my MSci 311, I wrote a piece on LCBO and how they've instituted organizational changes. Thanks Professor RD for the 80. Maybe a little undeserved, but see for yourself:

Tastes have changed, but what about the LCBO?

March 24, 2008
D.Fang


The Liquor Control Board of Ontario (LCBO) has come a long way from its founding mission to enforce strict control on the sale and consumption of liquor, as well as provide social responsibility in protecting the public from the potential ravages of alcoholism. However, that mission statement dates from over 80 years ago. The LCBO’s mandate and organizational structure has revised over the years, to adapt to and take advantage of changes in the market. It has demonstrated that a government owned corporation can succeed and indeed, thrive in today’s market. The LCBO is a model for organizational change, and has demonstrated that with the right management in place, sweeping changes can be implemented, while producing immediate benefits. The government is not the only beneficiary of the LCBO’s success. The organization has been instrumental in bringing a wide variety of products to consumers, allowing access to products that are near impossible to locate otherwise, due to the LCBO’s purchasing power. While the future looks bright for LCBO, it did not arrive at its current state without some hardships. Not only must we look at what caused these changes to occur, but also to what changes the LCBO needs to make in the future.

Let us first examine the internal make-up of the LCBO. It is the single largest buyer and retailer of liquor in the world, operating 602 stores across Ontario and holding 50.5% of the province’s alcoholic beverage market share. LCBO stores offer 19,226 products and 5,935 products offered through its Vintages program.[1] It employs about 6,500 full and part-time employees. The LCBO is run by a 9-person board. Members are appointed by the Lieutenant-Governor, through Orders-in-Council, on the recommendation of the Premier and the Minister of Public Infrastructure Renewal, for terms of up to 5 years. The LCBO has 6 major divisions: Human Resources, Finance, Information Technology (IT), Retail, Merchandising and Distribution. Divisions are responsible for coordination amongst themselves, whenever an issue affects more than one division. However, there are no systematic policies in place to ensure daily coordination between the various divisions. Also, the LCBO does not have any benchmarks for measuring communication and information flows across organizational departments. Requests for interviews with LCBO regional store managers for further information were refused, and the requests were instead directed to the corporate website.

As the LCBO moves away from simply being a distributor of liquor to a full-fledged retailer, the most important thing to focus on is the customer. More precisely, what type of alcoholic beverage is most attractive in the market, and how can the LCBO capitalize on it? The answer is quite simple. In one word, wine.

It does not take a wine connoisseur to discover the increasing popularity of this drink. New wine producing regions are sprouting all over the world, and consumers are becoming more and more sophisticated in their knowledge and appreciation of wines. An inspection of the LCBO’s annual reports shows that in 2002-2003, wine sales totalled $819 million, a 6.4% increase from the previous fiscal year.[2] In 2005-2006, wine sales were $988 million, an increase of 3.1% from the previous year.[3] In 2005, Canadians consumed 396 million bottles of wine, which shows an increase in consumption of 23.23% from 2001-2005.[4] As consumers continue to demand more wine from all parts of the globe, the LCBO must adjust its distribution system, and streamline its own internal structure to maintain efficiency and effectiveness.

As explained in Gareth R. Jones’ Organizational Theory, Design, and Change, Fourth Edition, planned organizational change is normally targeted at improving effectiveness at one or more of four different levels: human resources, functional resources, technological capabilities, and organizational capabilities.[5] While not clear cut, organizational change in the LCBO as the result of increased demand for wine falls under several of these levels. Effectiveness at the human resources level is important because of the increasing knowledge of consumers. Staff at the retail level must be able to articulate product details, whether to novice wine drinkers or more seasoned connoisseurs. With the wide variety of wines available, staff must be trained not only to be knowledgeable on basic wine facts but also to be able to offer recommendations to customers. This requires more than buying everyone a copy of Robert Parker’s Wine Buyer’s Guide. A framework must be laid down to familiarize store staff with existing inventory as well as each new release of wines, so as to be able to act more as an advisor to customers rather than just a salesperson. In terms of functional resources, the LCBO must be able to handle rising levels of inventories. This means better coordination between its distributors and its retail locations. Systems must be in place to ensure that manageable levels of inventory are maintained in the stores, without sacrificing selection and choice for the consumer. Technological capabilities must increase. New IT systems must be implemented to keep track of inventories and shipment times. It is also useful for customers who are looking to see if certain bottles of wine are available in other locations. While laws forbid the online purchase and shipping of alcohol, an online database to view wine selections would be very useful for customers. We must now make a comparison of actual changes the LCBO made, to see if theory can make it into practice.

The organizational structure of the LCBO began to change in earnest in the late eighties. In 1988, the LCBO used no computers in its stores and all accounting and payroll tasks were done manually. Quarterly sales results took 6 months to reach upper management. It was obvious that things needed to be modernized. Every facet of the operation needed to be overhauled, along with its unknowledgeable and overstaffed stores. A new board and upper management was brought in, to bring accountability to the LCBO. New programs were introduced to improve on its organization, distribution systems and retail services, as well as a redesign of its stores. Customers began to respond favourably to these changes, as well as an aggressive new marketing campaign that sent the message that drinking wine was simply a part of a healthy lifestyle.

In recent years, LCBO has changed a great deal, to meet these new challenges. While not all of these changes can be attributed to the rising consumption of wine in Canada, it certainly has played the largest role in increasing profits and cash flows to the government. One task that the LCBO’s top management wanted to improve on was its supply chain procedures. A large part of the supply chain is the flow of inventory. The objective was to get 80% of deliveries straight from the trucks into the stores, without having to be stored in warehouses. To make this happen, store managers had to be retrained to work with smaller inventories that arrived just on time. Inventory managers used a centralized inventory replenishment system, which delivered inventories to stores several times a week, in smaller loads. The result is an inventory turnover rate of 7.6 compared to 5.2 times in 2001, a cost reduction of $86 million and an increase of $1 billion in sales.[6]

In 2003, LCBO instituted a system called New Item Submission System (NISS). This was provided to its suppliers, in an effort to bring new products to the market faster. It led to cost reductions of $1.18 million annually and nearly $130 million in new product revenue by managing new products almost immediately. In 2004, the LCBO introduced a more secure, flexible, and high performance Enterprise Project Management system (EPM). It wanted to provide its staff with an efficient way to collaborate on projects, and this software was the answer. Benefits were immediate: improved project management and resource allocation, streamlined communications and collaboration among IT teams, and reduced time spent on administrative tasks.

LCBO is also making a concerted effort to train its employees as well. All staff undergoes mandatory product knowledge training, and because of the improvements in supply chain procedures, are able to spend more time dealing directly with customers. There are also highly trained product experts that can provide customers with very detailed information; there are 190 employees who have received this designation. Finally, LCBO is dedicating more and more space for its Vintages section in their stores, specializing in more premium wines. All these changes and enhancements indicate that LCBO is not resting on the fact that it is a monopoly, and is actively pursuing opportunities that this new demand for wine can provide. It demonstrates that the LCBO is willing to do whatever is necessary to improve, whether it’s hi-tech solutions at the management level or training solutions at the store employee level. Every stage of the operation is crucial to its success.

Over the years, the LCBO's general trend has been towards innovation and learning. It has fostered this sense of learning, in order to better cope with changes in the marketplace. The LCBO has created a learning centre to gather research on changes made by its competitors. There have been new employee training techniques, such as teaching videos and new marketing strategies such as venturing into the gift market. An increase in IT has also been witnessed, as well as more product testing and knowledge management, to maintain a competitive edge. Most promisingly, upper management has displayed that it is able and willing to implement major changes. There have been significant efforts to increase the organization’s ability to handle and implement change, and as a result, the LCBO has become less bureaucratic and more responsive to the needs of its stakeholders.

Looking forward, there are some more improvements that can be implemented. A system to order wines online to be picked up at the store would be more efficient than the current system of sending in order forms and waiting for sales representatives to call for payment method confirmations. Also, more availability of premium wines would satisfy the die-hard wine collectors. While greatly improved, the distribution process is still in need of tweaking. Orders from special Vintages catalogues can take months to be delivered, even after arriving in warehouses. A more transparent tracking system, similar to the ones used by post offices, would allow customers to track their purchases online, without having to call LCBO over and over.

The LCBO truly is a model corporation for organizational change. It has shown that it has not only the ability to implement change, but also the willingness to do so. It always keeps an eye on the market, anticipating its next move so that there is no surprise. As for the future? Wine sales will only go up, and as wine consumers become more and more savvy, will LCBO be able to keep up? It will be a challenge to keep everyone satisfied, not only among the wine drinkers but also with the beer and spirits crowd as well. It is a challenge that LCBO has shown it can master.

References:

Barrows, David and Arthur Barrows., Change Management & the Liquor Control Board of Ontario (LCBO), IPAC IAPC Ryerson University Case Study 2.19

Bird, Malcolm G., Revolutionary Change: The Liquor Control Board of Ontario, 1985-2005, The Department of Public Policy and Administration, Carleton University, (June 2006), from: http://www.cpsa-acsp.ca/papers-2006/Bird.pdf

Cirillo, Jennifer., Beyond the Bottle, Beverage World, Vol. 126, Iss. 1781. (Dec 15, 2007), pp.60-68.

Genosko, Gary and Scott Thompson., LCBO: Profits vs. Social Responsibility, Toronto Star, (July 25, 2005), from: http://agora.lakeheadu.ca/agora.php?st=83

LCBO Annual Report 2002-2003, from: http://www.ontla.on.ca/library/repository/ser/7892/2002-2003.pdf

LCBO Annual Report 2005-2006, from: http://www.lcbo.com/images/pdfs/lcbo_an_report.pdf

LCBO.com, Media Centre, from: http://www.lcbo.com/aboutlcbo/media_centre/faq.shtml

Maclean, Natalie., The Grape Canadian North, Nat Decants, 2007, from: http://www.nataliemaclean.com/articles/canadian_wine_facts.asp

Patrick, Ryan B., LCBO keeps supply chain flowing, itWorldCanada, (July 9, 2004), from: http://www.itworldcanada.com/pages/docbase/viewarticle.aspx?id=idgml-034cf823-efba-4517&portal=extended%20enterprise&s=395692

Vintners Quality Alliance 2007 Annual Report, from: http://www.vqaontario.com/aboutVQA/AnnualReports/vqa_annual_report_07.pdf

Wines of Ontario, Media Centre Fact Sheet, from: http://winesofontario.org/MediaCentre/html/FactSheet.htm






[1] LCBO.com Media Centre
[2] LCBO 2002-2003 Annual Report, Wines, pp.24
[3] LCBO Annual Report 2005-2006, Wines, pp.10
[4] CNW Group, The increase in wine sales in Canada is twice as high as in the rest of the world, (Feb 8, 2007)
[5] Jones, Gareth. Organizational Theory, Design, and Change, Fourth Edition. Pg. 302
[6] Cirillo, Jennifer., Beyond the Bottle, pp.62

7 comments:

  1. This line "It is the single largest buyer and retailer of liquor in the world,...." is wrong, as the world's largets liquor buyer is Tesco, not the LCBO. That fact has been established for several years now. The LCBO is the largest government owned and controlled" buyer and retailer, which is the correct statement.

    http://www.gismondionwine.com/article.php?key=853

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  2. I stand corrected. Unbelievable. You actually read through the entire thing? There's much better ways to waste your time.

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  3. This comment has been removed by the author.

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  4. And btw, the link that you sent me states that Tesco, the supermarket chain, is a larger retailer of wines than LCBO. Not buyer. Not largest in the world. It's just a supermarket. And coming from Jancis Robinson, why should anyone be surprised that she loves telling people how wrong they are about everything? Blows my mind that Tesco and LCBO would even be compared together, considering how different the two systems are. And that someone would even fact check my paper using this piece as supporting evidence.

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  5. Nice article D.

    In your research, did you come across any possible improvements/changes on consignment side of things?
    Or is the LCBO more concerned with their retail business...

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  6. Thanks Brian!

    By consignment, do you mean their auction system? Because I believe anyone can set up a "Lot" of wines for auction.

    I was mostly concerned with their internal organizational structure, not so much on exactly how they do business. That was what the assignment was supposed to be, and I lost marks because Professor thought that it was too much of an advertising/marketing piece.

    But you bring up an interesting point. I only have experience with the Vintages ordering system, which is quite terrible. I feel like I have to jump through hoops just to order some wine, their system is really antiquated.

    What about you, have you ever put up anything for consignment?

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  7. Nope. Not auction. Private ordering.

    Send me an email and we'll talk

    brian@liffordwineagency.com

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