Reimagine CPG Supply Chains

Background

Many industries are getting disrupted and the pace only seems to be increasing. One Accenture study concluded that by 2027, half of S&P 500 companies may no longer exist! Consumer product companies are no different and they are battling to stay relevant within their industry. As the CPG Industry faces increasing number of challenges, for a CPG company to thrive or even survive will depend on how effectively it is able to convert the challenges into opportunities. In this context, we believe that supply chains assume a lot of significance because they are the critical link between a company’s business strategy and its operations strategy. Supply chain is the conduit through which a CPG company can fulfill the promises it makes to its consumers and its markets. A great branding and marketing strategy would enhance consumer engagement and generate the pull for the company’s product, but if the product is not available on the shelf at the right place at the right time, the overall consumer experience would suffer. Negative consumer experience in today’s world has disastrous consequences. Hence, for a CPG company, fulfilling the consumer demand as reliably and as rapidly as it could is of the highest importance. In fact, to stay ahead of competition, the company has to not only meet but exceed consumer expectations.

Brand Relevance Challenge

The consumer marketplace has always been very competitive and numerous fierce battles have been fought. CPG companies protect their brands aggressively. In spite of this competitive spirit in the CPG company’s DNA, they have not been able to stop the onslaught of new entrants. The stark fact is that the new entrants are giving the incumbents hard time in existing product categories! The new entrants who have created whole new product categories are forcing the established players to play a catch-up game after having already established themselves in leadership positions. According to an Accenture study in the US, with 19% of category sales, the smallest food and beverage companies are leading with revenue growth of 53%. In emerging markets, big CPG companies are losing market share and small brands which were not there in top 100 are now in top 3. Also, 40% of leading brands are facing declining sales.

So, the first major challenge to overcome is to protect the relevancy of the brand in order to protect and eventually grow market share.

Brand management and marketing has been the forte of CPG companies. The CPG companies had the best branding and marketing teams internally which collaborated with best advertising and creative talent externally to create memorable brands. Once the brands were established, the consumers only consumed the brands. Under the holy grail of the established brand identity, the CPG companies could afford to push multiple me-too products and product line extensions garnering more market share. But this has now changed. Consumers are no more passively receiving marketing messages and product offers but they have become product creators and active curators. Today’s consumers greatly influence how the company’s messages and offers are interpreted in the market and there could be a significant difference in what company expects versus what response it receives from the market. This shift of power from the company to consumer’s hands has resulted in creation of new business models. Some of the new entrants in the CPG industry collaborate with the consumers in the value creation process be it as an investor (crowd-funding), product innovator, manufacturer, marketer or even seller.

The established CPG players have twin objectives at a very high level to go after: to experiment with new business models and to change their core branding and marketing operating model with consumer as the center. The CPG companies have to develop and collaborate with eco-system of players with portfolio of digital technologies and skills to accomplish this. Also, they have to develop the digital foundation to scale the twin objectives and be ready to add on more capabilities in order to capitalize on the new opportunities that come up.

Agility and Responsiveness Challenge

Its been almost a decade when first consumer product companies started talking about omnichannel demand fulfillment. The omnichannel demand fulfillment became a necessity as consumers started buying products on their phones, over the internet, through ecommerce players like Amazon and others. So, the traditional brick and mortar channel had to be complemented with these digital fulfillment channels. As Amazon started offering a greater number of categories online with promise of short fulfillment window and a flexible product return policy, the expectation of consumers regarding order fulfillment started changing dramatically. Another important change that came about in the consumer buying behavior was a result of the ability to evaluate and buy products any day of the week and any time of the day. Also, consumers could cancel and change orders easily on the fly. This has brought about a whole new dynamic in agility and responsiveness required to service orders over the digital channels. There is another interesting thing that has emerged in the order fulfillment space. If the consumer does not find what they were looking for in a retail store or a supermarket chain, they could inform the service staff who in turn try to get the product shipped from another store sometimes directly to the consumer’s doorsteps. This phenomenon has resulted in a greater number of store-to-store transfers and direct store deliveries. Also, drop shipments from the manufacturer to the customer’s distribution center or store is also increasing. All these approaches are targeted to increase agility and responsiveness in supply chain operations.

What we find is that the share of digital channel purchases across product categories is increasing dramatically. In the earlier days, Walmart disrupted the CPG company supply chains by offering every day low pricing across its stores for the first time. In the digital world likewise Amazon’s prime day is causing disruption of similar or greater magnitude. In the digital fulfillment area in order to increase agility and responsiveness, CPG companies are having their own mobile applications and websites tied to their independent ecommerce channel or piggy-backing on ecommerce channel of their customers like large supermarket chains Walmart, Target, Carrefour, Aldi etc. or ecommerce channel of pureplay online retailers like Amazon, eBay and other notable category specific and region specific eCommerce players.

Multiple Supply Chain Challenge

CPG companies have a unique challenge in the context of their supply chain operating model. In light of emerging new business models, new fulfillment channels, focus on consumer centricity and need for agility and responsiveness in fulfilling customer and consumer demand, a single supply chain is insufficient. In fact, having multiple fit-for-purpose supply chains is the need of the day.

Traditionally, the focus of supply chains has been to move from right to left on the Efficiency and Cost frontier. This assumed one fit-for-all supply chain.

This now has changed and the supply chains are increasingly getting segmented. One way to look at it is following:

At the least, the above segmentation results in three different fit-for-purpose and concurrent supply chains. The 1st segment represents the existing supply chain delivering core products and new products through existing distribution network. The 2nd segment represents new fulfillment channels: direct store delivery, drop shipment, store to store transfer, direct to consumer delivery of core products and new products. The 3rd segment represents delivering innovative products developed in collaboration with consumers through innovative ways in addition to the new fulfillment channels example being consumer as manufacturer, marketer and seller of products. The 4th segment will not be relevant because innovative products as described earlier will not be delivered through existing distribution network till, they are accepted by the masses in which case they would become part of the core business.

Future Supply Chains

Across the board and specifically in the CPG industry, companies are facing increasing amount of volatility and there is no doubt about that. Multiple factors contribute to this high volatility: omnichannel demand fulfillment, digital consumer behavior, entry of more nimble competitors with differentiating go-to-market business models, increase in number of new products, shortened product lifecycles, increase in number of fulfillment channels and routes to market and shortening order fulfillment lead times. Over and above this, the current COVID pandemic has created a different and unprecedented volatility and underscored one fact that volatility due to extraneous environmental, biological and geo-political factors will continue to stay. Given the backdrop of all this, something that had been relegated to annals of supply chain literature has come to the fore-front and that is supply chain risk management.

Future supply chains have to be risk ready strategically and operationally. Risk management discipline has to become core tenet of supply chain strategy and the supply chain operating model.

If we just prefix risk in the above figure with supply chain- that is the level of risk management rigor that needs to be incorporated in the supply chain strategy and operating model of the future.

The other core capability required in the supply chains of CPG companies is end-to-end visibility of supply chain performance at any time. As CPG supply chains have become extended with multiple supply chain partners working in collaboration with each other together with the requirement of agility and responsiveness, the requirement for visibility has become more pronounced and in fact it has become a driver for achieving competitive advantage. The good news is that the advancement in technology in the areas of data availability over cloud platforms, Internet-of-Things, interoperability across systems and devices, data analytics and powerful visualization could be leveraged to achieve this goal. How well the CPG companies are able to adopt and leverage these technologies will determine how much control they would have on their supply chains.

Thirdly, supply chains have to become consumer centric. Everything in the CPG world is geared towards achieving consumer centricity. We discussed in the paper earlier about the importance for the CPG companies of keeping their brands relevant in the digital age and the only way to do that is to become extremely consumer centric. Supply chains have to work in tandem with organization’s branding and marketing and commercial organizations to achieve consumer centricity. Thus, supply chains have to be aligned with consumer’s buying journey. With advancement in digital technologies, it has become possible to not only understand consumer’s buying behavior but also predict it and subsequently go to the next level by prescribing products over mobile, social media and over the internet that consumer will be interested to buy. All this happens in the digital world whereas the actual fulfillment of consumer’s demand happens in the physical world. The overlap between digital and physical supply chains has blurred. What is required is to enable frictionless interaction between digital and physical supply chains aligned to consumer’s journeys.

Earlier, we had mentioned that having multiple fit-for-purpose supply chains in the CPG world is not an option but a necessity. We had also mentioned that CPG companies if they are able to redefine their supply chain operating model could convert more opportunities into sales by adding new capabilities to their supply chains with time. Thus, another core capability required is to ensure seamless co-existence of multiple supply chains with a combination of standardized foundational and modular differentiating capabilities.

In addition, with the fast evolution of digital technologies particularly Artificial Intelligence, Machine Learning, IOT sensors and Edge Computing, Machine-to-Machine/Machine-to-Human/Human-to-Machine communication interfaces, a correlation could be drawn between how driverless vehicles drive and how supply chains could operate. Its not far that intelligent, self-correcting and autonomous, supply chains will emerge. Portions of supply chains be it use of sensors and additive manufacturing in production, use of Robotic Process Automation in automating repetitive and transaction heavy processes, Driverless trucks and IOT in transportation and logistics, demand sensing using AI/ML for predictive forecasting of consumer demand, are already undergoing transformation. We feel that, CPG companies have the opportunity to strategically leverage the next generation technologies to create supply chains of the future.

Last but not the least, we should not forget that business will still be conducted only if human beings work in conjunction with each other and with these new technologies. As the penetration of advanced technologies in supply chains is growing rapidly, the CPG companies have to develop technology savvy supply chain talent in their supply chain organization. CPG companies are and will be spending billions of dollars in digitalizing their supply chains and in order to take the full benefit of the transformation, the supply chain organization needs to transform as well.