Transcript Consumer & Reatil Summer Academy Session

7th Conference
BUSINESS LOGISTICS 2008
Supply Chain Management as revenue generator:
Customization and Differentiation
Portoroz, September 2008
Jan van der Oord
Partner
Management summary
Supply Chain Management can become a key revenue
generator in the region: Customization and Differentiation
Threat
Opportunities
Recommendation
Closeness to the market
Reduced traditional
differentiation
opportunity
• Brand equity pull
is no longer
reliable
• Product
alternatives
available at lower
cost structures
• Cost competition
limited by
increasing scale
of competition
• Develop and exploit
existing customer
intelligence
Adapt to local demands
• Build in customer specific
service features and allow
cost-to-serve
(Further) development of
Differentiation and Customization
of the supply chain to
- increase customer loyalty
- Maintain/increase margins
Improve local distribution
• Fill the current lack of
(sufficient) professional
distribution capability
Source: A.T. Kearney
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Brand equity pull is no longer reliable
Brand manufacturers need to increase trade leverage
supported and supply Chain capabilities
A branded Category
Future
World
Class
“Supply Chain
Dominance”
Brand
Equity
Innovation
Brand
Equity
Trade
Leverage
Trade
leverage
Industry Average
IT
Infrastructure
Finance &
Accounting
Planning
ERP
Facilitation
Distribution
Raw Material
Sourcing
Manufacturing
xxxx
Laggard
Necessary
Beneficial
Crucial
Relative Contribution to Business Value
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Brand equity pull no longer reliable
The retail industry concentration and private label growth
leads to a dramatic re-allocation of the industry profit pool
Example United Kingdom
Food retail
industry1)
2006
~10 years
Re-allocation industry profit pool
Abrands
789 bn. US$
Total
2,255
bn. US$
Other brands
1,941
bn. US$
Private
labels
314bn US$
-Private
Labels
-1.466bn
US$
Retailer
Wholesaler
18
2
34
1
Brand
Manufacturer
38
2
43
+20%
2
80
1982
65
60
55
1990
2000
2010e
-20%
1) Estimated development of the brand structure within the food retail industry of mature markets based on analyses
in scope countries
Source: Datamonitor, AC Nielsen, A.T. Kearney
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Product alternatives available at lower cost structures
Brand manufacturers have to fight against a cost
disadvantage of 32 %-points
Cost gap overview for brand manufacterers in Consumer Goods
18
100
21
12
61
68
7
49
Gap
-12
Cost of goods sold:
• Spot purchases
• Flexible formulations
• Lean production
• Cheaper packaging
• Design values
A-Brand manufacturer
-14
R&D, S/M/A, Distribution
• No R&D
• No Sales force
• Reduced Marketing and Advertising
• Narrow distribution footprint
• Limited SKUs
-6
Other Costs/Profit:
• Reduced Mfgr Profit
• Streamlined O/H
Private Label manufacturer
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Cost competition limited by increasing scale of competition
Industry consolidation rapidly increases the competitive
gap of regional companies with international giants
Top Line- and Bottom-Line Opportunities of the Acquisition
• Brand leverage and
brand portfolio
enhancement
• Enhanced power
against retailers1)
• Market penetration
of existing core
markets (especially
Russia, India and
China)
• Extent into new
product categories,
e.g. fruit flavored
candy bars
•…
Revenue
Synergies
Strongly Increased
Annual Profit
+
Profit
+
Cost
Synergies
Illustrative
• Leverage sales,
marketing &
distribution
infrastructure (Mars
distributes in 180
countries)
• Supply chain
network optimization
• Procurement
synergies (e.g.
packaging material)
• Resource
optimization (best
practice sharing)
Additional (soft) synergies expected: New career opportunities for people
1) Companies highly dependent on relatively small space available near the cash register; deal will help to increase leverage against retailers
Source: Company information, A.T. Kearney
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Even the giants face the same problems: B and C-brand
business profitability will become marginal
Reliable sales and potential losses of Nestlé‘s chocoloate
business in Germany
Example
Nestlé
Chocolate (Germany)
310m sales ≡ 7.8% of the overall company sales (CS) in Germany (~ 4bn €)
A-brands1)
A-brands1)
B-brands2)
brand portfolio
B-brands2)
C-M.3)
C-brands3)
55 mil. € (18%4))
94 mil. € (30%4))
~4 mil. € (~1%4))
49 mil. € (16%4))
66 mil. € (21%4))
~4 mil. € (~1%4))
38 mil. € (13%4))
Reliable sales
160 mil. € ≡ 4.0 of CS
Potential losses in sales
142 mil. € ≡ 3.6% of CS
• Utilization of the clear distinguished positioning
of "After Eight" and "KitKat" for maintaining the
market pull
• Utilization of the uniqueness of "Choco
Crossies" and "Smarties" for a distinguished
positioning
• Divestment of "Lion" because of a lack of
differentiation within the competitive chocolate
bars segment
• Additional investments into the improvement of
the brand value and the customer benefit
Seriously threatened sales
~8 mil. € ≡ 0.2% of CS
• Divestment of "Rolo" and "Nuts" because of a
lack a lack of differentiation within the
competitive chocolate bars segment
• Utilization of the additional resources for
investments into segments and products with
a higher marginal utility
1) Sales >1% of total sales within the chocolate segment in Germany 2) Sales 0.1%-1% of total sales within the chocolate segment in Germany;
3)Sales <0.1% of total sales within the chocolate segment in Germany 4) % of Nestlé’s sales within the chocolate segment
Source: Euromonitor; Desk Research
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Increasing trade conditions is not sustainable, already now
the link to retailer performance is low
Contract structure client example
100%
12.9%
34.0%
Trade
spend
often
higher than
advertising
Total contract
None
Only 15 %
linked to
actual sales
performance
22.0%
16.3%
14.8%
Not clearly
defined
Directly linked
to growth
Not challengingValuable, but
Challenging and
or low value no control on
controlled
actual deployment
Most trade spend not clearly linked to performance
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Category leaders: leverage position and develop category
vision, fact-based and key account specific
Category management analysis –
File example
Importance & delivery of
shopping attributes
What leading manufacturers do:
Purchase frequency
Category A
Category B
Att1

Importance
Att3
 Att2
  Att4
Att5

 Recognize importance of channel and shelf
profitability
Delivery
AGPROI —
Sales/ft2
A
B
C
A
B
C
 Identify growth opportunities in core and niche
market segments
retail matrix
Y%
 Work with the retailer to get a clear picture of
true profitability and factor into assortment
decision
• Profit adjusted for trade funds and promotional
pricing
• Shelf productivity
 Are prepared and pro-active to adjust support of
items and categories to achieve the partners’
objectives as well as your own
High
productivity,
low sales rate
Adjusted gross
margin
Average Inventory
Target / average
AGPROI
0%
0
Low
productivity,
low sales rate
Low
productivity,
high sales rate
Target / average
Sales/Sq. Ft. ($/Sq. Ft.)
 Develop expertise to lead the right mix (and a
varying mix) of marketing strategies and to
provide fact-based inputs to retailer category
planning processes
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What should the rest do? Collaboration as strategy not
very successful so far and does not provide better results
Extent of achieving
desired results
High
Low
Low
Extent of collaboration
High
Retailer
Supplier
Supply chain
Product innovation
Source: A.T. Kearney Supplier-Retailer Survey
Exclusive offerings
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Customization to avoid ‘substitution’ and ‘being sourced’…
the opportunity for supply chain professionals
Example FMCG
% customized products in large European countries
% customized product as part of total sales for FMCGs
% volume
>20%
30
%
15
%
High promotion
categories
Cross category
coverage
20%
>5%
35%
15%
>10-20%
30%
30
%
% SKUs
50
%
>5-10%
% Expected annual customization growth
Value creation ranking per customization types
37%
33%
Decreasing value
-25%
23%
20%
FMCGs
Retailers
Average
High growth
Source: retailers and FMCG interviews, A.T. Kearney desktop research
Displays
Bundle
packs
Mixed Customized
cases products
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Biggest challenge: how to grow customization AND keep or
increase profitability with our regional scale limitations
Traditional approach
to customization
• Product and single
issue focus
• No integrated
approach,
fragmented
responsibility
• Campaign driven,
Inefficiency implications for FMCG companies
Customization costs
Supply chain
Uncontrolled trade spend
Obsolescence/losses far above the
other supply chain activities
Lack of scale due to fragmented
responsibilities
Higher costs due to limited/poor
planning
Manual executions and unnecessary
transport costs
Stretched supply chain organization
lack of integrated
business planning
Marketing
Customer service
Lack of control of brand image and
consistency
• Reactive, driven by
Time spent by Marketing on technical
development
Inability to respond effectively to
increased in retailer demand for
customized promotions/products
the retailers
Source: A.T. Kearney
Limited access to some promotions
for small geographical units
Costly solutions to meet requirements for
shelf-ready packaging (eg Tesco UK)
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Complete review of supply chain required: identify all main
areas of change and improvement
Supply Chain Assessment
Segmentation
Overall Client score: 1.7
Stage 1
Functional
optimization
3
2
Current
status
Segmentation
1.3
1
Stage 2
Supply chain
optimization
Stage 3
Value chain
optimization
Source: A.T. Kearney
0
Inventory
Management
1.5
Planning
1.4
"One size fits all" is not good
enough
• Customer segmentation with
no implications on supply chain
• Same target of 98% hitrate for
everything
Inventory Management
Investment of €150 mil.
decided by local planners
• No systematic inventory
management
• Decisions by local planners
Planning
Sales leaves demand plan to
local production
• Plans not interlinked
• Monthly sales forecast
inaccurate: rarely used in
replenishment
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The new supply chain starts with defining the segments and
their requirements
Illustrative
Premium
(Brand / Uniqueness)
Premium driven margin
opportunity
Strategic Retailer Business Classification
“True Single Customer Brands”
“True A-Brands”
•True premium brands with universal
consumer pull
•Sold through multiple retailers
•Brand build through sustained levels of
innovation as well as A&P
•Must have products
•Single retailer
•Directly supporting the retail format brand
building and differentiation
Squeezed in between, struggle for shelf space
Squeezed in between, struggle for shelf space
‘Commodity” Brand
“Base-Branded”
Price Figther
(Basic Need)
• Me-too brand
• Scale driven, focus on unit cost
•Low margins due to commoditization
Volume driven margin
opportunity
“Private labels”
•Single retailer, private label
•Potential scale disadvantage compensated by
low A&P spending on brands
•Scale disadvantage decreases as retailers
(regionally) consolidate and get scale.
Multi-Retailer
Retailer Specific
Indirect retailer control: sourcing
leverage, category management, and
format strength
Direct retailer control: format
differentiation
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Use of proven segmentation methods to simulate the
impact on the supply chain …. Before not after!
ABC-XYZ analysis
Sales per
SKU
Segments
Runner: large stable products
Runner
• Large, stable sales
• To plan by machine
"automatically" based on history
• ~2,000 SKUs
"Planner": large volatile
products
A
"Planner"
• Large, volatile sales
• To plan by sales
• ~500 SKUs
B
C
X
100%
Y
200%
Z
Volatility of demand [%]
Source: A.T. Kearney
500%
Noiser: small
volatile products
Noiser
• Small, sporadic sales
• To plan on aggregated level by
history
• ~5,000 SKUs
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Keep scale, standardize and define customized service
menu within a cost effective framework
Premium brands
Group 1
Hypermarket
Commodity brands
Group 2
Group 3
Group 6
Menu 1
Customer A
Customer B
Menu 2
Customer A
Drugstores
Customer A
Customer B
Customer B
Menu 4
Discount
supermarkets
Menu 3
Menu 2
Out of home
Group 5
Customer A
Customer B
Service
supermarkets
Group 4
Price Fighter
Menu 6
Menu 8
Menu 7
Menu 5
NA
NA
NA
NA
Customer A
Customer B
Menu 9
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Developing the right customization capabilities involving
all supply chain elements is key … integrated approach
Example of capabilities
Derived competitive advantage
Sales & Marketing: Consolidated
dynamic product and service portfolio
based on standards
 Availability of a larger choice of options, while maintaining
Production: Development of customer
specific execution on production lines
 Lower cost per unit
Purchasing: Centralized procurement
process
 Lower cost per unit in line with volume growth
cost control
 Pro-active sales strategy of customer specific offerings
 Stronger negotiation power with service providers and
large suppliers (f.e. packaging, cardboard suppliers)
W&D: Customization in logistics centres  Scale for investment in automation and late customization
capabilities
The new capability development are a key lever to get the
buy-in of S&M and maintain cost competitiveness
Source: A.T. Kearney
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What is required … operational excellence in Sales &
Operations Planning process to aligns all functions
Snapshot of elements in the sales and operations plan
Business plan / Marketing plan
Top-down target from ABP/benchmarking plan APG?
Strategic
New
monthly
process
with 3
months
horizon
Input
• Sales forecast
("Planner")
• Historic
demand
("Runner/
Noiser")
• Launches (by
marketing)
• Events
(optional)
Demand
planning
Sales and
operations plan
Inventory plan
Rough
production
planning
Net demand plan
Campaign plan
Procurement
planning
Trade Goods/
Raw
Input
• Stock level
• Orders
• Runner/noiser
assets
Input
• Stock level
• Orders
Stable framework for operations
Operative
Source: A.T. Kearney
Order
entry
Availability
Order
confirmation
Scheduling
Commissio
-ning
Transport
planning
Dispatch
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What is required … New ideas beyond company borders,
like pooling with other manufactures?
Current SC Configuration
Manufacturers
Retailers
Supply Chain Pooling configuration
Manufacturers
Retailers
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To sell it in the company … large cost savings feasible
helping to create your case for change!
Objective
Eliminate obsolescence
Estimated cumulated savings on
cost of cost of customized
products
TBD
Potential solutions
Pack to order
Automate the
executions
Up to 3%
Bring executions on
production lines
Leverage the
scale
Up to 5%
Strategic sourcing
and centralized
organization
Consolidate
the forecast
information
Up to 10%
Planning consolidation
process
Reduce
complexity of
the offering
Up to 15%
Consolidated
dynamic catalogue
Rationalize
the demand
Up to 25%
Promotion
effectiveness
Source: A.T. Kearney
Sales/
Marketing
Up to 2%
Bring executions in
logistics centres
Supply
chain
Rationalise
transport costs
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