If there’s one industry that has consumer centricity at the core of its go-to-market strategy it has to be consumer products. Companies need to strike a very delicate balance between cost, quality, product innovation and market growth all whilst maintaining margins.
An apt analogy from a McKinsey report describes this juggling act:
“Management in a CPG organization, is all about finding the right balance between addressing short-term business needs and opportunities and setting a long-term direction for the future – 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 showed a losing battle in the supply chain. So what will be the top challenges facing CPG businesses in 2017?
Consumer Demand for Variety
Consumers have never been so demanding. There will always be an urgency to create new products when preferences change, which means an increasing number of SKUs and shorter product lifecycles. This increases complexity in product development, sourcing, production, fulfillment and fuels transportation costs to meet demand. As a result, pressure for consumer products companies to better manage inventory have never been so high. The consumer product supply chain needs to be agile enough to react to any changes in consumer preferences quickly and comprehensively.
New Markets
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. A data-driven approach to identify the categories and geographies with high growth potential is critical. Then, greater global supply chain flexibility will help consumer product companies to penetrate those new markets and create new delivery models and fulfillment channels.
M&A: Portfolio Consolidation
According to a Consumer Products M&A Insights report by Deloitte, there was significant merger and acquisition deal activity within the European consumer products sector last year. Thirty-six large-scale European deals were agreed to in 2015. The combined value of these deals came to €144 billion. The rationalization and consolidation of brand portfolios to deliver market leadership is 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. Any rigid enterprise systems and fragmented supply chain processes will be a stumbling block that will need to be addressed.
Digital Supply Chain Transformation
Following the innovation in front end marketing, investments in ecommerce and the customer experience, it’s no wonder that digital transformation has risen to the top of the executive agenda at global consumer products industry leaders. In general, digital transformation of the customer experience has been very much a 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 networked world, an organization’s success is no longer dependent on its own efforts alone but depends largely on how effectively it can orchestrate a vast, global, network of supply chain partners to deliver goods and services that meet the needs of individual consumers.
The nature of the consumer product beast is a low margin, cost focused business. How far can any company shift away from that? Getting the balance to achieve a sustainable business model while trying to grow revenue, is an art that leaders in consumer products companies need to perfect. Programmes to reduce costs, increase margins, and improve customer service levels (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 in order to maximize the return on their investment. Couple this with the cost to serve in new channels and markets and it is clear that CPG companies looking to optimize their supply chains face an incredibly delicate balancing act.
Laila Beswick, GT Nexus
