Supply Chain Metrics That Matter: A Focus on the Consumer Products Industry 25 SEP 2012

Supply Chain Metrics That Matter:
A Focus on the Consumer Products Industry
Using Corporate Annual Reports’ Financial Data to
Better Understand Consumer Packaged Goods and
Food & Beverage Supply Chains

9/25/2012

By Abby Mayer
Research Associate

Supply Chain Insights LLC

Contents
Research ................................................................................................................................... 2

Research Methodology .............................................................................................................. 2

Executive Overview ................................................................................................................... 3

A Closer Look at CPG Companies ............................................................................................. 5

A Closer Look at Food & Beverage Companies ......................................................................... 5

Industry at a Turning Point ......................................................................................................... 7

Inventory Management ........................................................................................................... 8

Cash: Full Larder .................................................................................................................... 9

Stalled Growth .......................................................................................................................10

Global Footprint ........................................................................................................................ 11

New Product Investment ...........................................................................................................12

Trade Promotion Management ..................................................................................................13

Moving Forward ........................................................................................................................15

Appendix ...................................................................................................................................17

Metrics & Equations...............................................................................................................17

Figure 5 Methodology ............................................................................................................17

Other Reports in this Series:..................................................................................................17

About Supply Chain Insights LLC ..............................................................................................18

About Abby Mayer .....................................................................................................................18

Copyright © 2012 Supply Chain Insights LLC Page 1

Research
This independent research was 100% funded by Supply Chain Insights and is published using
the principle of Open Content research.

Supply Chain Metrics That Matter will be a series of reports published intermittently throughout
the year by Supply Chain Insights LLC. Within the world of Supply Chain Management (SCM),
each industry is unique. To help companies understand differences, each report is a deep dive
on a different industry.

While we find it useful to understand the evolution of supply chain excellence by comparing
industries, we feel that the true stories of supply chain excellence can only be really understood
by comparing what happened within a period by peer group. The goal of this series is to share
these insights. These reports are intended for you to read, share and use to improve your
supply chain decisions.

Your trust is important to us. As such, we are open and transparent about our financial
relationships and our research process. All we ask for in return is attribution when you use the
materials in this report. We publish under the Creative Commons License Attribution-
Noncommercial-Share Alike 3.0 United States and you will find our citation policy here.

Research Methodology
The basis of this report is publicly available information from corporate annual reports from the
period of 2000-2011 for the Consumer Products (CP) companies. In this report, we use this
financial data to understand the supply chain: past trends, the current operating environment,
and recommendations for the future. To drive greater insights, we augment this financial data
with information that we have obtained through interactions with clients and recent insights from
our quantitative research studies.


Executive Overview
The average Consumer Products (CP) company is stronger in the execution of supply chain
management practices than their retail or pharmaceutical counterparts, but as companies will
see in later reports, CP progress has not been equal to that of High-tech and Electronics
manufacturers.

CP companies (including both consumer packaged goods (CPG) and food & beverage
companies) tend to be marketing-driven. They are struggling to understand the differences
between new market-driven, and their well-oiled marketing-driven, supply chains. With a strong
legacy in building persuasive marketing programs, the companies have leveraged a global “one-
size-fits-all” push-based supply chain strategy. These traditional supply chain management
(SCM) definitions have produced supply chains that respond, but don’t sense. They are efficient,
but not adaptive. They tend to be long (greater than twenty weeks) with waste pockets between
nodes.

The landscape of the industry has been greatly affected by mergers and acquisitions. In the
past decade, 57 companies were absorbed into ten. The industry is still digesting this change.
While most companies have 150 unique systems, the manufacturers in this industry will often
have five times the industry average. Getting to the right data to improve decision making
continues to be a challenge.

With rising commodity prices, slowing growth, increased pressure to improve efforts on
corporate social responsibility, and rising issues from product complexity, CP leaders are getting
more serious about supply chain excellence. They are in the early stage of building Market-
Driven Value Networks designed from the customer back to redefine source, make, deliver and
sell processes.

This transition to Market-Driven Value Networks over the next decade will not be trivial. The
team will first have to earn a seat at the table to work hand in hand with sales account teams to
help retailers design a more effective value network from the customer back. In these efforts,
companies will quickly realize that the one-size-fits-all push-based supply chain is grossly
inadequate. As a result, unique supply chains will be designed to serve special markets with
customer opportunities and product assortment tailored by customer demographic. There will be
six immediate impacts:

• Listening and Sensing. The early work of CP leaders on building Demand Signal
Repositories (DSR) will be the foundation for listening and learning strategies. This
structured downstream transactional data (e.g., Point of Sale, Warehouse Withdrawal,


Retail Perpetual Inventory, etc.) will be combined with unstructured customer sentiment
(e.g., social data, ratings and reviews, customer blogs and recipes) to build effective
listening posts for the supply chain.
• Compliance. Food legislation will be transformational. Only 1% of food and beverage
companies are ready. This change will redefine visibility and tracking systems and move
the industry from pallet-level to unit-level tracking. Lot tracking across product
transformation points will require a redefinition of manufacturing and order execution
systems. This change will permeate warehouse management, transportation, and
increase the need and potential of multi-tier visibility.
• Rethinking Constraints. They will also find the traditional supply chain that focused on
manufacturing as a constraint will need to be rethought. In the next decade,
transportation and raw material constraints will overshadow those of manufacturing.
• Building Effective Buffers. The original supply chains had two buffers: inventory and
manufacturing. With the outsourcing of manufacturing, many consumer value networks
now only have one buffer, inventory. As seen in this report, the management of
inventory has not been a core competency of this industry. This will need to change to
meet the goals of being more adaptive and socially responsible. Companies will be
forced to own the entire supply chain. Companies that actively design based on
push/pull boundaries will do it best.
• Collaboration as a Necessity. Retail expectations will push for smaller and more
frequent shipments while corporate social responsibility initiatives will push for lower
carbon footprints. The only way that companies will achieve this is by working together in
ways that have never been possible before.
• Redefining the Supply Chain for Channel Strategies. The evolution of digital
technologies—digital media, social listening, mobility along with ecommerce—is
redefining the channel. Amazon is growing in importance, and is seizing center store.
Companies that have never had an ecommerce channel before will now have it as an
important opportunity for growth. Digital Path to Purchase (DP2P) will grow in
importance as companies attempt to automate and shape demand in the four moments
of truth (the choice to place an item on the list, the decision to put the item in the cart,
the check-out and product usage). The result will be the need for data to move in real-
time versus near real-time through the supply chain, and the redefinition of supply chain
execution for emerging channel strategies.


Over the past three decades, there is a long legacy of supply chain innovation by leaders in this
industry. This industry moves slowly, but deliberately. While the challenges are many, CP
companies have a strong base from which to move forward. The struggle is usually in finding
leadership that understands the supply chain as a complex system with finite trade-offs to be
managed versus a cost center to be milked.

A Closer Look at CPG Companies
The two types of CP companies are consumer packaged goods companies and food &
beverage companies. While the remedy is often shared for the two companies, there are
several unique factors differentiating the two that may help to better understand the current
state of their operating environments. While both move products through the same channel and
face similar challenges and opportunities with retailers, a CPG company has fewer items, less
complexity and lower commodity costs than a food & beverage company. CPG companies
produce products for the commodity categories of paper, laundry, oral care and household
cleaning. They tend to be larger, more global, and have less manufacturing outsourcing than
their food & beverage counterparts. Their technology systems are also more advanced and their
supply chain leadership teams are generally more mature. They are more active in talent
development and work with government/industry partnerships.

CPG is dominated by four large companies: Colgate-Palmolive, Kimberly Clark, Procter &
Gamble and Unilever. They actively invest in new products taking four of the five top spots in
terms of R & D spending to drive product pacesetter status as seen later in figure 5. In our
report, Conquering the Supply Chain Effective Frontier, we share insights on how these large
consumer products companies tackled the Supply Chain Effective Frontier and balanced supply
chain metrics while pushing for supply chain excellence in the last decade.

A Closer Look at Food & Beverage Companies
Food & beverage companies operate under a different set of conditions than the more general
CPG companies. Due to the seasonality of raw materials, these companies are more
susceptible to commodity price increases and most hold larger inventory stores as they provide
year-round foodstuffs, but may only purchase in-season commodities. As anyone who buys a
tank of gas or a loaf of bread can attest, commodity prices have risen and continue to rise as
seen in figure 1.


Figure 1. Commodity Prices for 1997-2012

Increasing commodity prices are creating a difficult operating environment for food & beverage
companies whose raw materials are overwhelmingly commodities. Recent annual reports from
food & beverage companies demonstrate the increasing commodity pricing pressures on these
companies:

“Net sales and other operating income increased $19.0 billion, or 31%, to $80.7 billion.
Net sales and other operating income increased $14.2 billion due to higher average selling
prices, primarily related to higher underlying commodity costs, and increased $4.8 billion
due to increased sales volumes, including sales volumes from acquisitions.”
•Archer Daniels Midland 2011 Annual Report, page 23

“[2010] operating profit grew 9%, reflecting lower commodity costs, primarily cooking oil.”

•PepsiCo 2011 Annual Report, page 41

“During 2011, our aggregate commodity costs increased primarily as a result of higher
costs of coffee, dairy, grains and oils, packaging materials, other raw materials, meat and
nuts. Our commodity costs increased approximately $2.6 billion in 2011 and
approximately $1.0 billion in 2010 compared to the prior year.”
•Kraft Foods 2011 Annual Report, page 6

In addition, food & beverage companies are regulated much more stringently by government
compliance and oversight. Their supply chains are more regional.


Industry at a Turning Point
For the CP leader, they face a time of unprecedented challenges. Growth is stalled,
collaboration is increasingly an empty buzzword, inventory levels are stagnant, cash is growing
in corporate coffers; and opportunities for innovation are rare, expensive, and even more rarely
acted upon. A recent Supply Chain Insights quantitative study reveals the top pain points for
individuals operating within corporate supply chain structures as seen in figure 2. Difficulty
accessing data is the top area of pain (41%) with 32% of respondents having difficulty using that
data to provide a basis for action and improvement in supply chain execution. It is not an easy
time to be a supply chain professional (is it ever?).

Figure 2. Top 3 Elements of SCM Pain for Respondent

Complexity reigns. Over the last decade, the number of items in the average US grocery store
has increased three-fold. The number of shelf items grew ten times faster than retail stores’
profits. With the decline in retail profitability and the attack by Amazon and other online retailers
on the “center store,” consumer products companies will need to realize that marginal growth
from product proliferation is not greater than the rising supply chain costs and retail frustrations.

The power in the extended supply chain is shifting to the shopper in the store. The
manufacturer continues to lose power. As a result, companies are abandoning traditional
advertising and retail practices to drive growth and build brand loyalty in the store through


Digital Path to Purchase. Each company is jockeying to transform their supply chain to a value
network and capitalize on understanding and using the DP2P to identify and shape the
moments of truth leading up to a consumer purchasing their product.

Inventory Management
Inventory management, one of the hallmarks of companies with advanced supply chains, is
stuck in neutral. CP leaders have been unable to make progress. As seen in table 1, Days of
Inventory values have entered a phase of stagnancy. There has been little improvement, and
even lost ground, in regards to inventory management over the past 12 years.

One of the major challenges in inventory management is the strong belief that the best supply
chain is the most efficient. As a result, many supply chain leaders have increased Return on
Assets (ROA) and focused on Continuous Improvement Initiatives (CCI), often throwing the
supply chain out of balance. Since inventory is a corporate metric, and seldom used as a cross-
functional metric, there is a lack of accountability for inventory improvement. As a result, most
companies lose balance. They decrease manufacturing costs and increase inventory.

Table 1. Days of Inventory in Consumer Products for 2000-2011

Inventory and value chain costs are being pushed backward in the supply chain, upstream to
partners. This is not sustainable. The value chain is weaker and the downstream partners are
more fragile.


Days of Working Capital metrics, as shown in figure 3, have also been stalled with little to no
progress. While some companies made progress in the period of 2003 to 2007, it was achieved
primarily via terms and contracts with suppliers. By passing the costs to upstream partners, CP
companies may claim a measure of improvement and supply chain excellence that is not
organic, but rather allowed only through the passing on of costs. The CP leaders are guilty of
passing excess inventories and inefficiencies backwards in the supply chain to the least viable
members of the chain. Unlike Boeing, Intel or Samsung, these leaders have not learned that
they need to take responsibility for the entire supply chain. If this lesson is not learned, they will
face a similar dilemma as the automotive industry where supplier health is a limitation to growth.

Figure 3. Days of Working Capital for 2000-2011

Cash: Full Larder
The shift in power in the value chain, and the rampant M&A activity, has created uncertainty.
Most CP companies, as shown in table 2, have cash levels that are both high and stagnant.
This cash could and should be better utilized to propel companies forward in their journey of
supply chain evolution.


Table 2. Average Free Cash Flow Ratio

Stalled Growth
Finally, growth is stalled. Both the CPG and food & beverage industries are enduring a time of
slowed growth in regards to other industries. Perhaps most ominously, the growth levels over
the past decade are well below those experienced by downstream retail partners as shown
below in table 3. With the growth in private label and house brands, retailers and manufacturers
are more competitive. It is a battle of brands, and the manufacturer is losing.

Table 3. Average Industry Growth by Sector for 2000-2012


In an effort to avoid the stall in growth, CP companies have adopted three different techniques
to continue to drive growth. While these techniques have worked in the past, they are offering
limited returns at this juncture. The three techniques are geographical spread to emerging
economies, investment in new products and line extensions, and the use of trade promotion
spending to stimulate end-user demand. Here we provide the data to understand the limited
returns on these old techniques and offer recommendations for new techniques and approaches
to return to higher levels of annual growth.

Global Footprint
CP companies mainly operate on a global platform; but, each company has chosen to define
global differently. There are internal struggles between global and regional governance. There is
no clear single definition for the “right” global operation structure. It needs to be a part of the
definition of supply chain strategy. The following data was collected from Supply Chain Insight’s
Voice of the Supply Chain survey of supply chain executives conducted in April 2012. While the
majority of supply chain executives surveyed in this report operate on a global platform, the
definition of global is varied.

Figure 4. Global Definition

For example, the regional structure of Johnson & Johnson is not comparable, apples-to-apples,
with Procter & Gamble’s more global structure. These structures are different, but equally viable
in the global operating environment. In addition, with the majority of companies operating on a


global footprint already, there are narrowing opportunities for global growth. Africa remains the
next greatest prize, but the “endless” growth into new emerging economies will not continue
forever.

New Product Investment
New product innovation has largely been line extensions in the recent past. This lack of
progress on breakthrough innovation is clearly seen in figure 5 below. It illustrates the level of
R&D spending in millions of dollars that goes into establishing a new product pacesetter, which
is identified by Symphony IRI Group by exceeding year one sales of $7.5 million. 1 A more
detailed description of figure 5’s underlying methodology is available in the Appendix.

Figure 5. Cost of a New Product Pacesetter for 1997-2010

Although the term collaboration is bandied about between retailers and manufacturers, it has
fallen short of its promises. Both inter- and intra-company collaborative initiatives all too often
fail to deliver on the promises. This is not to say that the opportunities don’t exist; they are just
not being effectively optimized. They are sales-driven, not market-driven. Although the supply

1
Symphony IRI Group.
http://www.symphonyiri.com/Insights/Publications/NewProductPacesetters/tabid/149/Default.aspx


chain is functioning, the value network is breaking down as CP companies struggle with low
growth rates and unfulfilled promises at the store.

Innovation success is higher when the supply chain is designed for launch. This requires close
coordination between the supply chain team and the commercialization efforts in the stage gate
processes. The manufacturing and supply chain design of new products should be a key
component of the organic R&D process. It should not be an afterthought. Furthermore, the
newest advancements of social and ecommerce enable companies to test new investment
opportunities and products without the large monetary investments of the past. Finally, the
opportunities for open design and “coopetition” provide a new perspective for R&D and new
product innovation.

Trade Promotion Management
The final technique of CP companies to drive sales growth is investment in trade promotion
activities. Similarly to the global issues highlighted above, each company identifies trade
promotion differently as seen by the balance sheet definitions below.

Table 4. Definition of Trade Promotion

While comparison across companies is not viable in this instance, the pattern that emerges is
increasing trade promotion spend with marginal sales growth benefit. From 2000 to the
present, the majority of profiled CP companies have steadily increased trade promotion
spending as each defines it, as seen in figure 6 below. Only 52% of trade promotions are
measured for effectiveness.

In many ways, trade promotions are a “tax” or a cost of doing business dictated by the grocery
retailer. It can add costs and shift demand without adding value. Consider that Kroger, a United


States $82 billion grocery retailer, reported a net profit of $1.1 billion in 2010, but received over
$6 billion in trade allowances from suppliers.

Figure 6. Trade Promotion Spend of CP Companies for 2000-2011

Different companies define and utilize trade promotion in different manners to drive sales, but
the bottom line is that few trade promotions are driving incremental increases in revenue. Table
5 illustrates trade promotion spending for the CP companies as a percent of annual revenue.
The trend becomes even clearer here, as trade promotion spending as a percent of revenue
continues to grow, indicating the fact that this spending is not driving equivalent sales gains.

Table 5. Trade Promotion Spending as Percent of Revenue


Clearly, the age of driving growth through old patterns is ending. New opportunities are
presenting themselves to CP companies who are willing to listen and engage in evolution to the
next level of supply chain performance. Our recommendations for those supply chain leaders
are detailed below.

Moving Forward
In order to break the pattern holding back CP companies, there are several recommendations
addressing a variety of problems that need solved in order to raise companies to the next level
of supply chain excellence.

• Define and Align on Supply Chain Excellence. Supply chain as a discipline is 30
years old, but companies are still struggling to define supply chain excellence and
agree on what defines a leading supply chain. The drive for supply chain excellence
is a journey to expand the effective frontier constraining profitable growth. A more in-
depth look at the Supply Chain Effective Frontier and how to drive improvements is
available in Supply Chain Insights’ latest report: Conquering the Supply Chain
Effective Frontier .
Figure 7. Effective Frontier


These trade-offs, as shown in figure 7, should be made deliberately to drive steady,
incremental growth against a business strategy. Make deliberate decisions to avoid
haphazard results.
• From Supply Chain to Value Network. Secondly, the understanding of a supply
chain is gradually being replaced with a value network approach in which each
member of the chain adds a level of value to the final product. The old and empty
definitions of collaboration will not work within the “value network” world. A value
network approach incorporates a serious look at inventory management as opposed
to passing holding costs to up- and downstream members. True collaboration
requires companies to embrace the reality of a value network as opposed to
operating as separate cogs in the supply chain.
• Use the Digital Path to Purchase. Recent technological innovations have created
an abundance of opportunities to connect directly with the end user by cultivating
and understanding the digital path to purchase. This includes opportunities for
listening and sensing technologies, and the use of Point of Sale, Warehouse
Withdrawal, Retail Perpetual Inventory information with unstructured consumer data
from social media, Twitter, as well as ratings and review. The DP2P enables
companies to follow the process consumers take in the moments leading up to
purchase and better understand what drives decision making at the consumer’s
level. More information about the power of the digital path to purchase and Big Data
that makes such information available is contained in Supply Chain Insights’ report:
Big Data: Go Big or Go Home?
• Rethink Partners. In addition, there exists the exciting opportunity for consumer
products companies to rethink their partnerships. On the retailer side, they may
consider a move to disintermediate traditional brick & mortar outlets by moving sales
to an online platform. These companies may initiate their own websites or may sell
directly through Amazon now. On the other side, companies should continue to
engage in meaningful collaborative projects with suppliers and upstream partners.
Take down the barriers and flourish in an open innovation environment.

Although there are clear and valuable differences within the CP industry, the prescription is the
same. With an understanding of the effective frontier, the digital path to purchase and the
patience to see it through, companies can propel growth, increase inventory management and
innovation opportunities, and collaborate more closely with suppliers, buyers, and end
consumers to identify and adapt to changing market needs.


Appendix

Metrics & Equations
The followings metrics and equations were used in this analysis.

Figure A: Formulas used to calculate the metrics

Figure 5 Methodology
Figure 5 was calculated by dividing total R&D spend for the respective companies from 1997-
2010 by the number of New Product Pacesetters each company had during the same time
period as identified by the Symphony IRI Group.

Other Reports in this Series:
Check out our other reports in this series:

Supply Chain Metrics that Matter: A Focus on Retail
Published by Supply Chain Insights in August 2012.


About Supply Chain Insights LLC
Supply Chain Insights LLC (SCI) is a research and advisory firm focused on reinventing the
analyst model. The services of the company are designed to help supply chain teams improve
value-based outcomes through research-based Advisory Services, a dedicated Supply Chain
Community and Web-based Training. Formed in February 2012, the company is focused on
helping technology providers and users of technologies improve value in their supply chain
practices.

About Abby Mayer
Abby Mayer (twitter ID @indexgirl), Research Associate, is one of the
original members of the Supply Chain Insights LLC team. She is also the
author of the newly-founded blog, Supply Chain Index. During the week,
you will find Abby busy in the Supply Chain Insights Community
answering questions and helping supply chain professionals obtain
financial data for their own analysis.

Abby brings a diverse list of experiences, both academic and
professional, to the team. She has a B.A. in International Policitics and Economics from
Middlebury College and is completing her master’s thesis, focused upon the utility of the C2C
cycle in shipping & transport companies to complete the requirements for a M.S. in International
Supply Chain Management from Plymouth University, located in the U.K.

Previously, Abby worked as an operations associate at Peabody Energy in the Powder River
Basin, a restaurant manager in Montana, and a stone staircase builder along Maine’s portion of
the Appalachian Trail. A believer in an active lifestyle, she has also completed a thru-hike of
Vermont’s 280 mile Long Trail, the oldest long distance hiking trail in the United States. As part
of the planning and food prep process, she became interested in supply chain management
when she was asked to predict hunger pangs for the entire three-week trip before departure. If
that isn’t advanced demand planning, what is?!?!


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