subscribe: Posts | Comments | Email

Another Example of SKU Proliferation Leading to Cost Complexity

0 comments

Yesterday in one of our news feeds, we came across a report on FoodBusinessNews regarding snacks producer Snyder-Lance, and it efforts to address an ongoing challenge to increase profitability. We view this report as a typical current day example of how the C-Suite turns to the supply chain as a prime barometer and facilitator of needed cost savings.

The report outlines a “comprehensive and aggressive performance improvement plan” that a result of recent first-quarter financial results falling behind management expectations., according to the interim CEO. A number of factors were attributed to the sub-standard performance that were described as category softness, lower net price realization, unfavorable mix, cost headwinds and certain execution lapses. Some or most of these phrases should be familiar to our readers in consumer packaged goods, food, and beverage companies since most of the industry has been whiplashed by many of these same forces.

What is rather interesting and noteworthy are statements that overall business complexity drive increases in costs. Snyder-Lance has identified five priorities to attack the complexity problem which include manufacturing and supply chain streamlining efforts. That includes a realization that a proliferation of SKU’s (stock-keeping units), half of which only contribute a reported 5 percent of revenues, the other-half, the majority of revenues.

SKU proliferation is a familiar challenge in supply chain business planning, one that dates back quite a few years in CPG and consumer brand-oriented product areas.

There are many causes.

Companies that undergo periods of active merger and acquisition cycles will often inherit both added distribution channels as well as associated SKU’s. Likewise, companies with inherit multiple channels of distribution are often subjected to such risks.

The snack food area is particularly vulnerable because snacks are often subject to impulse buying within multiple outlets including neighborhood convenience stores, dispensing machines, convenience restaurants, food purveyors catering to service firms such as airlines, passenger trains, ferries and the like, and the typical member warehouse and retail grocery chains. A new market twist is that of online grocery basket shopping which online providers such as Amazon, Wal-Mart, Target, and other online retailers have introduced.

In fact, this analyst is of the belief that SKU proliferation is again becoming a more widespread problem because of the new realities of online retail. Retailers themselves are finding themselves bloated with SKU’s to address different sales channels, be that physical store where snacks are purchased in bulk or online on an induvial basis.

Another challenge that Sales and Operations (S&OP) teams are quite familiar with is the relationship dynamics of sales and marketing, who advocate for creating separate SKU’s for what they believe will be new and upcoming customers. After all, a separate SKU allows the new customer to gain personalized product and at the same time, more definitive tracking of a channel’s sales volume.

There is little doubt that SKU Proliferation indeed can drive complexity and supply chain inventory and distribution costs. Advanced inventory management or inventory optimization tools help in identifying and addressing problem areas. The resolution, however, involves a lot of internal supply chain cross-functional and external sales and marketing collaboration. It is also a condition and a watch out that should be factored in the analysis of the increased costs related to supporting today’s more focused online business models.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Q1 Economic Data Again Echoes Challenges in Integrated Business Planning

0 comments

For multi-industry sales and operations planning (S&OP) teams, keeping an eye on the global economy and on individual global regions has been an important consideration in efforts to meet business planning goals and achieve proper supply chain alignment. Yet, global and individual region economic and supply chain indices often reflect a differing collection of trending and forecasting.

Entering the year, there was little doubt that 2017 would provide a multitude of uncertainties related to both global economies and geo-political developments that could impact economies. In its World Economic Outlook published in October 2016, the International Monetary Fund (IMF) cited a subdued outlook for 2017 with political tensions and policy uncertainties prevalent. The October WTO forecast called for anticipated global growth rate of 3.4 percent in 2017.

Last week’s Spring meeting of world finance chiefs in Washington brought forward a more optimistic outlook. The IMF has raised its forecast for global growth to 3.5 percent, the first time this agency has elevated its original forecast in the past six years. The agency cited a stronger reported growth rate in China in Q1 along with improving economies in Europe and Japan. The IMF chief economist indicated to the Financial Times that the world economy was firing on all engines, albeit not very strongly. Another former IMF chief economist indicated to the FT that the low-growth legacies of the 2008 financial crisis have literally reached an end.

That data alone would obviously fuel optimistic perspectives for integrated business planning.

However, during the past few days, GDP growth and PMI indices point to varying sign points.The U.S. Commerce Department reported that the U.S. economy literally stumbled in Q1, as manifested by a 0.7 percent annual growth rate in the January through March period. That figure reflected the slowest pace of expansion in almost three years. According to various commentaries, American consumers sharply cut-back on spending despite consumer optimism being at an all-time high. A drawback in inventories had a significant negative effect on growth in the quarter. Yet, economists and the Commerce Department remain optimistic since other data points to increased business investment and stronger growth in the months to come. The new Trump Administration has put forth a U.S. GDP growth target of 3.5 to 4 percent for the year.

Meanwhile, a review of major global and regional PMI indices indicates that:

  • Global manufacturing and PMI activity reflected by the P. Morgan Global Manufacturing PMI index slipped to a three-month low for April. This recognized benchmark of global supply chain activity registered a value of 52.7 at the close of 2016. The April value was reported as 52.8.
  • The ISM Report on Business PMI (United States) decreased 2.4 percentage points in April, while the accompanying New Orders index decreased 7 percentage points in April.
  • Eurozone manufacturing expanded at the fastest pace in six years during April.
  • China’s General Manufacturing PMI reflected that the country’s manufacturers started Q2 with a further slowdown in production and new business growth momentum.

The above data points, by our lens, are a reinforcement of what integrated business planning processes must now deal with on a continuous basis. There are now multitudes of different data and information points that must be synthesized, weighted, and factored with more emphasis on the weighting of regional or country-specific product demand sensing. General forecasts based on historic data are no longer sufficient. Planning is now a continuous process with continual input at a much more granular level.

Some current examples of the implications can be observed in the consumer packaged goods and automotive industry sectors.

Market data from Nielson indicates that volume sales for packaged food products in the U.S. fell 2.4 percent in the first quarter of 2017. Noted in one of our prior blog postings, many branded CPG food producers continue to deal with challenges of low growth and permanent changes in consumer buying. For the automotive industry, a multi-year period of robust sales growth in North America is showing signs of more subdued growth. Producers such as Ford Motor, Fiat Chrysler and General Motors reported April monthly sales declines, including popular selling truck and SUV models. According to data from WardsAuto.com, U.S. auto dealers are now languished with a 72-day supply of unsold new vehicles. A report by The Wall Street Journal indicates that GM has nearly one million vehicles sitting on dealer lots. Additional manufacturing cutbacks are now being considered even though the late Spring and Summer are traditional periods of higher volume sales.

Our prediction for 2016, and again for 2017 is that resiliency, adaptability, and risk mitigation are very important competencies since the pace of business and of economic data are in constant flux. It is much more important for teams to be able to constantly sense market demand and look-ahead to what is occurring in specific regions.

The takeaway is that S&OP and respective supply chain planning teams are tasked to insure bimodal business plan performance which implies growing the top revenue line, insuring business margins are fulfilled, and that proper contingencies for the business and for the supply chain are always in-play, regardless of the constant ebbs and flows of the global economy.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


More Concerning News for Consumer Packaged Food and Beverage Supply Chains

0 comments

One of the front-page articles in today’s published edition of the Wall Street Journal, Big-Name Food Brands Lose Battle of the Grocery Aisle (Paid subscription required) reports that a growing number of food retailers are electing to feature more strategic aisle placement to fresh and prepared products rather than large packaged-food brands. In essence, the report indicates that such building trends are complicating efforts to break out of a multi-year decline in organic sales growth, with more longer-term implications. We quickly add that from our perspective, such trends will place more pressures on existing CPG industry supply chains.

In our 2017 Predictions for Industry Supply Chains (Available for complimentary downloading in our Research Center), we elected to include Consumer Packaged Food (CPG) and Beverage supply chains in our industry-specific predictions. We have included this industry in our industry-specific predictions for the past three years and the industry supply chain stakes continue to become far higher.

Consumers have not wavered in their more health-conscious view of food and beverage consumption and their shopping preferences continue to shun traditional processed foods. This latest WSJ report observes that increasing numbers of food retailers who are always challenged with the need to maximize shelf space and foot traffic are now opting to allocate prime store space to fresh food, prepared meals and local brands that have garnered the new loyalty of health-conscious consumers. As industry participates are all too-aware, without store strategic placement, consumers tend to avoid the center aisles of grocery stores, which adds more fuel to declining sales trends.

The latest WSJ report cites market data from Nielson indicating that volume sales for packaged food products fell 2.4 percent in the first quarter of 2017. Further cited are the latest annual volume numbers indicating that packaged food product volume declined 0.4 percent annually, as compared with growth of 1.7 percent for fresh meat, 1.9 percent for fresh produce and 4 percent for prepared foods. These are not the types of sales trends that branded CPG product managers want to experience, and they continue to magnify the ongoing challenges for large CPG producers and their associated supply chains.

Compounding the challenges are the two largest retailers, Amazon, and Wal-Mart, each demanding more price concessions from the large CPG brands, each threatening volume reductions if their lowest price demands are not met.  That obviously leads to a delicate balancing act to appease both retailers, for different strategic reasons.

This week, three of the largest CPG producers, Mondelez, Kraft Heinz and Kellogg will be reporting financial performance numbers for the latest quarter and many Wall Street eyeballs will to paying close attention. Some are already setting expectations for another tough year for the industry.

Declining profits and meager sales growth continues to spawn activist investors to influence certain CPG, food, and beverage firms to consolidate. The prime disruptor in this industry remains Brazil based 3G Capital and specifically Heinz-Kraft Foods, demonstrating what is often described as a blitzkrieg of cost cutting predicated on zero-based budgeting tenets, with an acquisition model described in the analogy of a swimming shark with tendencies of buy, squeeze and repeat with the next target.

Meanwhile, speculation abounds as to what will be the next target for Kraft-Heinz. Names such as Mondelez International, Campbell Soup, Coca Cola Company, General Mills, Kellogg, and others are being tossed about.

The Supply Chain Implications

In the middle of such forces are CPG focused industry supply chains that continue to be pressured for additional cost reductions and productivity savings. This continues and at a more intense pace.  At the same time, visionaries continue to believe that the future still comes from process and technology enabled innovation and in sourcing, planning and marketing healthier and more organic food products.

This latest WSJ report observes that companies like Hershey and PepsiCo are actively collaborating with retailers to help re-think the center of the store for product placement and for boosting sales growth.

As noted in our industry-specific prediction, many food supply chains have heavy requirements for continuous new product introductions and in developing distribution strategies that accommodate an entirely different customer fulfillment need. Coupled with that is satisfying consumer needs for visibility into all levels of the food supply chain and specifically where food has originated.

All the above remain the primary agenda for CPG, food, and beverage supply chains in the coming year. The winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. By our lens, industry supply chains that invest in talent that can bring forward new creativity, collaboration and thinking for a supply chain model that leverages both online and in-store buying needs will likely benefit.

Again- Stating the Obvious

We again re-iterate what was stated in our prediction. The wave of activist investors surrounding the CPG food and beverage industry is destructive to supply chain capability and innovation, and the timing could not come at the worse time.  CPG industry supply chains and their network of food suppliers require the ability to support a business need for healthier and more organic food choices for consumers.  This wave of zero-based budgeting and cost cutting will not likely achieve that objective, and we as consumers, will have limited choices for healthier food.

It is a race to the bottom with notions that the survivors gain the spoils.

One must wonder what the end-state really implies, short-term investor rewards or industry supply chains with very little capability to support required process, technology, and product innovation.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


A Reported Price War Among Amazon and Wal-Mart with High-Stakes for CPG Industry Supply Chains

0 comments

Last week, business and industry media was abuzz with reports indicating that retail giants Amazon and Wal-Mart were engaging in an all-out war for both price and online dominance involving offerings of consumer packaged goods (CPG) products.

Needless to state, the stakes surrounding such dynamics are high, and the implications to CPG supply chains rather significant.  Once more, such dynamics are by our Supply Chain Matters lens, rather ill-timed for this industry.

Global business network CNBC posted a recode report indicating that last month, Wal-Mart gathered some of America’s largest household brands at its corporate headquarters for some tough talk negotiations. According to this report, Wal-Mart’s intent was to reset expectations with key suppliers regarding pricing concessions, and in-essence, seeking a 15 percent decrease in prices charged to the global retailer.  This represents a significant pricing concession from branded CPG suppliers, most of whom have already been buffeted by ongoing industry pressures for reduced costs.

As Supply Chain Matters blog has amplified in our numerous CPG focused commentaries, the threat of 3G Capital, under the guise of Kraft-Heinz, along with other activist investor forces that continue to surround the industry and pressure for added near-term profitability and shareholder value results. They have led to a zero-based budgeting wave impacting many brands, and whiplashing respective supply chains. Fortune described the 3G Capital playbook as a “meritocracy” that is on-track to consume the food industry itself.

The compounding and contrasting event stems from Amazon, who has invited similar major CPG brands to visit Seattle headquarters in May to convince them to join to offer more products directly online, in-essence, bypassing major chains such as Wal-Mart, Target, and Costco. According to a published report by Bloomberg, CPG brand attendees will hear from Amazon’s Worldwide Consumer chief Jeff Wilke, a direct report to Jeff Bezos.  Amazon wants to convince CPG brands to re-think their traditional supply chain distribution model, where popular products are designed, packaged, and shipped in the context of a physical retail store as the prime buying outlet. Key products would instead be designed and packaged for online merchandising, packaging, and customer fulfillment for personal consumption, as-needed vs. bulk consumption.

Major CPG are not only caught in the middle of two retail giants battling for supplier loyalty, but also in the middle of two distinct business distribution models that can dramatically impact future business performance. On the one hand, no major CPG brand wants to be on the outs with Wal-Mart, given the amount of unit volumes that are represented. A continuous zeal to feature the lowest prices for all major brands forces razor-thin margins with resultant consequences of taking cost out of all forms of packaging, distribution, and transportation of products to Wal-Mart distribution centers. In the case of this latest push-back, the global retailer reportedly could cause some brands to experience negative margins on specific products. Of course, Wal-Mart has its own strategic efforts to expand its online presence as manifested by the retailer’s recent $3 billion acquisition of Jet.com, whose online model is focused on individual item price competitiveness.

The CPG supply chain community is acutely aware of what drives costs.  That includes multiple SKU’s for major customers, a proliferation of packaging sizes or product offerings customized for individual retailers or order volumes that do not meet business margin requirements for key customers. Many prior cost-reduction initiatives hone-in on these cost-drivers. Yet, the online model of individual consumption could present added margin opportunities if priced appropriately.

Amazon and Wal-Mart are in-essence seeking to influence major brands to each major retailer’s different strategic business model. As Bloomberg points out:

Amazon has been struggling to crack the food and packaged goods market—an $800 billion category still dominated by Wal-Mart and other traditional chains. Persuading brands to design their packaging and operations for the online world would make it easier for Amazon to ship common household goods to urban dwellers in less than an hour, potentially making last-minute dashes to the store obsolete. Amazon must convince brands that even though online purchases represent a small part of their sales, e-commerce is the future.”

Wal-Mart’s strategic business model has the physical store as the prime focus for every-day essentials, whether a Wal-Mart Super Center or neighborhood store, while online will serve as the buying focus for occasional purchases, or for 1-2-hour pickup of food or consumer staple items picked-up in the nearest store.

Both retailers will demand the lowest prices available to any retailer, despite differing strategies, and as Recode observed from cited sources, both have ignited intense wargaming inside the largest CPG companies such as Kimberly Clark, Mondelez, P&G and Unilever. Other brands, large and small, will surely be impacted as-well.

In our 2017 industry-specific prediction, and in our numerous CPG supply chain focused blog commentaries, we have challenged what the end-state really implies, short-term rewards or industry supply chains with the capability to support both new online business and physical store merchandising and fulfillment models supported by continuous product innovation.

The decisions made in the coming weeks and months will be the determinants for not only the business and the supply chain, but for the negotiating and management skills of brand leaders themselves.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


2017 Industry Specific Prediction- Consumer Packaged Food and Beverage Supply Chains

Comments Off on 2017 Industry Specific Prediction- Consumer Packaged Food and Beverage Supply Chains

In our recently unveiled 2017 Predictions for Industry Supply Chains (Available for complimentary downloading in our Research Center), we elected to include Consumer Packaged Food (CPG) and Beverage supply chains in our industry-specific predictions. We have included this industry in our industry-specific predictions for the past three years and already, industry dynamics of activist investors surrounding the industry are once again underway, and the supply chain stakes are becoming far higher and likely destructive.

Consumers have not wavered in their more health-conscious view of food and beverage consumption and their shopping preferences continue to shun traditional processed foods. They demand healthy food choices containing natural and sustainable ingredients. Throughout 2016, these trends continued to be reflected in the business and financial performance of globally branded food producers who now continue to be challenged in achieving single-digit top-line sales and profitability growth. Global observers such as the Economist question whether the global expansion and presence model has run out of steam because of diminishing financial returns.

As what occurred in 2016, declining profits and meager sales growth continues to spawn activist investors to influence certain CPG, food, and beverage firms to consolidate. The prime disruptor in this industry remains Brazil based 3G Capital and specifically Heinz-Kraft Foods. A report from Fortune describes the 3G Capital playbook as a “meritocracy” that is on track to consume the food industry. The model includes wholesale replacement of an existing senior management team and what is often described as a blitzkrieg of cost cutting predicated on zero-based budgeting tenets. This model is further described in the analogy of a swimming shark with tendencies of buy, squeeze and repeat with the next target.

When 3G acquired Heinz, upwards of 7000 job cuts were initiated while five production facilities were shuttered. Earnings Before Interest and Taxes (EBITA) improved by 8 percentage points over an 18-month period. Heinz then acquired Kraft in 2015, and reports point to upwards of an additional 5000 in headcount reductions. A recent published Fortune report cites research firm AllianceBerstein as indicating that Kraft-Heinz is already 88 percent towards its goal to cut an additional $1.5 billion in annual costs by the end of this year.

Acquisitions govern growth as opposed to just organic sales growth.  The CPG industry is now consumed with the threat of 3G, and as Fortune observes: “The entire food industry is “3G-ing” itself before Kraft-Heinz can do it to the companies.” Fortune writes: “The whole food industry is speculating who’s next.” We concur and we predicted that there will indeed be another major acquisition involving a major branded CPG company in 2017.

Little did we know that it would come so soon and with far broader scope.

Dynamics Already Underway and the Stakes Increase

Last week featured the news of what our prediction included although the target and size was a big surprise. Kraft-Heinz issued a $143 billion acquisition offer for global CPG provider Unilever. While the offer was quickly rejected as insufficient, and subsequently withdrawn, the implications are far larger and once-again reverberating across the industry while all await the next shoe to drop. The Economist headline was: Barbarians at the Plate: 3G Missed Unilever but its methods are spreading.

Within the past few days Campbell Soup and General Mills reported disappointing sales and earnings. Campbell’s cited mistakes in its fresh-foods business unit that included a recent product recall and decision to harvest carrots while they were still small. Late last week, General Mills reported weaker than expected revenues from sales of yogurt and soup along with weakened consumer demand. The firm’s outlook for the remainder of its fiscal year that ends in May is expected to decline by 4 percent.

Today, The Wall Street Journal reported that Unilever is now pivoting from the Kraft-Heinz attempted acquisition with its Board now deliberating on options to deliver greater short-term value for shareholders.  That could include the sale of the firm’s current food division or attempting an acquisition of its own in the personal care area.

Meanwhile, speculation abounds as to what will be the next target for Kraft-Heinz. Names such as Mondelez International, Campbell Soup, Coca Cola Company, General Mills, Kellogg, and others are being tossed about.

With such a backdrop, pressures increase on remaining CPG food and beverage companies along with associated food suppliers.  By our lens, the survivors are those that embrace innovation and find ways to best accommodate today’s consumer choices.

Industry Supply Chains Buffeted from the Impact

In the middle of such forces are CPG focused industry supply chains that continue to be pressured for additional cost reductions and productivity savings. This will unfortunately, continue and at a more intense pace.  At the same time, visionaries continue to believe that the future still comes from process and technology enabled innovation and in sourcing, planning and marketing healthier and more organic food products. Thus, many food supply chains have heavy requirements for continuous new product introductions and in developing distribution strategies that accommodate an entirely different customer fulfillment need. Coupled with that is satisfying consumer needs for visibility into all levels of the food supply chain and specifically where food has originated.

All the above will be the primary agenda for CPG and beverage supply chains in the coming year. The winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. Many will need to be equipped to deal with our other 2017 predictions such as responding to the perfect storm in the requirements for skilled supply chain talent across many supply chain, procurement and distribution dimensions along with the needs for advanced technology to support more predictive decision-making.

Bottom-line, the CPG industry remains in a state of defense and apprehension, and by our Supply Chain Matters lens, industry supply chains will pay the inevitable price in needs for further cost and headcount reductions along with blocked efforts to instill added product, process, and resilience to overall business support capabilities.

Stating the Obvious

Sometimes, a blog such as ours needs to be blunt in viewpoint to provoke additional thinking or changed mindset. The wave of activist investors surrounding the CPG food and beverage industry is destructive to supply chain capability and innovation, and the timing could not come at the worse time.  CPG industry supply chains and their network of food suppliers require the ability to support a business need for healthier and more organic food choices for consumers.  This wave of zero-based budgeting and cost cutting will not likely achieve that objective, and we as consumers, will have limited choices for healthier food. It is a race to the bottom with notions that the survivors gain the spoils.

One must wonder what the end-state really implies, short-term investor rewards or industry supply chains with very little capability to support required process, technology, and product innovation.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


« Previous Entries