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Best practices inConsumer Packaged

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For some years retailers have been facing adownward pressure on prices. Consequentlythis challenge is shared with their CPG suppli-ers. This trend forces both to look for optimiza-tion beyond their borders and therefore drives the

willingness to collaborate in various domains.This is why a collaborative supply chain is highon the agenda of their executives. From the man-ufacturers perspective, the complexity of productproliferation is another reason to collaborate withthe retailers in order to synchronize both sup-ply chains. The number of product variants hasbeen growing for various reasons. Private labelproducts are taking a larger part of the retailershelf in order to differentiate on the one hand

and to establish a consumer relationship on theother hand. Product innovation is creating dif-ferent product variants for different subsegmentsof consumers. Marketeers continuously stimulatethe consumption through temporary promotions.The result is an ever growing product portfoliocomplexity for the CPG producers. Yet, there isno room to accommodate a corresponding costincrease. Last but not least, retailers are request-ing 99% service level, as they cannot afford tohave empty shelves and bare missed revenue.

The straightforward answer to this challenge(for both) could be a raise of safety stockto absorb the uncertainty of consumer demand.However, because of the credit crunch, todaymore than ever cash is king. Every CFO islooking to reduce working capital needs andurges supply chain executives to lower stocks.The challenge of inventory reduction can be

pictured best by the Japanese metaphor thatwas used in the days of just-in-time ( JIT) thinking.Inventory is like the water level in a river. Thecompany is represented by a ship navigating inthat river. The higher the water level, the lowerthe probability the ship will hit a rock somewherein the river. The aim is to gradually lower thewater level to make the rocks (biggest first) visible.Once identified, the company starts an action toeliminate the rocks. When this is accomplished,

one can lower the water level again to forcenew rocks to surface. The emphasis is on the

gradual approach to avoid that the ship encoun-ters the fate of the Titanic. The story also nicelyreflects the idea of continuous improvement. Thismetaphor also explains why the best practices insupply chain and operations are to be found in a

specific category of CPG: chilled foods.

The chilled foods industry faces all of theabove CPG challenges and more. Mostchilled products have a short product shelf lifethat varies between 5 days and 35 days. Freshdairy, prepared meals, packed sandwiches areproducts we daily or weekly take out of the fridgesomewhere in a retail store or a gas station. Tra-

ditionally the total product shelf life is split equallyover the producer, the retail shelf and the consum-er fridge, each of them getting one third of thetime to store and conserve the product. Althoughplenty of good reasons could be listed to raisethe stock at the producer level, there is a physicalconstraint to generaly keep more than one weekof inventory. The chilled foods CPG producer iscontinuously confronted with a though dilemma:either have too much inventory that eventuallyhas to be destroyed for shelf life reasons, or

suffer service level issues because stocks are toolow to meet demands. This segment of CPGindustry has learned to navigate in rivers hardlyfilled with water. Although this seems like mis-sion impossible, this industry achieves today 99%service level at an acceptable cost. This is dueto the fact that their supply chain engine is tunedlike a formula 1 car.

In chilled foods, all departments have learnedand realized that they have to approach thechallenge holistically. They all have to contributetheir share to achieve this state-of- the-art teamresult. Sales carry the responsibility for best-in-class forecasting to minimize demand uncertainty.Lean and reliable operations allow for quickchangeovers and small production batches at anacceptable cost. Maintenance managers focuson preventive maintenance programs to assurelines are operating when they are expected todo so. Supply chain collaborates with the cus-tomer to manage inventories throughout the entire

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chain. Marketing looks for promotions that meetconsumer expectations while avoiding unwantedcomplexity in operations. R&D product innova-tions are also designed to minimize manufactur-ing complexity. Engineers focus on agility ofoperations. Holistic, group thinking, is the onlyway to navigate this ship with a minimum depthof water to keep it floating. There is no room forrocks and most of them have been taken out along time ago. Silo acting has been replaced bystreamlined cross departmental processes. This iswhy all CPG can learn from the best practices inthe business of their colleagues in chilled foods.

Author : Peter Verstraeten, Managing PartnerEquazionDate : 30/8/2010 S&V Management Consultants 2010

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