Download Insight_Eight Levers to Increased Growth and Profitability for CPG

Consumer Sector
We make it happen. Better.
Thought Leadership
Eight Levers to Increased Growth and
Profitability for CPG Companies
A paper by Whit Allen, Vice President
August 2015
Better
Strategy
Operational Transformation to Fund Strategic Initiatives
The Supply Chain
is capable of
becoming the
untapped cash
source you’ve
been looking for.
Manufacturers of consumer packaged goods
(CPG) need constant innovation in products
and marketing to compete effectively.
Sometimes the only obstacle to more
branding strategies, new product innovation
and research and development (R&D) is
finding resources to invest in these top-line
growth initiatives. For many CPG companies,
the supply chain is capable of becoming the
untapped cash source they’ve been looking
for.
Inefficient supply chain networks,
inadequate processes and aging plants can
stifle innovation, increase hidden costs and
prevent organizations from getting more
product to the customer faster. However, a
CPG manufacturer can turn around this
unhealthy scenario by focusing on levers in
the supply chain that initiate growth and
ensure profitability. A healthy supply chain
reduces the cost of the goods you
manufacture, adds millions of dollars in
revenue and makes predictable amounts of
cash available for strategic projects.
While top-line growth is a big factor in
success for consumer product companies, its
counterpart is profitability. The wellmanaged supply chain, acting in concert with
business initiatives, balances cost reduction
with the need for top-line growth by freeing
enough cash to contribute as needed to both
the top and the bottom line.
If you are not getting the cash you need from
your supply chain, you have not fully
exploited these eight levers to growth and
profitability.
1. Integrate siloed continuous
improvement organizations
Often, a company creates a Continuous
Improvement (CI) group to implement Lean
Manufacturing/Six Sigma principles. This
journey can be an important way for
Operations to trim expense or even self-fund
a major technology project. But too often, CI
groups can’t deliver the savings they set out
to achieve, or they deliver a benefit they
cannot sustain. Even if they manage a
financial win, they rarely tie that win to a
budget that hits a top-line growth initiative.
They do their job, explain to the rest of the
organization what needs to be done, but fail
to find out what works on the plant floor or
provide the necessary coaching to ensure
sustainable results.
To be effective, the CI group needs a
connection to other parts of the organization,
including sales, marketing, R&D and new
product innovation. They need to be
embedded in the management, control and
reporting system (MCRS®), which entails
getting weekly updates from maintenance,
operations and other support functions.
MCRS is the glue that holds an organization
together – the Key Performance Indicators
(KPIs), meetings and forums that drive
decision-making, prioritization and obstacle
removal. By standing off to the side, the CI
group may fail to leverage useful company
assets, such as a project management office
(PMO) that’s prepared to track benefits and
develop a stage gate methodology.
2. Drive a benefits case
A CI group or any entity responsible for
operational change needs to be directly
accountable for an on-budget, on-time
financial result. It’s not enough for them to
identify activities that will drive down costs.
They need to put a value to proposed activity
changes and use that value to drive a benefits
case. The benefits case targets the KPIs that
need to change for an organization to see
financial gains. Often, the dollars a CI group
promised to deliver don’t materialize,
because 1) metrics and data have not been
tightly connected to a profit and loss
statement and 2) roles within the group have
not been clarified. Without a benefits case
that demonstrates the value of changes, the
business is likely to question the decisionmaking criteria and fail to approve the
proposed initiative.
To validate the benefits of an activity, you’ll
need to develop a baseline and evaluation
methodology that ensures the benefits are
realistic and deliver financial payback. For
example, if you do everything possible to
open up capacity only to discover that the
plant isn’t producing more because sales
can’t sell more, you haven’t based your
business case on reality and its ability to cash
in on that capacity.
3. Manage capacity tipping point
Whether a company sets out to increase
capacity or inherits capacity through a
merger or acquisition, they will have to take a
proactive approach to continually balancing
the capacity tipping point. Otherwise, they
risk either driving down their Overall
Equipment Effectiveness (OEE) or driving up
overall costs. While insufficient capacity can
cause service level problems, too much
capacity decreases utilization, causing either
inefficient operations or a need to change
business strategy and sell excess capacity
through private label or co-manufacturing.
Driving more pounds or cases of product
through an organization is desirable as long
as you can balance customer demand with
plant utilization. To ensure an optimal
balance of top-line growth and profitability,
businesses need to understand their true
capacity and operate from a set of guiding
principles on how they are going to manage
that capacity. Are you willing to limit shifts,
cut inventory, shut down plants, change
where you make a particular product?
4. Utilize mid-level supervisors to
ensure program sustainability
It’s a waste of time, money and effort when a
company invests in changes and then cannot
sustain those changes. The key to program
sustainability is the mid-level supervisor—a
person who used to be one of your best
operators. A business might show a mid-level
supervisor a video on how to be good
manager or provide Human Resourcesspecific training, but rarely teaches them how
to be better supervisors in a manufacturing
facility environment. Most mid-level
supervisors spend 60-80% of their time off
the manufacturing floor and behind a laptop
with time cards and safety reports rather than
actively participating in manufacturing,
maintenance or operations processes.
To create financially sustainable results
requires giving mid-level supervisors the
coaching, mentorship and expectationsetting skills they need to become better
supervisors. They need to know how much
time to spend on the floor and what a good
day looks like. They also need a sound
understanding of the metrics – What is the
meaning of OEE and yield, and how does a
supervisor have an impact on these? They
also need a management, control and
reporting system (MCRS®) that gives them
visibility into the plant and more interaction
with the people who can help them do their
job, such as maintenance staff and the plant
manager.
5. Weigh your choices for
network optimization
The costs of manufacturing and distributing a
product constantly change along with the
business environment and the customer
base. To balance these variables, CPG
businesses can make a choice about whether
to reduce their assets or utilize assets better
through new business. For example, you
might be able to find new customers or sell
excess capacity through a private label or
co-manufacturing. Conversely, it can be
costly to keep a plant up and running at 30 or
40%. You may do better to reduce your
footprint and reinvest in R&D or in improving
a plant to regain top-line efficiency.
To make fact-based decisions around these
issues calls for understanding what your
capacity is and monitoring it through
an executive review process. It’s
important for businesses to
track the variants monthly,
because demand can
change quickly and
you need to make
asset
decisions just
as quickly. It takes more than a spreadsheet or
a five-year plan to make asset decisions that
honor the need for top-line growth and
profitability. It takes advanced analytics – a
level of scrutiny that satisfies executives and
finance departments.
6. Manage Inventory
Obtaining the right levels of inventory to
satisfy customer demand is critical for both
growth and profitability. If you’ve kept too
much idle inventory, you may not have the
cash you need to reinvest in top-line growth.
If you don’t keep enough inventory to satisfy
orders from your biggest customers, your
profits suffer. Often, businesses face
write-offs because they waited for a quarterly
or annual budget review to assess inventory.
To avoid idle or obsolete inventory exposure,
businesses need to track their inventory
regularly and benchmark it against
competitors. They need analytical forecasts
to help them decide where to invest in
inventory and what kind of inventory they
need – finished goods, partially finished
goods or raw materials. For example, you can
build a made-to-order item to customer
specifications if you hold inventory in raw
materials and components.
However, if you keep a broadly accepted item
as finished goods, it’s ready for quick
shipment to an extensive customer base.
Some businesses benefit from involving
third-party contract manufacturers in a
vendor managed inventory (VMI) process.
Better
Supply Chain
Unlock the savings
needed to fulfill
your company’s
strategic vision for
top-line growth.
7. Manage SKU proliferation
Customer demand fueled by consumer
preferences can change quickly in CPG
industries. This is particularly true in food
manufacturing, where the millennial
generation is demanding fewer additives and
better protein choices while your customers
want packaging variations that match
consumer preferences. These multiple
demands greatly ramp up new product
introductions with many global CPGs
launching an extraordinary amount of new
items per year. This innovation can be a boon
to top-line growth. But it also brings up
questions about how to prune unprofitable
SKUs and how to handle packaging changes
that can drive down operating efficiency,
drive up inventories and ultimately add to
operating costs.
To drive change and decisions in this volatile
market requires alignment between sales,
marketing and customer teams. Achieving
that alignment takes accurate data backing a
solid benefits case. All parties need to be
involved in reviewing the profitability and life
cycle of the current portfolio. Decisions to cut
a SKU should be based on profitability data at
the SKU level. When an accurate analysis
drives recommendations on which SKUs to
replace, cut or keep, both sales and
profitability should increase.
8. Employ integrated
planning processes
It’s not unusual to find a lack of
synchronization between demand, supply,
production and delivery that can quickly
drive up costs. If demand is not integrated
with inventory planning, you could have
either not enough inventory to fill orders and
poor service or too much inventory and a
high asset cost tied up in cash and inventory
that you don’t necessarily need.
To execute against demand generation in
operations requires a comprehensive view of
demand through supply, production,
execution and distribution of the product
into the market. You can significantly reduce
inventory and supply chain costs when you
ensure handoffs between otherwise siloed
planning processes and time the alignment
cadence between those processes. From
senior executives to the plant floor, your
MCRS needs fine-tuning for better forecast
accuracy, increased inventory turns and
service level improvements.
Integrated Supply Chain Solution
Frees $30 Million for Cereal
Manufacturer
A leading U.S. producer of ready-to-eat
cereals initially engaged the Management
Consulting division within Hitachi Consulting
to drive operational excellence for their
largest plant. During the scoping process,
Hitachi Consulting saw an opportunity to
help the cereal manufacturer gain substantial
financial benefits by expanding their
approach to include Supply Chain Planning.
The integration of planning and scheduling
with plant production and OEE
improvements at the largest plant was so
successful that the project expanded to
include additional locations.
Following an analysis to quantify the
business case and identify areas for
improvement, Hitachi Consulting worked
with the manufacturer’s team to implement
change at all levels in the organization. The
cereal manufacturer gained $30 million in
annualized benefits that could be used to
fund top-line growth and used these
benefits to formulate a more competitive
pricing strategy. Lean manufacturing
principles improved production yields, and a
new MCRS added the necessary visibility to
improve OEE. The manufacturer also
experienced more accurate customer
forecasting, a more stable and reliable
production schedule and a reduction in SKU
complexity that reduced the cost to serve.
Summary
A healthy supply chain, where people armed
with analytical insight follow sustainable
processes, is a wellspring for growth and
profitability. A CPG company that can unlock
that bounty through transformational
change at the supply chain level stands ready
to save millions of dollars annually. That
savings can provide the boost a company
needs to continually fulfill its strategic vision
for top-line growth.
As the Management Consulting division of
Hitachi Consulting, we can help you find and
exploit the areas in your supply chain that tie
to growth. And we can show you how to
create a healthy balance between growth
and profitability through analytical insight.
To make transformational changes with
long-term financial impact requires more
than better systems and processes. It requires
people who understand the rationale for
change and their role in achieving it. That’s
why we emphasize one-on-one coaching
that establishes organizational readiness for
change (ORC).
Traditionally, CPG organizations are data rich
but insight poor. Hitachi Consulting helps you
harness data, connect improvement plans to
an integrated supply chain and coach the
behaviors of the leaders to make fact-based
decisions that drive sustainable benefits.
About Hitachi Consulting
Hitachi Consulting is the global management
consulting and IT services business of Hitachi
Ltd., a global technology leader and a catalyst
of sustainable societal change. In that same
spirit—and building on its technology
heritage—Hitachi Consulting is a catalyst of
positive business change, propelling
companies ahead by enabling superior
operational performance. Working within
their existing processes and focusing on
targeted functional challenges, we help our
clients respond to dynamic global change
with insight and agility. Our unique approach
delivers measurable, sustainable business
results and a better consulting experience.
For more information on Hitachi Consulting,
please visit the company’s website at
http://www.hitachiconsulting.com.
About Hitachi Ltd.
Hitachi, Ltd. (TSE: 6501), headquartered in
Tokyo, Japan, delivers innovations that
answer society’s challenges with our talented
team and proven experience in global
markets. The company’s consolidated
revenues for fiscal 2014 (ended March 31,
2015) totaled 9,761 billion yen ($81.3 billion).
Hitachi is focusing more than ever on the
Social Innovation Business, which includes
power & infrastructure systems, information
& telecommunication systems, construction
machinery, high functional materials &
components, automotive systems,
healthcare and others. For more information
on Hitachi, please visit the company’s website
at http://www.hitachi.com.
About the Author
Whit Allen is Vice President focused on the
Consumer Industry for Hitachi Consulting’s
Management Consulting division. Whit
has over 20 years of experience focused
exclusively on serving clients in the
consumer products industry and his
expertise includes work with several Fortune
500 corporations as well as privately held
companies and mid-tier clients spanning
food manufacturing, household care,
and personal care manufacturing.
For more information, Whit can be reached
at [email protected].
Contributing Authors
Christopher Gregory, VP Consumer Products
Ron Scalzo,VP Supply Chain Solutions
Brad Stitt, VP Supply Chain Solutions
Hitachi Consulting is the global management consulting and IT services business of Hitachi Ltd., a global technology leader and a catalyst of sustainable societal change. In that same spirit—and building on its technology
heritage—Hitachi Consulting is a catalyst of positive business change, propelling companies ahead by enabling superior operational performance. Working within their existing processes and focusing on targeted
functional challenges, we help our clients respond to dynamic global change with insight and agility. Our unique approach delivers measurable, sustainable business results and a better consulting experience.
www.hitachiconsulting.com