Archive for the ‘SKU Rationalization’ Tag

Consumer Good’s dilemma

Consumer Packaged Goods (CPG) has always been considered a solid, recession-proof business. After all, people always need to eat, wash and look after their households. However, steady demand does not mean firms can afford to be complacent. A number of developments are producing significant headwinds – and opening up new opportunities for growth. How CPG leaders navigate these waters can make the difference between building or losing market share.

The CPG industry is facing many challenges, including:

  • Weak growth

Times are tough. Unemployment remains high, incomes are flat and a recessionary mindset continues to influence consumer behavior in terms of higher coupon usage, increasing market share of deep discounters and the growing popularity of lower cost private label brands.

  • Margin pressure

Margins are under siege tracing to rising input costs and limited pricing power due to retailer consolidation and pricing pressure from discounters. Emerging market growth was supposed to offset this funk. However, emerging markets have become more competitive due to slowing growth rates and the rise of viable, more competitive local brands. Profit risk comes at the same time as managers need to boost their capital and marketing spend to drive product & manufacturing innovation and next generation IT capabilities.

  • Growing role of regulators and activists

Governments are getting more involved in what goes into our bodies and households. Increased oversight has important implications in terms of regulatory compliance, product development and marketing tactics. Some regulators are trying to levy higher taxes on products that are considered unhealthy, introducing measures to improve product safety, scrutinizing product claims and labels, and discouraging marketing to children. Moreover, there is increasing consumer demands for transparency on how companies perform when it comes to sustainability and corporate social responsibility as well as where products are made.

These are not easy challenges but the future need not be grim. Leaders should consider the following strategies to cope with this ‘new normal’:

  1. Embrace digital transformation

New digital technologies and devices have fundamentally changed consumer behavior in many categories. Winning companies will skillfully embrace digital transformation to more tightly connect their brands to consumers, and demand to their supply chains.

Yet, most firms we have researched have been cautious in embracing digital business. They do so at their own peril. Many companies need to quickly become proficient at digital marketing; adapt to new information gathering & mobile buying practices; leverage Big Data insights and; recognize the role of social networking in driving word of mouth referrals, awareness and community-building.

CPG firms have a variety of emerging technologies at their disposal. They can use location-based services to deliver personalized promotions or content based on their physical location. Companies can also leverage a smartphones or tablet’s camera functionality to directly enhance the customer experience. By scanning QR codes on a product, consumers can get more information, such as advice on how best to use a product or which complementary products to buy.

On the operational side, cloud services plus “agile” development practices give companies the ability to shorten the product innovation cycle, reduce infrastructure costs and rapidly scale functional capabilities.   Mining Big Data insights can help organizations better identify consumer preferences and trends, improve marketing ROI, refine pricing and deepen relationships with retailers.

  1. Refine brand strategies and portfolios

The difficult economic climate requires brand managers to refine their targeting and value propositions while holding down cost. In particular, companies will need to have distinct strategies to address an increasingly stratified market of affluent and lower-income consumers as well as seniors and ethnic groups. Multi-category firms should think about pursuing complexity reduction initiatives to cull poorly performing and costly sizes, variations and brands as well as streamlining operations and maximizing scale economies.

  1. Optimize channels

According to a 2013 Deloitte study, U.S. consumers consider 2.5 channels for their CPG purchases across 28 food, beverage and household goods categories. Consumer migration to both on and offline channels for selling and support creates operational, IT and marketing headaches around integration, alignment and efficiency. To profitably serve consumers with a consistent experience, firms need to balance their reliance on traditional channels like retailers and wholesalers with the need to follow consumers into emerging channels (e.g., mobile computing) and deliver them more personalized service, products and information. In 2014, the ‘holy grail’ of brand strategy has become delivering the omni-channel customer experience.

  1. Tweak supply chains

Many companies can do more to squeeze more flexibility, predictability and efficiency from their supply chains. For example, Big Data and Predictive Analytics combined with advanced IT systems can better match supply and demand in real-time, minimizing inventory levels, improving service performance, and reducing stock-outs.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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Cut complexity, boost profits

Companies in industries as diverse as consumer and industrial products, banking, IT and telecom looking to sustain growth and reduce risk will naturally evolve towards a high degree of business complexity. The level of complexity will be directly correlated with the range of products and services offered, the intricacies of the operations, and the organizational structures deployed. Not surprisingly, complexity (both visible and hidden) come with an expensive price tag including unnecessary input, production, and selling costs as well as operational lethargy. Companies that can eliminate needless complexity and prevent its return will build margins, increase agility and improve resource allocation.

Cutting complexity is a significant enterprise-wide opportunity for organizations. Complexity reduction projects can produce more than $10-million in annual savings by eliminating labour redundancies, consolidating raw material inputs and optimizing supply chain networks. Moreover, indirect benefits such as higher productivity, fewer errors, and better employee engagement were forecasted to generate up to twice the amount of direct savings. The Boston Consulting Group estimates firms with the right strategies and cost transparency can realize a 25% to 100% increase in profit margins.

Excessive complexity is often found in organizations with the following traits:

A strong ‘customer is king’ mission

Many companies go overboard satisfying customers with little regard to the long-term organizational impact. Managers regularly offer new products, features and marketing programs to customers as specials or targeted against small niche segments. Inevitably, product proliferation occurs, and with it comes complexity challenges around inventory management, production scheduling, and sales efforts.

Matrix-intensive organizations

For many firms, a matrix structure is the default organizational model.  As these companies grow, so does the complexity especially when the structures and processes are poorly designed and implemented (e.g., overlapping roles & responsibilities, inadequate information flows, unclear decision rights). Complexity is manifested through process redundancy, increased conflict over mandate & priorities, and slower decision making.

Complicated supply chains

Most large firms maintain a large (often global) network of suppliers plugged into a convoluted supply chain. Managing this network is inherently difficult in the best of times. However, one small change in the external environment like adding a new supplier or connecting to a new IT system can dramatically increase operational complexity within the firm.

It should be pointed out that not all complexity is created equal. Clearly, some actions and choices are needed to reduce business risk, maintain core competitiveness and retain important clients.  However, problems arise when the revenue or value derived from these activities is far below the actual, enterprise-wide cost of delivering them. The management challenge is to separate the good complexity from the bad complexity and to deal with the bad. 

To do this, managers need visibility into the problem, some strategies for tackling complexity across the organization and the fortitude to prevent its return.

1.      Understand the problem

You can only fix what you can see. Conduct a product, department or company-wide review to comprehend the scope of the complexity problem. You could start by analyzing how each SKU within the product portfolio or extensive activity in a major value chain contributes to revenue, margin or enterprise-wide cost.

2.     Identify the culprits

Complexity follows the “80/20” rule – typically, 80% of complexity will trace to 20% of products or activities. The analytical challenge is to identify these 20% margin-killers, while safeguarding “good” complexity like strategic stock keeping units (SKUs) or prudent risk management activities.  Once the culprits are identified, managers should break them down into their component parts for analysis. For example, SKUs can be broken down into ingredient and packaging inputs. A value chain can be mapped into discrete processes, touches and approvals etc.

3.     Start Pruning

Once managers have the data, it’s time to reduce the logjam. Below are three common strategies for cutting complexity:

Consolidate and streamline

With products, look for opportunities to eliminate poorly performing SKUs and to consolidate the number of raw material and packaging inputs that go into the remaining portfolio. To reduce operational complexity, consider ways to minimize or remove unnecessary touches in areas like internal reviews, team & communication practices, and sub-optimal processes.

Bundle to increase standardization

Some companies have the ability to standardize complexity. For example, automotive and PC makers have been successful at combining dozens of product features, styles etc. into standard consumer bundles that could more readily be manufactured, inventoried and sold in volume.

Price for complexity

Some businesses must learn to live with certain complexity due to key client or regulatory demands.  In these situations, managers should look to recoup some of the cost of complexity by raising prices – and communicating these reasons to customers so as to manage churn.

Never going back

Pruning can often be the easy part. The bigger challenge might be ensuring the complexity doesn’t not return. Managers need to take steps like instituting disciplined product line management systems to make sure complexity does not creep back.

Although a strong customer focus, powerful supply chain or large product portfolio can differentiate a company, it can also burden it with undue complexity – much of it hidden and insidious.  Firms can unlock significant savings and accelerate the speed of their business by systematically tackling the complexity challenge.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.