Consumer Products Industry: How the Smaller Players can Compete

Meeting Advanced Supply Chain Requirements for the Non-Traditional and Small Consumer Products Manufacturer

 

Evolution of Advanced Consumer Products Supply Chain Requirements

The Consumer Products industry has had several significant shifts in supply chain methods over the past 30 years.  In the 1980’s, large grocery and mass merchandise retailers began to influence manufacturers to execute their supply chain processes in a manner that would be beneficial to the retailer’s cost structure.  As the large manufacturers of high volume consumer products adopted new service oriented processes, the resulting inter-enterprise design proved advantageous to both sides.   

In the 1990’s, another group of large retailers, the big box retailers of specific product segments, followed suite.  However, this change (along with the expansion of the product line by mass merchandisers) moved these supply chain process requirements to a new group of manufacturers.  In these cases, manufacturers were forced to adapt to meet the same supply chain services and performance of their predecessors.  These manufacturers often sold through wholesalers/distributors, but were being forced to sell direct to retailers to achieve the established industry supply chain financials.  In many cases these manufacturers were selling only part of their product line directly into a consumer channel resulting in an operational disruption to their remaining business operating model.  For the big box retailer, compliance to supply chain operational requirements became the most important decision point for determining which product to place on the shelf, especially for product lines that did not demonstrate significant consumer preference.

By the turn of the century, a new shift in supply chain in consumer products started to emerge, Demand Driven Supply Chain.  This approach was to leverage information regarding actual sales to consumers and use this as the trigger to replenish supply to the retailer.  This pull approach differed significantly for the traditional forecast driven push approach to supply chain management.  Later in the decade, consumer product sales on the internet gained traction, first with retailers providing an alternative to brick and mortar outlets, then as a direct approach for wholesale distributors to bypass retailer and then as a channel for manufacturers to bypass the entire retail channel and go direct to the consumer.  More recently, social media has change the ability for small manufacturers to get their products recognized by the consumer and following this trend, more large retailers are merchandising products from these smaller manufacturers.

The Supply Chain Challenge for the Non-Traditional and Small Consumer Products Manufacturer

Many non-traditional consumer products manufacturers have supply chains designed for business to business commerce of non-consumer products.  Others find that they get a greater return by investing in their product development or manufacturing scale than in improving their supply chain processes.  Still others are early in their overall business maturity and cannot afford to be fully competitive in their supply chain processes, often because their overall volumes do not permit the economy of scale benefits of large volume supply chains.

However, the entire consumer products channel is now based on the underlying performance capabilities established over the past 3 decades.  These include:

·    Competitive fill rates and on-time delivery targets

·    Limits on inventory investment by the retailer

·    Ability to support customer facing CPFR programs

·    Ability to respond to pull signals based on POS data

·    Ability to ship direct to end consumers

Thus, these non-traditional and small consumer products manufacturers need to develop some reliable methodological approach to meet these in a cost-effective manner that allows acceptable profitability in an inherently low margin channel.

Key to Supply Chain Success for the Non-Traditional and Small Consumer Products Manufacturer

Success for consumer products manufacturers is driven by how effectively, reliably, and efficiently they can respond to changes in consumer demand and preferences for product characteristics.  The most successful are those who can utilize the mass amounts of very granular data and be predictive in their planning to meet these volatile demand signals.  In addition, they typically have physical supply chain operations that are flexible so they can respond efficiently to changing plans.  This allows for a minimal about of inventory investment to buffer against demand changes.   However, many non-traditional consumer products manufacturers are structured to support other types of supply chain attributes common in business to business transactions, such as shipments to a limited network of customer locations, just-in-time programs, and promotion free sales.  Small consumer products manufacturers simply do not have the scale or resources to reach this level of sophistication. Thus, these manufacturers ability to apply leading edge consumer products supply chain practices is limited.

Fundamentally, though, the root of success is to have visibility to whether the manufacturer’s ability to supply is in line with the actual consumer demand and when it is not, what is the best way to react.  The decision on how to react depends on the time horizon that the imbalance is identified, for example:  

Long-Term

·    Demand – Will reduced revenue impact the company’s overall financial performance ratios and if so, how can it be increased?

·    Supply – Can inventory be built in advance or supplied through new or alternative sources of capacity?

Mid-Term

·    Demand – Can demand be manipulated in order to either achieve the best margin based on the available capacity of supply or to reduce product variations that create less efficient manufacturing?

·    Supply – Can capacity be increased through extending working hours or by planning longer production runs and will the increase in inventory build adequately cover the demand shortage?

Short-Term

·    Demand – Can customer demand be prioritized to best allocate capacity while preserving customer service expectations and profitability targets?

·     Supply – Can actual consumption of inventory be identified to avoid sending replenishment inventory to the wrong place at the wrong time, thus making more inventory accessible for to supply real demand signals?

Improving Supply Chain Effectiveness by Reducing Impact of Volatility

Non-traditional and small consumer products manufacturers often find it to be difficult to respond to the short-term volatility inherent in the consumer products industry.  Although it is the actions of external parties that create this volatility, it is often the internal needs of the business that create the pressure.  This is a result of the need to hit the sales plan to meet the financial plan and in many cases the need to attained desired inventory positions at the end of a financial period.

This is where the results of the Integrated Business Planning (IBP) monthly process can come in to play to support decision making when there is a demand - supply imbalance. One result of the IBP process is to establish the specific financial, sales and supply chain objectives for the immediate next month so that the entire business has a completely balanced executional plan.  Typically, the assumption is that this IBP plan for the current month is fixed.  However, the external changes (and potentially some internal failures) make the assumption of a fixed integrated executional plan to be invalid.  The IBP does however provide an overall framework for what the end performance expectations need to be.

It is often the case that all parts of the organization spend much time and effort responding to variances between plan and actual and often these variances have an additional burden of forcing new imbalances between demand and supply.  Although necessary to make adjustments to respond to market place volatility, the typical approach is flawed.  What usually happens is that each functional area looks at their requirements based on the IBP and makes adjustments to do their best to meet their portion of the plan.  However, this independent solutioning adds further risk to adding more demand – supply imbalance because it is the aggregation of the activity that is what is measured against the IBP plan and there are many ways for each functional area to meet their overall performance numbers.

A new best practice, often referred to as Executional Sales & Operations Planning is an approach that takes a similar collaborative planning approach used in IBC and incorporates it into the executional response to market variances, all while using the IBP plan as the “guard rails” to keep the organization working to achieve the overall performance plan.  As this process occurs throughout the month, the whole organization can start to make proactive decisions that are integrated in their design while reacting to variable demand and supply signals.  For the non-traditional consumer products manufacturer where this channel represents just a portion of their business, this approach will also take into consider IBP plans and requirements for the rest of the business, reducing the impact of the consumer market volatility on their Business to Business operations.

Conclusion

The consumer products industry has evolved over the past several decades in a way that has elevated expectations for both improved supply chain economics and for being highly responsive to actual consumer demand signals.  Non-traditional and small consumer products manufacturers can be highly successfully in this environment, matching the service levels of the established leaders without this channel becoming an operational and financial burden.  Understanding the balance between demand and supply for all time horizons is foundational and critical to a consumer products manufacturer’s success. Keeping the organization focused on the integrated business plan objections helps the organization navigate through the highly variable market forces and break down functional silos so response decisions are aligned across all aspects of the business.

 

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Jim Krasner is a Principal with GitaCloud. 

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About GitaCloud

Incorporated in Delaware, GitaCloud is on a mission to improve integrated business planning and decision making competencies at it clients. GitaCloud Principals come from a rich background of helping dozens of leading Fortune 500 companies through their business transformation in Sales & Operations Planning, Demand Planning, Supply Chain Planning & Optimization domains. GitaCloud offers a full range of services: business transformation advisory, reselling best of breed cloud software, Systems Integration engagements, and Supply Chain Managed Services. GitaCloud clients range from Automotive, High-Tech, Pharmaceutical, Consumer Goods, and Retail verticals across North America and Asia Pacific markets. For more information, please visit www.GitaCloud.com.