Consumer packaged goods (CPG) manufacture has never been exactly sexy but that could be about to change, says IBM head of practice for the sector, Simon Perry. Retailers like Wal-Mart and Carrefour are increasingly calling the shots, new technology like RFID is in the offing and manufacturers are increasingly being forced to think the unthinkable – such as outsourcing manufacturing.
What they should be concentrating on, he believes, is their core competencies and outsourcing the rest, segmenting their supply chains, adopting technology to make them more flexible and, perhaps above all, working out how to get innovative products to market as quickly as possible.
There are even signs that some manufacturers may pull out of manufacture altogether to concentrate on marketing and innovation.
The real value that a CPG manufacturer can bring is not necessarily in manufacturing or even in the supply chain but product innovation and customer insight. The value may not even be in coming up with a new formulation of detergent, but in getting it to market ahead of the competition. In the future, says the head of IBM’s supply chain practice, Adrian Edwards, ‘time to market could be more important than pure research’. However, it would need a radical change of thinking by companies that have always thought of themselves as manufacturers and product innovators, in some cases for two centuries.
Supply chains need to be differentiated. What works for a mass-produced, generic product like toilet paper may not for a high-value branded cosmetic, where the customer is liable to walk out of the door and go elsewhere if it isn’t on the shelves.
The CPG industries were comparatively early adopters of technology such as SAP but now they are working ‘to bring their supply chains up to world class’, Adrian Edwards adds. Short term, this could mean adopting new technology like auto-RFID or web-EDI. However, in doing this, they need to be mindful that it is the retailers, not the manufacturers, in the driving-seat. Open architecture will thus be essential.
The industry has also moved on from giant universal exchanges to private electronic hubs, although there also public exchanges in Europe like WWER, GNX and CPGMarket.com. They could be useful in helping CPG manufacturers achieve full visibility of their costs and present a single face to the customer.
Technologies like RFID are exciting, adds Perry, even within the four walls of a CPG manufacturing operation by removing wasted effort by, for example, removing the need to manually scan products in and out. It could tell you what is buried in the inside of a pallet or even give an idea where theft or shrinkage is happening.
A big plus
‘Longer-term, if items can be tagged they could be tracked right through the supply chain. The big problem for the CPG companies at the moment is that while they can give very high levels of service to the DC or back of store, inside everything tends to fall down. If you can know where things are, that could be a big plus.’ Ultimately, RFID could create the dream of a fully-responsive supply chain.
It might also help firms understand consumer behaviour although some of the scare stories in the popular press about shoppers being ‘tracked’ as they wander down the high street may have to be assuaged first. (It’s highly unlikely, by the way, that this would ever be possible).
Enrico Camerinelli, programme director for the Meta Group describes the current state of RFID technology as ‘high promise but with a lot of confusion in terms of standards’. The real value of the technology, he believes, is being able to understand consumer behaviour.
However, industry-wide adoption of RFID is probably closer than we think, say SAP’s Nigel Ford and Dave Telford. After all, Wal-Mart has already told its core suppliers that they need to be RFID-compliant by 2005. ‘We could see full adoption by 2010’. For the consumer, it might mean fewer empty shelves, while for manufacturers it could usher in true vendormanaged inventory as information would flow far more easily.
The days of huge IT budgets are over, for the time being, believes Camerinelli. ‘It’s now more a case of leveraging existing investment.’ In the meantime, CPG firms have to exist in a cut-throat world, where intensive marketing through promotions is a fact of life. According to Ed Stubbs, solutions consultant at enterprise software specialist JD Edwards, one well-known household brand name reckons to sell 85 per cent of its output through promotions. In fact, say Ford and Telford, respectively business development manager and business development manager for CPG industries at SAP, for most grocery items 30 per cent seems to be the minimum sold through promotions for most grocery lines, rising to 80-90 per cent for heavily promoted items. Faced with two for one promotions, brand loyalty is increasingly hard to maintain, they say.
Even the physical logistics of managing promotions has become big business. Exel’s Chris Jackson – account developer for shared user logistics – says that his company – a leading 3/4PL – is increasingly asked to look after co-packing and repacking operations for promotions. ‘Rework is growing,’ he says, ‘as there is strong retailer demand for greater flexibility and more efficiency.’ Exel can often get closer to the point of manufacture than specialist repacking firms and is able to comply with legal and health requirements.
SAP meanwhile has been fine-tuning its systems to reduce the ‘irritant’ effect of promotions and to counteract the inevitable increased volatility by helping account managers deal more effectively with customers. However, ‘sales and operational planning are not currently always carried out as effectively as one might expect in many firms,’ they say. ‘For example, for promotions, does the forecast sales always get built into the organisation’s operational planning in a timely way?’
The CPG sector has become big business for JD Edwards in the last few years, says Ed Stubbs. ‘Pricing is becoming extremely complex – that for Tesco might be different than for a local cash-andcarry.’
In many other sectors, sales forecasting is an important element of JD Edwards’ work, but in a business where promotions account for such a high percentage of turnover, it can be almost impossible to determine a true base level of demand.
One effect of these often very short-term horizons is a blurring of the distinction between planning and execution. ‘It’s almost drifting towards real-time.’ But it does mean much more emphasis on visibility – for example, a production planning decision needs to be visible to everyone involved pretty instantly. ‘Fortunately, the computer processing power now available means that this is possible.’
In parallel with these trends has been a move by many CPG manufacturers towards lean or low-cost production, with outsourcing of production, often to Eastern or central Europe. While this does have lead-time implications for the western fringes of Europe, it makes a lot of sense for the German market. ‘Again, we have technology to model all those effects,’ explains Ed Stubbs. There are signs, also, of a trend to computer industry-style complete outsourcing of manufacture with the original brand owner concentrating on marketing.
A difference of opinion
Opinions differ in the industry on whether the emphasis should be on cutting stocks of raw materials or on keeping strategic buffer stocks of basic materials. As the cost of most raw materials is not particularly high and many products are non-perishable there is an argument for holding finished or semi-finished goods in order to maximise responsiveness.
Another interesting trend, of which there are early signs, is for retailers to sign contracts with manufacturers not for specific products but for a percentage of a plant’s production capacity. The thinking here is that it could make it much easier to guarantee that a product will be delivered in the right quantity at the right time.
CPG manufacturers have moved to single plants manufacturing the same product for more than one country or market. This in itself creates complexity with issues such as production scheduling.
A couple of years back, Unilever famously announced a programme to rationalise the number of SKUs. This was very effective, says Stubbs. However, the pressures of new products and packaging have effectively reversed those gains and the number of SKUs is, for most manufacturers, as high as ever.
The manufacturers of CPG goods are also faced with selling into some complex and varied retailer systems. Some have outsourced downstream logistics totally while others have started to look at an electronic auction model. However, ‘it requires a lot of competence to take on these innovative ways of dealing with supply chain issues’, says Stubbs
Not enough attention has been paid in the past, perhaps, to the quality of the supply chain or to the human factor. Stubbs knows of instances where a company’s expansion plans in some markets has been curtailed by quality issues.
CPG has been one of the early adopters of Vendor Managed Inventory, according to smart solutions provider, SEEC. European sales and marketing director Steve Ashurst explains that while initiatives such as building electronic exchanges and then expecting retailers to use them haven’t been entirely successful, VMI has caught on because it offers retailers reduced costs and, for the manufacturers of CPG goods, a degree of customer ‘lock-in’.
VMI can cut costs for retailers by taking inventory off their shoulders and it also helps automate the process. True, many retailers have already invested in EDI systems, but EDI doesn’t lend itself to CPG with its frequent changes of product and packaging specifications.
VMI can also help address one of the most vexed issues in CPG, namely the number of days’ worth of outstanding orders, which in Ashurst’s experience can be 78 days – on a turnover of perhaps E4,5bn. While some slowness to pay is wilful, in other cases it is due to lack of information and visibility. VMI makes it easier to control the process.
VMI should also make more sophisticated order management possible and allow real rather than buffer data to be transmitted. One issue that existing EDI solutions don’t always take into account is returns. It can also cut down the amount of confusion where, say, a manufacturer increases a carton size during a promotion and generally helps reduce instances of the retailer and the manufacturer’s information being constantly out of phase.
Linked to this are efforts to create a common electronic catalogue. In the US, Wal-Mart – perhaps spurred on by a study showing wastage costs of E3.4bn a year – is working on UCCNet standards, with similar initiatives in France and some other parts of Europe. While a universal electronic catalogue may seem to have something of the Holy Grail about it, if realised the rewards could be great indeed in terms of information flow and stock wastage.
‘I want it and I want it now’ has permeated to the supermarket shelf, especially with the US-style proliferation in packaging types, formulations and promotions that has occurred in recent years, says Andrew Yuille, marketing director of specialist software firm Strategix. ‘The interesting thing from our point of view is what it is doing to systems. In the old days, IT systems were built around doing business in the day and finding out what you’d done overnight. But now managers want to know immediately, especially if it’s something that puts an order at risk.’
These are the types of issues that Strategix’ new OneOffice suite is intended to address. ‘It brings together the front end of the business – the one that deals with the customer – with the stock management and procurement end of the business.’ It means, for instance, that marketing people can be told that a batch of product intended for a promotion is running late, so they can re-plan, postpone or cancel the event.
Being able to do this is especially important in the CPG industry, which has embraced leanness to the extend that there may no longer be enough slack to allow such blips to be overcome. It allows manufacturer, distributor and retailer systems to talk to one another, creating a single joined up enterprise, argues Yuille.
Strategix’s marketing director Peter Lusty adds: ‘We’re seeing pressure to gain efficiency right across the enterprise, with people taking more responsibility across departmental boundaries.’
Other trends in the CPG sector have added to the pressure, including reduced inventory and the movement of manufacturing capacity to distant locations. ‘So the earlier you can nip a problem in the bud, the better’, says Lusty.
He continues: ‘Traditional reporting systems were not good enough, but new systems are smart enough to cope.’ In fact, he says, the limitations these days are not so much IT as physical constraints such as the maximum number of deliveries it is possible to handle at a DC or retail outlet.
The main difference that the new breed of IT offers is that it is proactive, and infinitely flexible. It is possible for users to set their own thresholds ‘so if you find that someone is consistently late delivering you can focus on the type of alerts they’re getting’.
Moreover, unlike most previous IT systems, OneOffice is self-correcting so that alerts relating to events for which corrective action has been taken are not left cluttering up the system.
Relationships are important throughout the CPG supply chain, not only between retailers and their direct suppliers but between the latter and their own suppliers. Spending management solutions specialist Ariba has just launched a module, Supplier Performance Management (SPM) aimed at improving collaboration. The idea is that companies can analyse not just the initial cost of supplies but factors such as timeliness or precision of delivery – even the accuracy of invoicing.
The aim is not to beat up your suppliers, says Ariba’s director of product marketing, Paul Hampton, ‘but to allow decent suppliers to get closer to their customers.’ The system provides a range of likely KPIs such as product quality or delivery performance but it can be customised.
As SAP points out, getting costs off the bottom line is going to be important for companies in the future, particularly in slow- or no-growth markets. Hampton says: ‘One customer, which said that they expected to make savings of $32 million, estimated that to achieve the same effect through sales growth they would have to increase turnover by half a billion dollars – a tall order in today’s market.’
Colgate-Palmolive, which began its SAP R/3 implementation programme in 1994 with the aim of continuing to boost the long-term improvement in its gross profit margin with a target of 60 per cent by 2008.
On-time and complete customer order fulfilment had been improved from ‘very poor’ levels to around 90 per cent but further improvement was hampered by inadequate visibility of capacity constraints and demand – which was losing the company potential revenue. While replenishment order cycle times had been cut from nine to five days in North America, in other parts of the world they were much longer. Internal inventory levels and costs were high.
All these factors led to C-P starting a Global Supply Chain initiative in 1999 with the aim of building on its SAP investment. Although only part-way complete, the improvements have been spectacular, says SAP. For instance, VMI has led to a 98 per cent improvement in on-time and complete order fulfilment while the cross-border sourcing initiative has cut cycle times by almost half. Collaborative planning has cut error rate for promotions with one major retailer from 61.9 per cent to only 21.9 per cent.
Meanwhile, there is a lot that can be done to streamline physical transport. Exel is continuing to develop its two European Managed Transport Systems in Birmingham and Mechelen (Belgium), which can be briefly described as closed loop freight exchanges.
Visibility is also an important factor for logistics software specialist, G-Log, whose director for strategic marketing in Europe, Dominic Regan explains the efforts by one of its major customers, consumer products manufacturer Newell Rubbermaid to ensure that it is getting the best out of its transportation across 25 or more different divisions. While thoughts inevitably turn to technology, there is a lot to be said for ensuring that basic processes are right – like carrier rationalisation or carrier scorecards – before adopting expensive software solutions.
For Newell Rubbermaid, it was important to get the transport system operating smoothly as the company is increasingly sourcing from places like China and needed a system that would allow it to consolidate loads in the Far East rather than shipping piecemeal. Some of the exchanges that have developed can help, such as FreightTraders or the ocean shipping portals like GT Nexus.
Visibility is everything if excess stock is not simply to be transferred from the factory yard to the supply chain, and there is a lot that could still be done to cut order cycle times. ‘However, you can only take stock out when you can have certainty in your supply chain,’ Regan explains.
He adds that work by MIT suggests that the issue in industries like CPG is not so much the stock you have in the supply chain, but where you hold it and in what form. For instance, rather than hold stocks of bottles, all printed up for a particular country or market, a heap of plastic pellets could be more effective – ready to be turned into bottles at the touch of a button.