(Left: Takshay Aggarwal, Middle: Manish Varshney, Right: Kishor Gummaraju)
The key mission of every CPG company is to deliver its brand promise. The Baby Boomer generation drove the growth of packaged goods and made companies like Kellogg’s, P&G and Kraft Heinz household names and darlings of Wall Street.
While the growth in the last three decades has been good, this engine has been slowing and has come to a grinding halt in the last five years, in the range of 0.6% to 1.0% growth. In addition, stocks of major CPG companies hit 52-week lows in a roaring stock market.
What ails these companies? Why is growth a challenge? Is there a way out?
One needs to look closely at what is happening.
Changing Consumer Habits And Preferences
Consumers today expect to be able to buy almost anything, anywhere, at any time and at low prices. Gen Z and Millennials are looking at niche, healthy, organic, local, sustainable and authentic brands. The emergence of direct-to-consumer business models has further resulted in companies like Dollar Shave Club and Amazon being a lot closer to the consumer and their preferences than traditional CPG companies.
Eroding High Entry Barriers To Market
For CPG companies, it takes hundreds of millions of dollars to build a brand, 18-36 months to bring new products to market, and equal time in parallel to negotiate with retailers to get products on shelves. This served as a bulwark against any small companies; the cost of business was too high.
Things changed when Google, Amazon, and Quirky entered the picture. Quirky just needs your idea to design and manufacture on your behalf. GoDaddy just needs your credit card to start up your web site. Search engine optimization (SEO) will make you stand out, Amazon will provide you virtual shelf space to sell your products and drop ship orders as they come in. The barriers to starting up a business have eroded. This has resulted in the emergence of localized niche players that target micro segments and chip away at revenue growth.
Outdated Supply Chain Capabilities
CPG supply chains were built as linear value chains. This linearity brings with it the inherent inefficiency of supply chain latency, impacting the ability of the supply chain to react to real-time changes in demand. Coupled with this, the rise of direct-to-consumer business models has resulted in a need to orchestrate their supply chains across pallets, eaches, drop ship and last mile delivery. This is something that the CPG value chains are not geared for.
Establishing The Zero Distance Supply Chain
All this has resulted in an existential crisis for many CPG companies. It is imperative that they figure out a way to deliver on the needs of the consumer — in her preferred channel, at the right time, and at the right price. This requires a supply chain that is able to sense and respond to consumer needs in the most efficient manner. This is what we call a Zero Distance Supply Chain — a supply chain that is at zero distance to the consumer.
CPG companies will thus need to figure out an effective way to operate in this new omnichannel context. Their supply chains will need to orchestrate brand promise across multiple business models ranging from direct-to-consumer, drop ship for Amazon and Jet.com to traditional retailers. They will need to evolve into highly efficient, loosely held networks across different players in the consumer ecosystem.
Newer capabilities like artificial intelligence, machine learning and IoT combined with the improvement in computing capacity have now made it possible to build solutions that are able to intelligently orchestrate the supply chain in near real time. Supply chains can effectively respond to demand signals, weather events and inventory issues in a timely manner without excessive human interaction.
Making It Happen
However, making this happen is no easy task. It involves building new technology capabilities while ensuring that the existing business operations are not impacted. It also involves a significant rethinking of business processes and work practices. The keys to success are best understood by the learnings from partnering with a very large CPG company looking at re-architecting its supply chain planning function.
Delivery in agile sprints: Solving all the supply chain planning functions at once is like boiling the ocean. Hence it is critical to assess all the functions but work on the solution in agile sprints, delivering value at quick and regular intervals.
Rethink the processes and roles: It is not sufficient to put in AI, machine learning and automation. It is also very important to rethink how the supply chain functions would operate in the new context. The new capabilities create bandwidth for planners to be able to perform other strategic and value-added tasks. This also results in changes to job profiles and KPIs, which need to be planned for.
Drive the cultural change: Adoption of these new capabilities requires a culture willing to learn and experiment. CPG companies have traditionally reveled in picture-perfect planning with action items running in hundreds of lines, with a high degree of finality to everything. As a senior CPG executive put it, “Detailed planning and predictable outcomes have made us extremely successful but are the biggest hindrances to adopting an agile culture.”
Results Achieved And New Capabilities
The results we’ve achieved with this CPG firm have resulted in the following capabilities:
- Real-time planning of supply chain in seconds versus days with current planning applications
- Autopilot supply planning capability — planners intervene only in case of exceptions not handled by machine, resulting in a significant reduction in planning effort
- A self-learning system that can anticipate issues and learn from new data
The benefits we have been able to realize have also been substantial:
- An improvement in service levels by 0.1%
- A greater than 50% improvement in productivity
- A one-day reduction in on-hand inventory
Establishing a Zero Distance Supply Chain, which is able to sense and respond in an efficient manner in near real time, is key in the new omnichannel environment.
Establishing this is not a simple task. However, taking a comprehensive yet pragmatic approach of tackling all aspects of technology, process, people and culture can help realize value while establishing the foundation for the future.
Takshay Aggarwal is Associate Partner at Infosys Consulting with extensive experience in supply chain, operations and business development . He helps companies across industries leverage disruptive technologies like AI, ML and digital capabilities to evolve their operating models and transform their businesses to effectively serve their customers while scaling operations efficiently.
Manish Varshney is a Senior Principal in Infosys consulting in Retail, CPG practice with 18+ years of experience across Fortune 500 companies. He is leading the Automation Practice in Infosys Consulting focusing on CPG processes specifically in Digital Supply Chain and Master Data.
Kishor Gummaraju is a managing partner at Infosys Consulting with extensive experience in consulting, innovation, business development and running business operations. He has been responsible for delivering large business transformation programs and significant innovations in the manufacturing, retail and CPG industry. His current area of focus is driving value leveraging AI and intelligent automation – and scaling its capabilities across key U.S. clients.