A colleague recently forwarded me a news article about how ING’s investment in digital platforms is expected to return approximately $1 billion in annual savings by 2021. It reminded me of a Progress survey a few months back that revealed how many companies recognize the need for a digital transformation but are reluctant to take that leap. Many of those surveyed list the lack of skills and lack of leadership as critical challenges to switching to a digital platform.
Even for companies that recognize a digital transformation is critical (96% actually, according to the Progress survey), it can be challenging to initiate the undertaking until they have compelling evidence of the benefits of investing in digital platforms.
That’s what I want to do here—share some compelling evidence.
I recently communicated with a Consumer Packaged Goods (CPG) company about the strategic objectives outlined in their 10-K for 2015. I quickly identified the applicability of these objectives to many CPG—and other consumer goods—companies. I also noticed that their goals for future improvement aligned with the core digital powers provided by o9. With some quick math based on our existing clients’ savings with o9, I calculated conservative estimates on the value proposition for this company if they underwent a digital transformation with a platform like o9’s mPower.
Here are four long-term strategic objectives common to CPG companies and how a digital transformation can produce real value.
Objective 1: Transform product innovation
A critical element of a high-value innovation process is business case definition (and revisiting that case as conditions change). When undertaking an innovation initiative, such as for a new flavor or targeted marketing, R&D must evaluate consumer trends. CPG companies often have long product innovation cycles, approximately 18-36 months for some, and consumer interests frequently change during this cycle.
Because of the many interlocking variables in consumer trends, product development, and marketing initiatives, R&D must continuously check and recheck those elements. If the process for assessing these drivers is inefficient, then the process either occurs too infrequently to be valuable or takes too many resources that could be better spent elsewhere. Digital platforms that record and monitor these drivers can streamline this review process on consumer trends and disseminate the information to the relevant teams in product innovation.
During this CPG company’s innovation cycle, R&D produces five choices for a new product. The company can only launch one-two or most—of these new products. What does this mean for the other three or four products? Will the company idle these products and throw them later? These strategic decisions are generally left to the executives, and many companies struggle to provide the information they need on the right key business factors. First, decision-makers need visibility into current, unbiased information on product innovation, product development, and supply chain capacity. Then, they need the analytical capabilities to decipher that data. Trade-off analysis capabilities in digital platforms enable executives, such as the Chief Growth Officer, to evaluate the revenue potential and costs for new product choices. The visibility into key business drivers and the analytical techniques to assess those drivers together facilitate more efficient and practical innovation.
Digital platforms like o9’s mPower have helped leading consumer products companies break down silos in innovation and improve decision-making capability. For this CPG company, global innovation is a big spending category (over 5% of revenue), with over $400 million in the R&D budget for 2015. A conservative 1% cost reduction in innovation through more efficient business case definition, redefinition, and more effective trade-off analysis would represent over $17 million in available resources to improve product innovation further. A similar movement against R&D costs would free up over $4 million. By providing visibility into key business drivers and providing analytical techniques for translating that data into decisions, digital platforms can help transform product innovation into a cycle of continuous improvement.
Objective 2: Revolutionize selling
A congested S&OP process whittles away at your company’s margins. In this CPG company's case, the sales cost was a staggering $18 billion. Therefore, the company needed to improve sales efficiency radically.
Digital platforms can revolutionize sales in the following ways:
- Improving sales feedback and field engagement through a next-generation planning system for the supply chain
- Enabling more effective scenario analysis and reducing excessive error in forecasting by monitoring revenue drivers
- Enhancing visibility into unbiased, current data and calculating key business metrics that make sense of that data
- Facilitating more effective collaboration up- and downstream with retail partners, distributors, and suppliers by using an intelligent system of engagement
It cannot be easy to conceptualize the concrete benefits of these improvements in the S&OP process. I’ll frame it this way: if one segment of the company’s product portfolio brought about $4 billion in revenue, increasing revenue by simply 0.5% through Revolutionized Selling would be a value proposition of $20 million.
Many companies reluctant to undergo a digital transformation have their data scattered across several (often disparate) systems and must manually collate that information, often in spreadsheets. One of the digital platforms' primary values is extracting all that information and inputting it into one space so managers and planners can fully understand it.
o9 has a track record of helping CPG leaders transform their sales and commercial organization. With o9, Asian Paints can now digest information from the field and combine it with data from their existing systems (e.g., ERP software). With this information readily available, they can conduct trade-offs and scenario-planning analyses on the best bets. In other words, they can use data from the supply chain and sales & marketing to make smarter and faster S&OP decisions.
Revolutionizing sales goes hand in hand with the third strategic objective—driving efficiency to fuel growth.
Objective 3: Drive efficiency to fuel growth
Many elements of more effective innovation, sales, and core planning result in improved efficiency. As I outlined above, implementing more effective product innovation and sales processes frees up a substantial amount of resources that can be reallocated to initiatives that support company growth. Greater efficiency fuels growth through…
- Improvements in free cash flow from higher inventory turns and reduced inventory overhead
- expanded margins through more effective commercial planning and scenario analysis
- An improved understanding of the competitive environment, which reduces costly errors and missed opportunities
Increased efficiency reduces costs, meaning more significant margins. For example, during my conversations with this CPG company, I learned that their 2015 inventories were valued way over $2 billion. More effective trade-off analysis, faster propagation of critical information, and more effective supplier/customer collaboration through Revolutionized Selling would reduce inventory positions. A conservative reduction of only 1% would give this company over $25 million in value.
As another example, this CPG company committed over $5 billion to inventory and production costs for 2016. Investing in greater efficiency—by reducing expedites, excess, and overage and more effectively tying production to consumption—could lead to a reduction in costs by a conservative 1%, which would represent over $50 million in value.
Increased efficiency also means that the resources for product innovation and, sales & marketing go further. This company’s advertising costs totaled over $1.5 billion in 2015. Better allocation of advertising spending and cost reduction through analytics for commercial teams would result in $15 million in value, which could then be used for other campaigns or even taken as savings.
Returning to an earlier point, remember how we said the company’s cost of sales was $18 billion? We’ve outlined how revolutionizing sales and improving efficiency (in terms of sales feedback and field engagement, forecasting and scenario analysis, measurement of commercial goals and metrics, etc.) can lead to a 0.5% or more cost reduction. This CPG company would represent at least $90 million in value.
Objective 4: Protect the wellbeing of the planet
A fourth and final objective is protecting the well-being of the planet, an issue that may be on the minds of many CPG companies. One of the primary motivations behind creating o9 Solutions was a dedication to the more effective allocation of resources. That’s because more effective resource allocation equals less waste, less cost, and an overall reduction in required input energy to achieve business results. o9's founder and chairman, Sanjiv Sidhu, illuminates this process in a short video on our company's vision:
The calculations above are based on conservative results. We've seen impressive movements of over 3% - 5% on some of these critical metrics with our customers. One example, with roughly $2.5B in revenue, is seeing over $300,000 per month in inventory cost reduction alone.
Those are the numbers. Another advantage of a digital transformation that can be more difficult to see is the value of people’s time. When people spend less time collecting, verifying, cleaning, collating, and presenting information, they can spend more time on the actions and decisions that help grow your company. That is the actual value of a digital platform.
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About the author
o9 SolutionsThe Digital Brain Platform
o9 Solutions is a leading AI-powered platform for integrated business planning and decision-making for the enterprise. Whether it is driving demand, aligning demand and supply, or optimizing commercial initiatives, any planning process can be made faster and smarter with o9’s AI-powered digital solutions. o9 brings together technology innovations—such as graph-based enterprise modeling, big data analytics, advanced algorithms for scenario planning, collaborative portals, easy-to-use interfaces and cloud-based delivery—into one platform.