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Top 5 supply chain challenges for consumer product companies

December 8, 2016

000013707142_fb_dairy_grocery_istock_gl497x373If there’s one industry that has consumer centricity at the core of its go-to-market strategy for the coming year, it has to be consumer products.

Leaders of consumer products companies need to strike a delicate balance between cost, quality, product innovation, and market growth, all while maintaining margins. Juggling all these and keeping the customer at the heart will always be a challenge.

An apt analogy from a McKinsey report describes this juggling act: Management in a consumer packaged goods (CPG) organization is all about finding the right balance between addressing short-term business needs and opportunities and setting a long-term direction. It’s like having a microscope for the daily business, and a periscope for future direction setting. Keeping a pulse on the everyday, ever-changing consumer preferences is paramount in the CPG industry, but at the same time, preparing for a future of growth is critical to stay in the running.

Last year, a study by the Grocery Manufacturers Association and Boston Consulting Group shed light on the challenges CPG companies faced in managing services, costs, and inventories. The survey showed a losing battle in the supply chain. The need to drive growth by reaching new customers and channels with new products is evident. The consumer product supply chain is always under pressure to deliver.

Here are the top 5 challenges facing them in 2017:

1. Consumer demand for variety
Consumers are more demanding than ever. There’s constant urgency to create new products to match changing preferences, which means more SKUs and shorter product lifecycles. This creates more complexity in product development, sourcing, production, and fulfillment, and higher transportation costs. This also adds to the pressure for CPG companies to better manage inventory. There’s no turning away from this. The consumer product supply chain needs to be agile enough to react to any changes in consumer preferences so the necessary adjustments can be orchestrated across the supply chain end to end.

2. New markets
According to McKinsey, the fastest-growing consumer product companies are those that have chosen to compete in the fastest-growing product categories and geographic regions. Manufacturers need to prepare for growth. One clear driver of revenue growth is investment in the right markets, which comes with its own set of challenges. Understanding the cost to serve in a particular market is one of the most significant factors in determining a product’s success globally. It is crucial that companies have a data-driven approach to identify the categories and geographies with high growth potential. Then, having greater flexibility in a global supply chain network will help consumer product companies to penetrate those new markets and create potentially new delivery models and fulfillment channels.

3. M&A: Portfolio consolidation
Another driver of sustainable revenue growth is mergers and acquisitions. According to a Consumer Products M&A Insights report by Deloitte, there was significant merger and acquisition deal activity in the European consumer products sector last year. Thirty-six large-scale European deals – with enterprise values exceeding €200 million – were agreed to in 2015. The combined value of these deals came to €144 billion, compared to 34 deals in 2014 amounting to €39.7 billion. The rationalization and consolidation of brand portfolios to deliver market leadership was a key influencer of M&A activity this year and possibly in 2017. Consumer product companies taking advantage of M&A opportunities may have high expectations for a fast path to sales growth or achieving cost efficiencies. During these times of consolidation and brand rationalization, any rigid enterprise systems and fragmented supply chain processes will be a stumbling block that will need to be addressed.

4. Digital supply chain transformation
Following the innovation in front-end marketing, investments in e-commerce and the customer experience, it’s no wonder that digital transformation has risen to the top of the executive agenda at leading global CPG companies. In general, digital transformation of the customer experience has a high priority for big brands, but the “window dressing” is not enough if the back-end supply chain infrastructure lets you down and can’t deliver the goods. In today’s globalized world, an organization’s success is no longer dependent on its own efforts alone, but is largely based on how effectively it can orchestrate a vast network of supply chain partners.

5. Low-margin, cost-focused business model and balancing act
The nature of the consumer product beast is a low-margin, cost-focused business. How far can any company shift away from that? This is a good question. Getting that right balance to achieve a sustainable business model while trying to grow revenue is an art that leaders in consumer products companies need to perfect. These goals to reduce costs, increase margins, and improve customer service levels, all to create sustainable business growth, is typically a very capital-intensive process. On top of all these pressures, the actual operational equipment, across the entire supply chain, needs to function at optimal performance levels to maximize the return on investment. Couple this with the cost to serve in new channels and markets, and you get yet another balancing act for companies to contend with.

For more information, please visit infor.com/SCM.

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