COVID-19 continues to be an undeniable force of nature. But thus far the twenties overall haven’t been kind to businesses worldwide. Supply chains have faced and continue to experience increasing complexities before and beyond the pandemic – think trade tensions, the unpredictabilities brought about by climate change, resource scarcity, polarized world politics and the continued threat of cyberattacks.
So, what choice do businesses have when the twenties raises its hackles and roars in their direction? They need to stand tall, be fearless and roar back or risk being left behind. In other words, there has never been a greater need for companies to adopt an agile, adaptive and fearless mindset.
“For decades we have used the term VUCA (Volatility, Uncertainty, Complexity and Ambiguity) in business to describe an environment that was already uncertain. Today, we can say that we have reached a new stage where companies have a clear choice of adapting or being left behind”, Fillippo Passerni comments in his whitepaper Digital Transformation Reviewed.
Increasing numbers of CPG companies are looking to mitigate continuous change with digitalization and new technologies in an effort to reduce cost and drive profit through higher volumes. Online retailers face some critical considerations, which include supply chain continuity, distribution, logistics, returns, and remaining attuned to consumer demands.
However, these aren’t the only challenges brands face in today’s quickly shifting CPG landscape.
CPG companies have traditionally focused on an efficient and well-organised supply chain – in essence, a single one-size-fits-all supply chain for all customers. However, increasingly CPG Captains are looking for ways to ‘de-average’, or segment customers and markets to better target opportunities. Increasing the relevancy of pricing architectures to better meet the needs of customers across channels allows retailers to offer a more tailored shopping experience – the type of shopping experience offered online – that considers discounts, private labels and promotional spend on an individual level. The ability to use demand spaces and customer mix to drive revenue and margin will be increasingly important and will require cross -functional involvement – think commercial, supply chain and finance with C-level understanding and commitment. But what’s the best approach?
For many CPG retailers, this means taking a merciless approach to SKUs on a channel level to fully rationalize their long tail. Most retailers have the burden of category assortments that total hundreds of SKUs and this level of choice, or illusion of choice, are stones in shoes for CPG captains striving to balance assortment size and productivity. So, what’s the best approach? Be fearless.
Juan Lopez, Global Director of Sales Operations at AB InBev, comments, “A lot of companies tend to innovate, adding products and brands to their portfolios. Look at the other side. Coca Cola has a concept of zombie SKUs – SKUs that have been stagnant for a long time that are smaller than a hundred percent of a bigger portion of volume or net revenue on their company. And they systematically go after them and kill them. That’s been the Coca-Cola mantra for the last ten years”.
This year they went even further. Eight years ago Coca Cola acquired Odwalla juice for $200 million. However, the brand was heavily reliant on a cold supply chain, so, end-to-end, from the moment of production to the moment of sale, produce needed to be cold, or it spoiled. This, of course, had a high cost attached. Odwalla had 3.9% of the total US market share . In 2020, Coca-Cola decided to divest the cold supply chain operation, and they did it in three months.
Making decisions around product rationalization based on sound financials and analysis also allows the right resources, people, marketing, and promotional spend to be reallocated to faster-growing brands and SKUs, streamlining operations. Getting this right will require CPGs to tie together strategic pricing and brand strategies with financial strategies through to promotion and supply chain execution.
Adjusting to demand
E-commerce retailers were never more widely embraced than in 2020, with many consumers turning into omnichannel shoppers looking for competitive pricing and convenient delivery options. According to a recent by Boston Consulting Group (BCG), the pandemic saw “online food and beverage sales [spiking] to as high as 15% of total retail sales” which was up from 3% of retail sales prior to the pandemic. Scott Mckenzie’s article in highlighted, “in May 2020, 44% of global consumers said they were shopping online each week, with 23% reporting shopping online multiple times each week”. And, in the last decade, emerging markets in Asia such as China, India and Indonesia have also contributed a significant amount to the global economy, adding new opportunities for growth and the complexity of this to the mix. With demand here to stay for online CPG retailers, the question is how to meet it in the most efficient way possible, predicting orders before they start rolling in.
Being a retailer that delivers
E-commerce supply chains also have a greater amount of touchpoints along the delivery route versus traditional retail stores – five times more – which means a longer pathway along which to safeguard the delivery of a product. And a lot more options when it comes to delivery methods: same-day, delivery to lockers, pick-up points, bicycle couriers and directly to consumers’ homes. This broad spectrum of options requires a very sophisticated, transparent distribution network and pricing that fit a customer’s needs down to a zip code level.
Making the best use of data
CPG brands such as Coke, PepsiCo and Unilever are using direct-to-consumer strategies to amplify the success of products sold across more established channels. This allows them to collect first-party data, gaining insight into purchasing behavior, demand, customer experience, promotion insights on a granular level etc., if the strategy is properly executed. An example would be PepsiCo’s Demand Accelerator (DX) program—an initiative created to unite the siloed functions of a company, such as sales, marketing and insights teams—for better data sharing. The program uses data and analytics to offer personalized marketing to a company’s most valuable customers and consumers, while refining ins-store tools and capabilities. DX’s streamlined approach has allowed it to outgrow the U.S.: It now has a significant presence in Latin America, Europe, the Middle East and Asia. This fully democratized model is allowing PepsiCo categories to deliver against the specific needs and desires of its customers.
Additionally, many consumer product manufacturers are under increased pressure to make assurances about product safety, quality and sustainable practises. Writing in Forbes, Micah Solomon noted that marketing was transformed in 2015 as the Millennial customer, born between 1982 and 2004, replaced Baby Boomers as the key consumers. Millennials, along with Gen-Z consumers, are eco-conscious consumers who are willing to pay more for sustainable products: Generation Z is the most willing at 73%, compared to Millennials at 68%.
From trust and transparency to compliance and meeting quality assured standards, CPG companies that adopt automation will benefit from better tracking and traceability of their products, from raw materials to the finished item. This in turn allows a business to convincingly and conscientiously give reassurances back to its customer.
Consumers are seeking self-expression globally. Personalization has become a mega-trend, putting pressure on brands to offer mass customization at scale. On the product side, Crocs’ Jibbitz charms are a great example of this, with consumers looking to augment their mass-produced products to make them unique.
The company’s collaboration with brands, celebrities and retailers and doubling down on its customizability has allowed it to ride the influencer wave. “Particularly your younger consumer is very focused on buying not necessarily a generic product, but they’re looking to buy a product that is customized for them,” Crocs CEO and president Andrew Rees, . “Our way of enabling that — and I think it’s a very compelling way — is Jibbitz. It allows the consumer to make that purchase a unique purchase for them. It allows them to express key attributes that they want to express about themselves to others and then, frankly, to change that over time.”
With customization comes a new level of complexity that impacts all parts of the supply chain, from product design and manufacturing to packaging.
Showcasing customer-centricity: a simplified four-step approach
Ideally, companies need to start meeting demand upstream, long before orders come in. How?
- Begin with the dream; the goals and aspirations that are leading the company, which in turn calls for identifying which channels and customers dictate the future of the company. Recognizing the importance of all customers as the ultimate judge of what is being produced is essential, but the exercise of identification will also spotlight key consumers whose needs and wants should be the companies top priority moving forward.
- Once these channels and customers have been identified, a business needs to determine its value proposition: how best to approach both in terms of price, service and complexity. These considerations will be integral in the services it uses to attract and retain its customers, which in turn poses the most important question: what supply chains need to be in place to plan and fulfil orders in a way that meets customer needs?
- Break this down, there are a number of factors that need to be considered: the level of efficiency, innovation and responsiveness being afforded by the new supply chain and how this impacts storage, delivery and the number of logistics managers for the channels or individual customers addressed above.
- From this point onwards, the company can take strides in organizing itself in a way that makes sense to its future operating model, managing customer expectations in a meaningful and measurable way depending on its performance per channel. The power of a business’ customer-centric supply chain leans heavily on its corporate processes, measurement, capacity and corporate culture. Thinking about KPIs, targets and most importantly customer data allows a business to gradually predict customer demand using the power of foresight.
We need to talk about data. It starts with collecting market intelligence
Different data sources are relevant, but some are less considered than others for valuable insight extraction. Macroeconomic factors, such as global trade data and GDP, are go-to sources in their holistic overview of the market. But unstructured social data already can be a key consideration and will increasingly be so – inclusive of competitor actions. Take product reviews as an excellent example of this: consumer reviews often drive the behavior and a brand’s perceived value in other consumers’ eyes.
“Companies should look to quick and novel ways to keep a pulse on consumer sentiment. In Italy alone, Facebook has seen a 40 to 50 percent increase in usage since the crisis began. A surge in online usage now underway offers an opportunity to tap into insights from social media to rapidly understand consumer sentiment and develop new ideas”. ()
But data is a commodity
Building a market knowledge model ultimately means transforming data into something you can digest. Looking at social events, for example, gives businesses knowledge of where and when they are happening, allowing them to leverage predictions at a very local, almost zip code level of demand. When it comes to consumer behavior, look to household composition, age profile, and demographic changes, while industry makeups will include seasonality trends, store locations, and regional concentration.
Juan Lopez adds, “Big data is internal as well as external. I think that’s key. Sometimes we find even within the company that we’re not connecting the dots – the data lives in silos. I think o9 Solutions’ platform allows for connecting the dots in one single platform and then building knowledge models on top. But what does that mean? What is the impact on my plan, and how can I use that information to upgrade and elevate my growth in the next 12, 18, 24 months?”
Why CPG companies need a digital brain
1 outlines the need for hyperautomation – using tools such as AI, ML, event-driven software and robotic process automation to create efficiencies, transparencies, agility and competitive advantages at every turn. Gartner clarifies, “Hyperautomation is the key to both digital operational excellence and operational resiliency for organizations. To enable this, organizations have to digitize their documents/artifacts and ensure their business and IT process workflows were digital. They need to automate tasks, processes and orchestrate automation across functional areas”.
For CPG companies, automating the process of extrapolating valuable insights is imperative post-COVID and beyond. In turn, this ensures the decisive advantage of foresight instead of merely acting on hindsight, the ability to sense and predict new trends before they have a real impact and a digital twin of each customer to anticipate their needs better, their next order and even the next product the company develops.
The value of next-generation platforms
Chakri Gottemukkala, CEO of o9 Solutions, an AI-powered integrated business planning (IBP) platform, recognizes the value of IBP software or a ‘digital brain’ for CPG companies, now more than ever. o9’s digital brain augments human intelligence with automation. By bringing together siloed and external market data, the digital brain allows companies to gain real-time insights, helping them plan better, make better decisions and connect the dots of their organization.
“Data has to be converted into knowledge. That’s how the brain works,” Chakri comments. “On the commercial side, the decisions companies have to make are around how to drive initiatives, whether it’s a new product, marketing or pricing initiatives. And we see many challenges there because, without this kind of data about what is driving demand, most of those decisions are being made based on tribal and historical knowledge, not institutional knowledge and market knowledge. That’s a significant area of transformation – what we call gap closure. And there’s a lot of executive interest in using this kind of market data and knowledge, AI, and analytics to inform commercial planning, revenue planning, and gap closure activities.
“What actions we took correlates with point of sale and shipment data to allow us to figure out the incremental impact… Now with that, I can reimagine my commercial planning process to figure out the optimal mix of investment and align my supply chain for excellent planning and execution”.
Across all these multi-dimensional problems of different growth drivers of demand, channels, and regions, the digital brain allows businesses to maximize the money they’re investing and their profitability on a continuous basis.
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About Stijn-Pieter van Houten
Stijn-Pieter is VP of Industry Solutions at o9 Solutions. He has over 13-year consulting career in Supply Chain Strategy and Transformation and a keen interest in Planning and Control Tower topics.