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PLCB changing inventory handling to save cash

PLCB changing inventory handling to save cash

The state's liquor board is overhauling its system of inventory management, asking wine and spirits suppliers to maintain ownership of their products -- and defer getting paid -- until the product is moved into retail stores.

That's different from the current system, in which the Pennsylvania Liquor Control Board owns all of the alcohol in the state's three storage warehouses.

The accounting move could save the PLCB up to $80 million in the short term, essentially by deferring payment on a big chunk of its product, and millions more annually based on inventory reduction, according to an analysis by Tompkins Associates. The PLCB would still store huge supplies of alcohol in warehouses, but wouldn't pay suppliers until the products are shipped to the retail shops. The fewer bottles handled by the warehouse manager, the less the LCB pays.

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The average time for a bottle in a warehouse is a few weeks for fast-moving products (or a few days, during the holiday season), but some specialty boozes can stay much longer.

The PLCB will also soon be asking suppliers to keep track of their own inventory, using a custom-built Web portal to tell the state when shipments arrive at the state distribution centers.

Until now, the liquor board bought its inventory, stored it at its warehouses and shipped it to individual state stores when those stores needed to be restocked. In other words, the PLCB owns and tracks everything in its warehouses.

Right now, "We have $304 million in inventory," said Joe Conti, CEO of the liquor board. "If we go to bailment, our inventory will be much less."

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"Bailment" is a legal term describing a process wherein property possession is transferred from one person (or company or agency) to another. By transferring possession of the product to the suppliers while it sits in the distribution centers, the PLCB could also charge fees to the suppliers for storage (though that's not currently the plan), or could assess penalties if the suppliers are over- or understocking inventory or aren't making on-time deliveries. Those potential penalty rates haven't been set yet.

"The suppliers are very nervous about what the penalties are going to be," said Terri Cofer Beirne, attorney for The Wine Institute, a trade group.

Previously, suppliers were supposed to be paid for their product within a month of delivery. Under the new system, payment will take two months or longer, taking place only after the product is trucked from a distribution center to a wine and spirits store.

That reduces the amount of time that the PLCB actually "owns" the product that it is selling; 90 percent of what sits in the various distribution warehouses will instead be owned by vendors, according to a recent PLCB update on the project.

Certain specialty items, from smaller vendors, would still be purchased upfront by the state.

A pilot program was set to begin this month with one major vendor, Diageo, the biggest booze and beer distributor in the world. But the agency is running two or three months behind schedule in implementing the program, said Mr. Conti.

If the pilot program goes well, the bailment plan will be more fully implemented with additional alcohol vendors.

In legislative hearings held last year, PLCB chairman P.J. Stapleton said a "major advantage of conversion to bailment is cost-savings and a freeing-up of capital ...; such fees could be used to increase the commonwealth's revenue and offset the PLCB's costs associated with the operation of the board's warehouses."

The PLCB also hopes the new system will allow for better product flow and fewer supply shortages.

At least 17 other states, primarily those with centralized wine and spirts purchasing systems, allow for "bailment" storage.

In most of those states, the bailment warehouses are operated by private middlemen, such as Liquor Group Wholesale Inc., which allows the state to stay out of the storage business.

That's already the case in Pennsylvania, where the three storage warehouses are operated by three private companies (the company that operates the Pittsburgh warehouse is O'Hara-based Genco ATC).

"This way, they get rid of all that overhead," said Mary Kramer, founder of M.J. Kramer & Associates, which specializes in wine and spirits regulations. Pennsylvania is "one of the few that haven't" used bailment warehouses.

The state's planned Web portal, meanwhile, effectively outsources much of its inventory management duties to vendors themselves.

The new system, in the planning stages for years, is part of a broader overhaul of the state's supply chain.

Now with three distribution hubs -- Pittsburgh, Scranton and Philadelphia -- the PLCB hopes to consolidate to two warehouses in the next few years. Pittsburgh would keep its warehouse, but the Philadelphia warehouse -- the only one of the three buildings actually owned by the PLCB -- might be acquired by the Philadelphia International Airport.

The new plan also comes against the backdrop of a proposed dismantling of the state store system. Incoming GOP Gov. Tom Corbett has said selling off the state's wine and liquor monopoly to private interests would be on the table as a revenue generator, and Pennsylvanians are in favor of privatization by a 2-1 margin.

Could the new system of bailment still be used even if the state store system is sold?

"That's, frankly, a question for other folks," Mr. Conti said. "The current governor has told us to run this place like a public company, like a specialty retailer. We are not in any way stopping these initiatives" just because the incoming governor may try to remake the system.

First Published: January 7, 2011, 5:00 a.m.

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