ARC's John Blanchard CPG Presentation @ ARC's Industry Forum 2009

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ARC's John Blanchard CPG Presentation @ ARC's Industry Forum 2009 in Orlando, FL. Opportunities and Challenges for the Food, Beverage, and CPG Industries.
Food, beverage, and CPG manufacturers find themselves caught between slow growth, rising costs, waning pricing power, accelerated regulatory and customer requirements, and a growing percentage of sales from a limited number of powerful and demanding retailer, and increasingly limited capital, human, and even material resources.

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ARC's John Blanchard CPG Presentation @ ARC's Industry Forum 2009

  1. 1. Opportunities and Challengesfor theOpportunities and Challengesfor thefor theFood, Beverage, and CPG Industriesfor theFood, Beverage, and CPG IndustriesJohn BlanchardResearch DirectorFood , Beverage , and CPG IndustriesARC Advisory GroupARC Advisory Groupjblanchard@arcweb.com
  2. 2. Challenging TimesChallenging TimesFood, beverage, and CPG manufacturers findthemselves caught between slow growth, risingthemselves caught between slow growth, risingcosts, waning pricing power, accelerated regulatoryand customer requirements, and a growingpercentage of sales from a limited number ofp gpowerful and demanding retailer, and increasinglylimited capital, human, and even materialresources2© ARC Advisory Group
  3. 3. Challenging TimesChallenging TimesHow do we improve marginsand increase profitablegrowth to sustaingrowth to sustainshareholder value?3© ARC Advisory Group
  4. 4. Business EnvironmentBusiness Environment♦ F d d d t f t d dili i i♦ Food and product safety due diligence increasing• Concerned consumer• Yearly food borne illness statistics• Global terrorism• Global sourcing & rapid high volume distributionGlobal sourcing & rapid high volume distribution• These facts plus product counterfeiting are producing• New industry and company food safety initiatives• Increased regulatory and customer requirements4© ARC Advisory Group
  5. 5. Business EnvironmentBusiness Environment♦ I i t l ti♦ Increasing government regulations• US Bioterrorism Act• FDA and USDA regulations• CBP/CT PAT• CBP/CT-PAT• DHSCustoms- Trade PartnershipAgainst Terrorism• Truth in labeling laws• FDA & USDA mandated HACCP programsE. coliListeriaSt hForeignMatlRecall Reasonfor fish, meat, poultry, and juices• Environmental regulations: land, water, airStaphSalmonelAllergen5© ARC Advisory Group
  6. 6. Business EnvironmentBusiness Environment♦ Increasing share of market controlled by a limited number powerfulretailers, manufacturers, and suppliers♦ Increasing global competition for everyone♦ Mature US and European markets with limited growth opportunities♦ Seeking opportunities in high growth emerging markets2 8 .0 %2 1%2 2 .5% 2 3 .0 %$6 .8 b25.0%30.0%$6.0$7.0$8.010 .5%12 .0 % 12 .0 %12 .2 %13 .0 %17.2 %16 .3 % 17.0 %$1.8 b$1.0 b $1.0 b$3 .6 b$1.4 b$1.8 b$0 3 b$0 .9 b$0 3 b$0 .9 b $0 .4 b5.0%10.0%15.0%20.0%$1.0$2.0$3.0$4.0$5.0$0 .3 b $0 .3 b0.0%SaraLeeGilletteKelloggKraftMills(Ex.Sams)Mills(Incl.Sams)EnergizerP&GHersheyRevlonCloroxDialCorp.$0.06© ARC Advisory GroupGeneralMGeneralMiShare of Business at Wal*Mart Dollar Sales+Data sources did not indicate whether Sam’s Club data was included or not in the reports.
  7. 7. Rapid Change, More Complexity, LimitedResourcesRapid Change, More Complexity, LimitedResources♦ Global sourcing of more limited, higher cost, more exotic ingredients♦ Value health and environmentally conscious and demanding new♦ Value, health, and environmentally conscious and demanding newconsumer♦ Lots of consumer short (fads) changing purchasing patterns♦ Rapidly changing demographics and new geographies (small♦ Rapidly changing demographics and new geographies (smallbodegas)♦ Increasing number of SKUs and new product introductions♦ Increasing percentage of sales from promotions♦ Increasing percentage of sales from promotions♦ Increasing importance of packaging♦ Limited resources♦ Available capital♦ L b l d kill t7© ARC Advisory Group♦ Labor pool and skill sets♦ Water, energy, ingredients, packaging materials
  8. 8. More Sustainable ManufacturingMore Sustainable Manufacturing♦ Driven by retailer initiatives• “The challenge of creating a low-carbon society willrequire a revolution in thought and action – arequire a revolution in thought and action – arevolution in green consumption.” - Terry Leahy –CEO Tesco♦ Driven by business and regulatoryy g yrequirements• As a part of their effort to eliminate waste andimprove efficiency, Pepsico has been applying eco-friendly technology in packaging, deploying solarfriendly technology in packaging, deploying solarenergy and methane gas recovery technology, andtesting hybrid vehicle programs in their delivery fleets♦ Driven by limited resources for manufacturing in most♦ Driven by limited resources for manufacturing in mostparts of the world♦ Driven by the “green” consumer/shareholderA 50% f id “ ” i h i h i8© ARC Advisory Group• A recent survey over 50% of consumers consider “green” in their purchasingdecisions and 20% are ardent “green” even concerned over how a companytreats its employees
  9. 9. Sustainable ManufacturingSustainable Manufacturing♦ To the consumer♦ To the consumer• Product availability• EnvironmentalresponsibilityEnvironment& ResourceFriendlyresponsibility♦ To the employee andhis/her familyFriendlyProducts/ y♦ To the local community♦ To many segments ofEnvironment& ResourceFriendlyPlantsEnvironment& ResourceFriendlySupply Chain♦ To many segments ofmanufacturing♦ To Wall StreetPlantsSupply Chain9© ARC Advisory Group
  10. 10. Response to Changing Business EnvironmentResponse to Changing Business Environmenti i l “Margins rise while returns are flat”♦Initial Strategy• Mergers, acquisitions, divestitures, outsourcing• Product portfolio rationalization/optimization“Margins rise while returns are flat”Product portfolio rationalization/optimization• Productivity initiatives• OEE, TPM, continuous improvement• Supply chain optimization programs• Supply chain optimization programs10© ARC Advisory Group
  11. 11. Now Food, Beverage, and CPG Manufacturers AreAskingNow Food, Beverage, and CPG Manufacturers AreAsking♦ How do I address the fluctuating price and availability ofcommodities?♦ How do I reduce my energy and other utilities costs andensure the long term availability of these resources?♦ How do I find and evaluate new technology that will supportinnovation and speed time-to-market?♦ How do I reduce my manufacturing cycle time?♦ How do I reduce my manufacturing cycle time?♦ How do I come up with new ideas or equipment that is multi-tasking and that can reduce change over time?♦ Wh t th b t t i t t f t f t i♦ What are the best metrics to support future manufacturingrequirements?♦ How do I support my ever expanding manufacturing andbusiness automation systems and networks?11© ARC Advisory Groupbusiness automation systems and networks?
  12. 12. Response to Changing Business EnvironmentResponse to Changing Business Environment♦Strategy Going Forward –“An agile, innovative enterprise tosustain growth and improvemargins”• Global “super branding”• Expansion of distribution channels• Process automation and integration of• Process automation and integration ofmanufacturing & business processes enterprise-wide• More sustainable & flexible manufacturing & supplyh ichains• Develop a more innovative and extendedorganization and culture (people)12© ARC Advisory Group
  13. 13. Operational excellence is nolonger enough.Its power to differentiate haseroded.Rory A. M. DelaneySenior Vice President13© ARC Advisory GroupStrategic TechnologyGeneral Mills
  14. 14. A Discipline of Innovation EmergingA Discipline of Innovation EmergingInnovation is generally recognized as the principledriver of growth and shareholder value• An increased rate of change has made anability to change more valuableg• Methods and tools are emerging to vastlyimprove innovation success rates• Companies need new insights to achievep ggrowth• Companies are “globalizing” their innovationprocesses. A “follow the sun” process isp pemerging• Companies are also utilizing more externalresources to drive innovation14© ARC Advisory Group
  15. 15. A Discipline of Innovation EmergingA Discipline of Innovation EmergingInnovation is generally recognized as the principledriver of growth and shareholder value• Companies involving suppliers earlier in design phase ofnew products and processesg• Some OEMs are driving innovation faster than their clients– even in non-traditional areas of their business• Patented product packaginga e ed p oduc pac ag g• More functions on a single unit or machine• More continuous on-line quality verification• New environmentally friendly technology• Packaging end line provider• Packaging end line provider• Sustainable manufacturing and limitedresources in emerging markets will15© ARC Advisory Groupresources in emerging markets willdrive innovation even faster
  16. 16. Where Are We Today?Where Are We Today?♦ Few food, beverage, CPG manufacturing sites havetheir processing, packaging, warehousing, logistics,and business systems networked together with bi-and business systems networked together with bidirectional electronic exchange of information♦ Over 67% of packaging lines do not measureperformanceperformance♦ All respondents felt there was room for improvement inon-line quality verification, with almost two thirdssaying there was significant room for improvementARC Insights & Manufacturing Performance Surveys 200716© ARC Advisory Group
  17. 17. Increased Need for On-line Quality VerificationIncreased Need for On-line Quality Verification17© ARC Advisory Group
  18. 18. Where Are We Today?Where Are We Today?♦ One of the primary reasons for purchasing productionmanagement software is compliance♦ Leading edge companies depend upon productionmanagement software to optimize margin and qualitymanagement software to optimize margin and qualityARC Insights & Manufacturing Performance Surveys 2007♦ Some factors inhibiting adoption of technology• Lack of ease of use for operatorsLack of ease of use for operators• Cost and complexity of maintaining technology• Lack of resources to evaluate new technologies• Long standing purchasing & amortization policies18© ARC Advisory Group• Long standing purchasing & amortization policies
  19. 19. What Do We Need To Do?What Do We Need To Do?♦ A More Comprehensive Plan to Meet Business andRegulatory Requirements includes:Regulatory Requirements includes:• Increased emphasis on performance monitoring ,continuous improvement, and flexibility• Improved electronic tracking and tracing from the sourceto the consumer• Improved manufacturing plant security• Increased on-line quality verification and Quality byDesign (QBD)• An “in depth” sustainable manufacturing strategy• An automation strategy that recognizes the commonalityin both business and regulatory requirementsA f l l bl19© ARC Advisory Group• A focus on people – your most valuable resource
  20. 20. It’s Not Just About TechnologyIt’s Not Just About Technology“To sustain the productivity surge, todays managers mustdevelop incentives that encourage their workers-as well asthemselves-to be more creative, self-starting, educated, andwilling to experiment. Jobs that call for simply following recipeswilling to experiment. Jobs that call for simply following recipeswill become scarcer, and demand for an innovation-drivenworkforce will continue to grow.”“……..It took 40 years for businesses to figure out how toredesign their factories and processes so that electricity coulddeliver a productivity payoff. Managers cannot afford to waitdecades to harness the greater productivity offered by todays“Productivitys Technology Iceberg” March, 2004by Erik Brynjolfsson,Professor of Managementdecades to harness the greater productivity offered by today sIT advances. …….20© ARC Advisory GroupProfessor of ManagementMIT Sloan School of Management
  21. 21. 21© ARC Advisory Group

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