Throughout the past year, my friends and family have become more interested in the work I do than ever before. I’m constantly fielding questions like, “Why doesn’t the local supermarket have my favorite hot sauce?” or “I don’t get it, how can we have so much access to food, and yet the shelves still seem so empty?” Just last week, a friend said to me, “It’s good to see my favorite foods back, but why did it take so long?”
Personal perspective of a shopper pushing shopping trolley along product aisle while shopping in a … [+]
The answer is the same: it all boils down to the supply chain—which can be a company’s weakest link or its competitive edge. And as important as these questions were at the start of the COVID-19 pandemic, they remain critical as consumer packaged-goods (CPG) manufacturers and retailers prepare for what’s next.
The players that best weathered the pandemic’s immediate shocks were generally those that could accomplish two difficult tasks at once: ensure on-shelf availability of products on one hand, while pivoting to omnichannel delivery with the other. The ability to keep physical and digital shelves stocked with what consumers want is powered by a resilient supply chain and a consumer-first product portfolio that masters complexity. Meanwhile, failure to adapt has a direct impact on sales growth—or lack thereof.
CEOs know it too, and are shining a spotlight on improving operational performance. In my conversations with consumer-sector executives, these are the key considerations we discuss in planning for what’s next.
Growing challenges require human—and machine—intervention
Consumer companies have enjoyed years of productivity improvement, much of it driven by lean-management principles that further refined the supply chains distributing products through well-established retail partnerships. But even as this model reduced inefficiencies and improved productivity, it also created vulnerabilities.
At the start of the pandemic, many CPG companies found themselves flatfooted, constrained in their ability to adapt quickly to supply and demand swings. Cracking the code of supply and demand requires new data and analytical methods implemented at critical junctures across the supply chain. This targeting is critical to understand the root cause of supply chain vulnerabilities, allows for real-time monitoring to warn of potential disruption, and creates new levels of visibility across the end-to-end value chain.
Yet data alone can’t predict the current environment. Accordingly, the transformation of consumer supply chains will require a workforce skilled in the capabilities the company needs to keep pace: automation and machine learning may aggregate large volumes of data, but experts will be needed to analyze the outputs.
A further challenge is that supply-chain talent is in increasingly short supply: in May 2020, over half of supply-chain executives said they were looking to external sources to hire more supply-chain talent. That’s on top of internal-development plans, with some 90 percent of executives saying that they need more digital-capable supply chain practitioners, through reskilling and upskilling workers.
Buoyed by a decade-long economic expansion, consumer-goods companies have rapidly expanded their product portfolios and extended existing lines in a bid to gain shelf space and capture fast-growing niche markets (such as wellness products and organic foods). In the confectionery category, for instance, a broader SKU portfolio can accommodate seasonal products and flavor variations, both of which seemed crucial to appeal to novelty-seeking consumers.
But rapid SKU proliferation exacerbated longstanding tensions between product-development functions, with their focus on cost and complexity control, and sales teams, with their need to meet evolving customer demands in expanding the top line. For some companies, the COVID 19 crisis became a breaking point.
That’s why one of the crucial insights CPGs can draw from the pandemic is the value of transferability of demand. If the number of ice-cream flavors on offer falls from 26 to 6, how will your customers behave? How many will buy one of the remaining flavors, how many will switch brands—and how many will opt for a different snack entirely? The dynamics caused by the pandemic are forcing CPG makers to ask new questions about their product assortments, and rethink their innovation strategies—all with the supply chain front and center.
Gaining a better understanding of which product and packaging features customers truly care about is key to eliminate waste, control cost spikes, and excessive overtime, all of which squeeze margins. Organizations can reevaluate product development, procurement, manufacturing, and merchandising to encourage common sourcing and develop one or more standardized product and packaging “chassis” (common baseline models and sets of ingredients upon which to build several products, for example). This approach can reduce costs and changeover times associated with product variation.
CPGs that successfully manage complexity can increase net sales by 1 to 4 percent and boost margins by up to 8 percent. The benefits have a ripple effect from unlocking employee capacity to refocusing leadership and employee resources on critical business areas.
One consumer-goods company had focused on increasing revenue—but at the expense of profitability. Over a three-year period, it had increased the SKUs it offered by 66 percent, which corresponded with a 40 percent decrease in sales per SKU and a 10 percent reduction in margin. By harnessing analytics and data that factored in revenue-growth targets and operational constraints, the company reduced its product portfolio by 25 percent while improving gross profit by 3 percent.
In another example, a machinery company went from actively selling about 800 product variants to selling about 25. By providing a better customer experience and shorter lead times, the vastly reduced portfolio increased sales by 5 percent while also achieving significant operational savings.
The decisions CPG companies make now will define what’s next. They need the willingness and flexibility to learn, adapt, and change as they go. And above all, they need to ensure that their people are with them on the journey.
I am a senior partner at McKinsey & Co. and a leader in our global Consumer and Operations practices dedicated to client success. I lead consumer-focused companies