Feb 28, 2014

Why the consumer goods industry needs to reassess its current operating model

February 28, 2014 - As a recent McKinsey Insights article pointed out, CPG companies are selling more of their products to more people in the world than ever before. Which is why their complex operating environment is a mix of meeting demand from developed and developing markets, increasing global and local competition, fickle consumer behavior, and complex business models. On top of this, CPG companies face severe input cost volatility and strained supply chains. Which is why their current operating model must evolve and to keep pace.

The challenges in new markets, where demand has outstripped that of the developed world consistently in the last decade, is to meet local preferences and regulations, with an eye on profitability. Add to this stiff competition from strong local players, necessitating all CPG companies to focus on continuous product development, packaging and marketing plans.

In older markets like Western Europe and North America, the CPG companies need to keep pace with the digital consumer - who shop, share, browse and recommend in a vastly socially networked world.

Other challenges include:

  • Increasing volatility in input costs. Since 2002, and contrary to prior 40 years, the Consumer Packaged Goods (CPG) sector hasn’t outpaced the S&P 500. The industry could pass on to customers only 15% of the 40% cumulative commodity costs increase given price sensitive demand. McKinsey estimates this effect drove 75% of the sector’s margin contraction, approximately $70 billion.
  • Supply-chain issues. Supplier identification and negotiations, low cost sourcing, and shared cost analyses are making it increasingly difficult for CPG companies to execute “design to cost” products and Stock Keeping Units (SKUs). Moreover, strained supply chains are often expected to ensure zero stock outs for strategic reasons.
  • Legacy systems, limited in-house analysis capabilities. It is often difficult to support demand planning, production, pricing, marketing and trade promotion decisions without scalable, in depth data analysis expertise. Outdated and non-interoperable systems often complicate the problem

To address these challenges, the consumer goods industry is searching for future growth and profitability by incorporating variable cost structures, decoupling geography specific processes and focused and outcome oriented data analysis in high-growth emerging markets.

Existing operating models often limit a company’s choices, as legacy conflicts and inefficiencies scatter efforts, resources, and management’s attention. And they are a barrier to agility. Agility being the ability to respond to market trends, implement strategic choices that can be supported through a scientific understanding of GBS operating models to serve key business functions like finance, supply chain, sales and marketing.

When external factors are beyond control, CPG companies will do well to turn their focus inwards and seek strategic contribution from business support operations. By embracing new operating models, CPG companies can ensure the longevity of brands despite the volatility.

Author: BK Kalra - SVP, Consumer Goods, Retail and Life Sciences