Supply Chain Report 2018

Building the Consumer Value Chain

Five trends that are transforming traditional business strategies

By Simon Ellis
Vice President, Supply Chain Strategies
IDC Manufacturing Insights

The mission of the modern consumer products company is to create and offer engaging experiences at scale for both consumers (the end users) and customers (mainly retailers). It is no longer sufficient to meet the needs of consumer segments; companies must now meet and exceed the needs of individual consumers, both in ways they expect and ways in which they have not yet imagined.

Strategically, there must be an emphasis on innovation excellence in terms of the success of new products and in the number of new products needed, on the ability of the supply chain to manage different engagement models, and on the ways in which both consumers and customers are engaged — and how that engagement gets funded. Consumer and customer expectations in various product categories will make these strategies mandatory, but implementation success and efficacy will determine profitability and competitive differentiation.

The challenge for the consumer goods supply chain, therefore, is to support the broader business in this mission. In part, that will be driven by becoming as ruthlessly efficient as possible, but it also will require the ability to support new, often digitally enabled business models. In IDC’s 2018 supply chain survey, when asked about the drivers of transformation, there was a clear mix of both.

Indeed, most of the consumer companies with which IDC speaks see dual goals for their supply chain programs. While the specter of disruption may be in the back of executive minds, the opportunities for digital transformation to drive productivity gains is in the front. While disruption mitigation and/or enablement is a critical part of digital transformation (DX) in the supply chain, in the here-and-now the focus appears to be more on efficiency and waste reduction (see Figure 1).

Be that as it may, it’s clearly incumbent on the consumer goods supply chain to be prepared for the future. The competitive environment is far friendlier to small startup businesses than at almost any other point in the industry’s history, and these “ankle biters” now represent a material percentage of overall industry growth. Many are employing digital supply chain capabilities that are central to their business models. With this in mind, let’s look at some key trends for the near future.

5 Trends for 2019 (and Beyond)
The consumer goods industry has come a long way in just a few short years. Here are five trends that we see driving change:

1. Over the next decade, 90% of industry growth will be captured by companies that successfully engage directly with consumers. Consumers rule the marketplace; they are ubiquitously connected, crave individuality/personalization and are intolerant of complexity and latency. They are a consumer goods company’s worst nightmare — and its greatest opportunity. It seems intuitively obvious that the companies who figure out how to best engage with these consumers will get more than their fair share of growth. And, by the way, as older consumers give way en masse to Millennials, the “problem” will intensify.

2. As barriers to entry fall over the next five years, smaller “lateral” competitors will wrest 10-15 share points from traditional, established enterprise players. It’s estimated that, of the $35 billion in net industry growth over the past three years, only $1 billion has come from traditional enterprise players. Although small entrants have historically contributed significantly to industry growth, IDC has never seen it this high.

What’s more, these new competitors are appearing in record numbers, which means their impact likely is not an anomaly. This is partly because historical barriers to entry (technology, manufacturing facilities, etc.) have fallen; they’ve either become “commodities” or are available via the cloud. Another reason is that, as consumers look either for personalized products that appeal to their generational preferences, smaller competitors are better positioned to be flexible and take risks.

3. By 2020, the contribution of new products (less than 3 years in market) to overall revenue will increase by 20%. Many product categories already experience fairly high SKU churn (cosmetics, for one). This is only going to accelerate over time as consumers become more demanding about personalization and product differentiation. For the purposes of these projections, we define new products as both “Horizon 1” (such as line extensions and variants) and “Horizon 2” innovation (new brands, value propositions, etc.). It likely won’t happen in all product categories, but it certainly will in the health & beauty and personal care segments (to name two). One implication here is the need for companies to up their game in the new product development and implementation process.

4. By 2024, more than half of consumer product manufacturers will rely on artificial intelligence platforms to drive digital trans-formation across their supply chain, leading to productivity gains greater than 20%. In the last few years, a massive increase in globalization efforts has led to increased complexity across supply chain networks. The number of DX initiatives has increased dramatically, and the growth of third-party platform technologies such as mobility, cloud and analytics will continue to have a strong impact on the way data is monitored and consumed. The data analysis that is undertaken will lead to additional insights that can help organizations realize the untapped value in their existing supply chains.

5. Within five years, half of all consumer product manufacturers will be using actual demand data instead of short-term forecasts, resulting in an average “on time, in full” delivery improvement of 2%. As data sets become more commonplace and accurate, from traditional sources like ERP and emerging ones like social media and IoT-powered sensors, it’s conceivable that short-term forecasting will give way completely to replenishment based on actual demand.

Demand visibility is much better today than it was three years ago, and there’s every reason to believe it will be progressively better three years from now. Recognizing the need for more flexible supply-side capabilities to engage across different channels and customer groups, manufacturers are already moving away from the restrictive supply organizations of the past decade. The components are increasingly in place, IDC believes, to transform demand replenishment from being primarily forecast-based to being response-based. A supply chain that can replenish in real time should not constrain itself to the “quaint” notion of forecasting.

The ability to better engage with customers and consumers, at scale and in real time, will ultimately separate the industry’s winners from the losers. Clinging to the traditional ways of serving the industry will work for a while but eventually will be a marginalizing strategy.

Advice for the Tech Buyer
Today’s consumers (and by extension, the retailer customer) have far more power in the buyer/seller relationship, due both to the abundance of information available to them and an increasingly competitive brand environment. This fact is driving product manufacturers to identify additional sources of competitive advantage by which to better satisfy increasingly demanding customers.

Manufacturers now compete in a fast-paced, information-intensive world in which both successes and failures exist with complete transparency. There is pressure to manage both inter-company and intra-company processes with greater alacrity. Standing pat is the surest way to fall behind.

IDC recommends a number of actions. They revolve around thinking about the future of the business, the likelihood of industry disruption, and the specific solutions technology can provide:

• Avoid “technology for technology’s sake.” Instead, solve business problems or seize on opportunities. IDC still gets manufacturers asking about “setting up our own IoT lab” or some such nonsense. Are you a technology company? If “no” is the answer (and it often is), manufacturers should instead work with a technology partner and focus their efforts on understanding how technology will help solve existing business problems (or anticipate future ones).

• Decide if a digitally enabled supply chain is important to how you currently run your business or how you expect to run the business in the future.

• Have a clear supply chain strategy and end goal: What do you want to be, when and how, in the context of creating market-altering customer and consumer experiences? Determine the extent to which the supply chain can support new business models.

• Take an “outside-in” approach to digital transformation and the supply chain. Work with external partners to define and develop capabilities; don’t try to do yourself what others can do better for you.

• Be objective about where you are and where you need to be. Many companies believe themselves to be far more advanced than they actually are and, as a result, may fail to act when and where necessary.

__________________________________________________

_____________________________

Disrupt OR BE DISRUPTED

IDC and Oracle outline key deliverables for the digital supply chain

In a world in which consumer satisfaction with brand products and services directly impacts organizational success, it is imperative that companies think, plan and execute differently than they have in the past. The list of business process changes, initiatives, and investment opportunities is long and the stakes are high for creating best-in-class supply chain visibility, efficiency and consumer fulfillment experiences.

The bar for fulfilling both business performance expectations and consumer expectations is higher, and companies need to act now to both reduce costs and add more consumer value in order to stay competitive — if not stay in business. The best supply chains will be built on strong foundations with data at the core, and as new inputs, outputs or technologies are added to the mix, processes will be adapted, maintaining or improving operating efficiencies while improving service.

New partnerships will be formed, ecosystems cemented, and services through which to access them will be revolutionized. Industry 4.0 solutions, including digital core technologies — IoT, AI/cognitive computing, blockchain, mobile, and voice — radically change the level of precision at which movements, activities, and processes can be managed.

Running IT supporting supply chains becomes less critical for some companies, and they hand off control to managed service providers. Others find that running as a SaaS or cloud-based capability offloads enough of the mechanics of IT while improving the ability to innovate and drive successful outcomes for their companies.

The fully digital supply chain enabled by Industry 4.0 is built on a common shared data core and essentially one version of truth. It is also a secure and transparent platform for seamless data exchange and collaboration. The following are critical implications with thoughts regarding how to take action. The consumer supply chain needs to deliver:

• Convergence among consumer goods and retail (direct-to-consumer models, enhanced collaboration). Retailers are expanding private brand portfolios, and consumer goods companies are figuring out how to influence and sell to the consumer directly; disruptive brands often start with a small set of products or a service finely tuned to fill a gap or take a fresh approach to solve for a consumer need. Companies need to be hyper-aware of shifting consumer trends and buying patterns, focus more on product and service innovation, and respond adroitly in areas forecast to be hot opportunities or implement the necessary defensive moves.

• Omnichannel solutions. As the identities of consumer goods and retail companies converge, driving towards a common data core becomes more important. Retail and manufacturing solutions will, of course, operate independently and have independent master files, but access to common customer, vendor, product, and sales history records becomes imperative. Marketing and fulfillment objectives align with customer satisfaction, and best-in-class supply chain execution makes satisfaction possible. Companies should evaluate the data that could be transformed to enable better consumer satisfaction.

• Product transparency and traceability. As marketplace product portfolios expand and global goods are available everywhere, issues of authenticity become more prevalent, and consumers desire more transparency and validation that the product they are buying is certified authentic and is what it claims to be. Similarly, as the planet becomes more populated, the food supply chain needs to evolve processes that improve quality and safety and reduce waste. Technologies such as IoT and blockchain can pinpoint a lot — a farm, or an animal that may, for example, be the source of a tainted product that needs to be recalled, or perhaps just traced for compliance reasons. Writing essential information to the blockchain at each crucial stage in the supply chain can help provide inter-enterprise visibility, as well as an immutable digital record.

• Real-time visibility. People can be more productive when visibility, enabled by IoT, improves the orchestration and execution of supply chain processes. Coupled with AI and machine learning, processes can be continually improved and continuously automated more, reducing human interaction requirements, improving inventory accuracy and enhancing performance results.

• Conveyance reinvented. Best practices in inventory visibility, combined with best-practice last-mile delivery execution, results in the highest possible fulfillment customer satisfaction ratings. Inventory visibility enabled by IoT solutions that include sensors, data capture, and analytics solutions is the first step towards no compromise-no disappointment fulfillment. But if you combine near-perfect inventory accuracy as a result of these IoT capabilities with best-in-class, distributed order management-driven, last-mile fulfillment solutions, products can be staged with more precision and pick, pack, and ship operations can respond most efficiently. The action required is clear: IoT for inventory visibility and distributed order management solutions.

Traditional incumbents (with legacy, etc.) must embrace digital transformation lest they find themselves disrupted, and must take actions to think, plan, and execute differently than they have in the past. Whether being a disrupter is an objective or not, behaving like a digital native should be.

Excerpted from “The Future of the Supply Chain: Disrupt or Be Disrupted,” an IDC White Paper sponsored by Oracle (Simon Ellis, Leslie Hand, Ivano Ortis; September 2018).

___________________________________

__________________________________________

RESPONDING TO DISRUPTION

Innovative companies provide a blueprint for success

By Mario Vollbracht,
Global Director, Consumer Products
Oracle

The IDC research report commissioned by Oracle (see above) identified four major trends that are reshaping today’s supply chains. Here, we’ll look at some innovative companies that illustrate how traditional players can respond to these trends.

1. Consumer Engagement
It’s not surprising that today’s hyperconnected consumer is driving the changes we’re seeing in the retail and consumer goods industries. Consumer-centricity is no longer a buzzword; it’s the only way for organizations to survive. IDC predicts that roughly 90% of industry growth in retail over the next five years will be captured by companies that successfully engage directly with consumers (see above).

If they aren’t already, companies must focus relentlessly on personalization and frictionless commerce. This translates into making it easy for consumers to shop when and where they like, and tailoring products and services to their needs. Exponential advancements in technology over the past decade have made this possible.

Personalized styling service Stitch Fix is a great example. The company blends human expertise, advanced data analytics, and machine learning to make it easy for people to find clothes they love matched to their individual style.

2. Nimble Outcompetes Scale
Barriers to entry that traditionally existed in the retail and consumer goods industries have fallen. This is due to technological innovations, such as ease of access to manufacturing and logistics resources. According to a recent Clarkston Consulting study, this change resulted in an $18 billion market share shift from large companies to small- and mid-sized businesses from 2016 to 2017.

There are some phenomenal success stories that illustrate the rise of nimble and new market entrants, such as the digital natives that take on the Goliaths of the industry through innovation and agility. Warby Parker is an online retailer of prescription eyeglasses. The company was founded by four Wharton MBA students who noticed a few, large players dominating the eyeglass industry. It initially launched a basic e-commerce website, offering prescription glasses at a fraction of the typical retail price. Today, the company is valued at approximately $1.75 billion and is growing fast.

Warby Parker leverages technology to modernize processes typically found at an eyeglass store. For example, measuring eye pupil distance is done from the comfort of your home by holding a credit card in front of your face and taking a picture. Since all credit cards are the same length, that length can be used as a calibration to calculate the actual pupil distance.

3. Consumer-Friendly Fulfillment
Today’s global enterprises need 100% visibility of their inventory — from supplier to consumer, and from pack to parcel, down to the unit — to ensure timely fulfillment. Businesses have invested millions of dollars in their interaction with consumers, but they now need to focus on delivering on their promise of the right product at the right price and the right time.

Connected consumers, buying from their mobile devices, need to know that their purchases are being fulfilled with urgency and accuracy. Supply chains have gone from being a cost center to a competitive business differentiator.

Direct to consumer brands are built around this promise: Dirty Lemon Beverages only takes purchase orders via text message; Function of Beauty lets consumers create their own shampoo formula, then puts the buyer’s name on the bottle.

4. Elevate Innovation
Where retailers and product manufacturers once were highly complementary partners in the consumer goods ecosystem, they have now become — to no small extent — direct competitors. Retailers have become formidable brand manufacturers across the globe, with private label brands experiencing continued, phenomenal growth.

Take supermarket retailer Kroger as an example. In a mere five years, Kroger has built a portfolio of leading private-label brands from nothing to more than $20 billion in sales.

Most innovation nowadays comes from new, small entrants. These newcomers have been successful in taking on the big incumbents in very established categories. Method Products entered a mature household cleaning market that was dominated by a handful of large brand manufacturers such as Procter & Gamble and SC Johnson. Two friends saw an opportunity to make and market eco-friendly cleaning options. Method grew quickly to more than $100 million in revenue before being acquired.

The Moral to the Story
In this era of endless disruption, technology has transformed retail and brought about a rapidly expanding digital marketplace. The only way to meet consumer expectations and exponential change is through technology that is built to scale and can evolve. Tomorrow’s business will employ enterprise-grade, cloud-based solutions to meet the challenges of a highly complex marketplace. That means using a digital supply chain that enables end-to-end visibility of goods, data, and customer feedback.

Download a pdf of the full report below.