TPM Report 2017: State of the Industry

Lora Cecere, Supply Chain Insights
12/21/2017

BUILDING OUTSIDE-IN PROCESSES

In the boardroom, the pressure is on. The consumer goods industry is battling multiple forces. The internal dialogue focuses on the impact of the “Amazon Effect,” cost pressures from the “3G Effect” (shareholder activism), and the potential challenges and benefits of disruptive digital innovation.

In this environment, traditional marketing programs don’t work nearly as well as they did in the past. Traditional supply chain programs don’t work as well either. They’re too insular. The traditional approach is inside-out, focusing on enterprise processes and transactional efficiency to improve order-to-cash and procure-to-pay.

To compete in today’s market, companies need to sense and respond from the channel back. The focus needs to move beyond the four walls of the enterprise.

Why Is Outside-in Important?
To understand the criticality of process redesign, let’s take a close look at one specific industry segment. As shown in Figure 1, the food segment has experienced a steady decline in operating margin (despite the benefit of declining oil prices). The main issue has been an increase in item complexity and its impact on costs. Mistakenly, consumer products companies have attempted to grow through acquisition over the last few years.

TPM Report 2017, Figure 1

Aligning with the Shopper
Consumer goods companies are still trying to survive on large, standardized systems that produce massive volumes of the exact same product. Those days are gone. What’s needed are outside-in processes that focus on the shelf and, most importantly, the shopper.

Today’s shoppers want locally sourced goods. They seek fresh, personalized products. They want wellness. They want convenience and product quality.

There are many market factors to consider. Among them:

New retail formats simplify shopping: Extreme discounters Aldi and Lidl are emerging in the U.S. as masters of store efficiency. While the traditional grocery store has more than 40,000 items in 250-plus categories, these Germany-based retailers have 80% to 90% fewer items in half the categories. The result is simpler shopping, as well as far fewer line extensions — and less brand variety — on the shelves.

This creates tension: Traditional consumer goods companies have added 38% more SKUs to their item master over the last five years. These line extensions drive cost and complexity.

Trust is eroding in big brands: The introduction of such successful start-ups as product manufacturer Honest Company and online retailer Brandless is a megaphone for consumer sentiment. Even their names defy big brand power.

At the same time, private label is growing. The penetration rate is 18% in the U.S.; it’s 45% in Switzerland. Big consumer brands are losing share. The center store is moving online. Yet many traditional brands have been slow to build a strong online presence.

E-commerce is changing everything: As Amazon extends its tentacles, stretching into supply chain crevices and redefining capabilities, many corporate boards are realizing that the future may be in doubt if they don’t act now. Meanwhile, shareholder activism is increasing, with industry giants like Procter & Gamble, Mondelez and Nestle being threatened. (It’s why Kraft and Heinz are now a single entity.)

How to Improve Margin and Share
Match Physical to Digital. Most companies are presenting a gap between the physical world and the digital online experience to the marketplace. E-commerce today is only 4.0% of total sales (although it varies widely by product category). But it’s expected to be 8.0% in 2021 and will continue to climb. Consumers want the package they view on their laptop or phone to match the physical reality. For manufacturers, this is a major issue that requires them to rethink both digital asset management and product delivery.

Aggressively Implement Smart Label. Consumers want to scan the shelf and view the life of the product. To gain market share, manufacturers should aggressively develop smart labeling to provide greater shelf visibility. This will require reworking data capture and other elements of the business process, but it is becoming a necessity with consumers.

Redefine Trade Promotion Spending. Start with a key one and make the transition category by category. Overhaul price/pack architectures, then take the 20% of revenue normally spent on trade promotion and reinvest it in building the omnichannel experience. Recognize that trade spending shifts demand rather than shaping and increasing baseline lift. As a result, it increases the cost of the product through marketing spend and related supply chain costs. Help wean the company off this bad drug called traditional trade promotion management.

Reduce Complexity. The consumer packaged goods industry has excelled at line extensions. But they’ve provided little value for consumers and added complexity to their decision-making — as well as to the manufacturer’s supply chain. They are a fundamental driver of higher costs. Although their launches allowed marketing to check the box on new product introductions, most were not successful. The solution? Simplify. Streamline the consumer experience by rationalizing line extensions.

Invest in Fresh and Wellness. Cookies, snacks and the like are declining in a market seeking fewer packaged foods and more wellness options. Redesign the supply chain to deliver localized assortments of fresh products to deliver on these wellness trends. Rethink categories to align with consumer needs and deliver on new value propositions.

The Mirage of Outside-In Processes
To remain in step with market trends, consumer goods companies need to build outside-in processes. That includes learning to use channel data and sensing demand. They need to test and learn from cross-channel consumer patterns and mine unstructured data to understand consumer sentiment.

The winner will not be the one who “yells” the loudest through marketing, but the one who listens the best through outside-in processes. The challenge in doing so, however, is to break down functional silos. Companies need to be market-driven, not marketing-driven.

An inside-out process can’t be modified to become outside in. The outside-in process must be defined as such from the beginning. 

The reason? An inside-out process is insular, all about the company. An outside-in process starts with the channel; data is synchronized to flow across markets rather than simply being integrated. The architectures are also very different. Some of these are defined in Figure 2.

Companies can start by drawing the outside-in flows on a whiteboard. Think of the data and signals in the channel that can inform systems and drive a better response. Then list the data and flows in the supplier base needed to succeed against the business goals. As a next step, list the goals and new requirements from the customer. Build the flows by listing all the data forms — from structured, unstructured, streaming, and federated sources — that can inform the decisions. Then identify the potential of outside-in processes.

Building outside-in processes literally requires thinking outside the box — the box in which most companies currently find themselves: saying they need to innovate but then limiting their thinking to traditional enterprise-based processes.

The four walls of the enterprise are the box. But the future of digital innovation is not enterprise thinking. Consumer goods companies must leave the past behind, to unlearn before they can relearn.

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