1 • Good morning, good afternoon. • Thank you for joining me today. • Many of you will have heard Ivan talk about how our focus on performance and execution contributes to our ambition of being the best performing, most trusted and respected consumer goods company in the world. • Today I want to share with you how Diageo’s supply organisation has adapted for the delivery of our ambition. • I want to share with you how we are focused on performance through the end-to-end supply chain – from sourcing inputs through to delivering high-end innovations; from reducing raw material costs to seeking revenue synergies; from mitigating our impact on the environment to creating great experiences for our consumers. 2 • I am going to start with our supply footprint. • We source, make and move 6.5 billion litres of our brands every year across 180 markets around the world. Supply employs almost half of Diageo’s employees and operates over 100 sites in over 30 countries. We bring amazing brand experiences to our consumers delivering quality product in a vast range of formats. In total we produce over 12,500 SKUs. We transform great innovation ideas to new and exciting products. In 2014 our supply business delivered 181 new innovations to market – some in record time. We also manage approximately £4 billion of Diageo’s cost of goods through procurement. • We are a global business, but we operate locally. Over the last decade, Diageo has transformed from being predominantly an export-led business with scale production centres in Europe and North America to becoming a truly global drinks company. We now have global and local operations covering production facilities, supplier relationships, customer collaborations and third party agreements in service of creating the leading beverage alcohol company in each market. This means we procure both locally and globally, we produce both locally and globally and we sell both locally and globally. 3 • But with our broader participation and local accountability comes greater complexity. • Supply liaises with over. In between there are over two billion separate components that go into producing our brands across spirits, beer, wine and RTD. • We buy huge quantities of commoditised inputs which are subject to global prices such as wood for casks, glass and cereals, and we source smaller, more specific items such as gold flakes for use in Smirnoff Gold or widgets for cans of Guinness Draught. • We are delivering faster and further. In the US, we can get large orders of single SKUs to distributors nationwide directly from the production line, cutting down the need for warehousing, and we are reaching more rural parts of Africa with new and innovative distribution solutions such as the Guinness Distribution Centres serving more remote communities in Nigeria. • Yet we need to maintain the same levels of service and the same quality standards no matter where we operate, which is why consistency and a standard Diageo way of doing things is critical. 4 • So what changes did we need to make to adapt to a global-local model? • The shift of accountabilities into market has led us to reconfigure our supply structure capturing the benefits of our global reach, scale and experience, while transferring skills and capabilities to drive performance at a market level. • While we are expanding our local production footprint, it is suboptimal to produce some global categories and multi-market brands at a local level. In the case of scotch whisky, it can only be produced in Scotland. Scale efficiencies we are able to extract from some of our larger sites and logistics make it more cost effective to produce brands in one place and export to others. This is particularly relevant where distances to distribute are short and the trade environment is supportive, such as Europe. The international supply centre produces 50% of Diageo’s volume across spirits, beer and RTD operating from facilities within Scotland, Ireland, but also in England and Italy where we have packaging lines as well. • In procurement we retain a team who are responsible for functional leadership and lead central procurement spend for global goods and services, but partner with markets in supporting the development of local supplier networks. • Responsibility for market delivery sits with the 21 General Managers, who have dedicated supply resource to support our participation strategies in each market. Each Supply Chain Director is responsible for building the supplier base, developing sustainable sourcing programmes where appropriate and negotiating on costs. The expertise that resides in the global procurement team supports market colleagues in delivering the best possible solutions. • Local supply leads are also accountable for delivering production targets through investment and driving efficiencies. Again we are leveraging the skills and knowledge within our business to deliver manufacturing excellence and have created two small teams within Global Supply who partner with markets. Our beer team based in Dublin advises our brewing operations, predominantly in Africa, on industry leading practices, innovation and capacity expansion. As we broaden our participation in spirits, especially in emerging markets, operational excellence is critical in supporting the supply chain. Much of the recent work has been in India, which I will come to later on, but other projects have included shifting Smirnoff to local production in Brazil and working to integrate tequila in Mexico. 5 • The actions we are taking in our supply organisation help deliver every aspect of Diageo’s performance ambition. • They are designed to make sure we are getting the basics right and building on them to ensure we deliver a first-class supply organisation that is recognised as the best, not just within our industry but across FMCG. Being best-in-class means we need to look at how we are performing across our entire supply chain from farmer to customer. This allows us to build our business while protecting the environment, create efficiencies and save costs, and it applies rigour in deploying capital resources. • It also directly supports growth. As a leading supply organisation we create innovations at pace and at scale; it helps the business excite our consumers with amazing brand experiences; and it supports the sustainable development of growth categories through investment in capacity and value creation from maturing stocks. • But before I go into detail on these areas, let me touch upon how we are embedding a simple, standardised and codified framework which not only captures data, measures performance and identifies risks, but enables every market to make decisions quickly and to the highest standard. This is helping us ensure we achieve consistent and continuous improvement throughout our end-to-end supply organisation, helping long-term growth in both the top and bottom line. 6 • Let me start by looking back. • Over the last ten years it has mostly been about Diageo’s focus on where to play. We have been building our supply organisation to support Diageo’s greater participation in emerging markets, increasing production capacity in distillation and brewing, modernising assets, investing in new lines, warehousing and technology. • Supply has been central to the integration of acquisitions, aligning standards and procedures to Diageo best practice. The acquisitions in Africa, Brazil, Turkey and China have been bedded down and we are working with our new colleagues in India to put in place the right controls and governance structures within USL. • A significant part of this journey has been about optimisation, and in some areas we have rationalised or restructured our businesses to reflect the shape of Diageo’s global footprint and its future growth profile. We have consolidated our brewing assets in Ireland into one centre of excellence in Dublin at St James’s Gate and we have been merging our packaging facilities in North America and Scotland to have fast, scale production units across multiple brands and SKUs. • As part of this modernisation journey, we have also been investing in reducing our costs and our environmental impact from the inclusion of water treatment facilities at our breweries and distilleries, to state-of-the-art bio-mass plants which turn waste back into energy for our use. • The majority of rebuilding and rationalisation has been completed. We’ll explore further opportunities for scale efficiencies, but now it is about the execution and our focus on consistency and continuous improvement. 7 • Diageo’s broad portfolios and more local production in emerging markets has brought different levels of regulation and policy, variances in standards and complexities in execution. Consequently our in- market supply chains are at different stages of maturity in achieving industry leading standards and optimal levels of execution. • Our big intervention to drive true end-to-end performance therefore is to introduce a universal standard and a consistent way of doing things that becomes the operating model across the supply organisation. • This creates a cycle of continuous improvement that is not only comparable to internal best practices but benchmarked with world leading supply organisations. We want to know what the best is out there and compete with it. • To do this we have developed a Global Performance Improvement Framework that consists of 16 KPIs measuring end-to-end supply chain performance in every market. These span the entire supply operation across governance, planning, sourcing, production and distribution. 8 • We have specified what the four levels of performance are and each market is rated to be in base, stable, progressive and leading. Within each level there are wide variances of performance. For example, the International Supply Centre is not far from moving to progressive, while in South Africa it may take a little longer to move towards the next level. Typically it would take three years of improvement for a market to move from one level to the next.