For the consumer packaged goods supply chain, the last 10 years have been the decade of "The Next Big Thing."
One after another, a parade of new ideas and nifty acronyms has commandeered the spotlight. Phrases like "reengineering" and "continuous replenishment," "activity-based costing" and "EDI," have generated buzz and spurred a range of individual and collaborative initiatives.
All were aimed at helping the industry develop leaner, more effective and profitable supply chain processes.
After 10 years of what has sometimes felt like unrelenting hype, the time may have come for many companies to take a deep breath, clear their heads and set some clear objectives before proceeding further. This, at least, was the prescription of the consulting team at A.T. Kearney, during a presentation entitled "CPG Supply Chain IT 2010," delivered at the GMA ISLD Conference last spring.
Recently, in an interview with Food Logistics, Sean Monahan, who authored that report, expanded on some of the ideas it outlined.
"From ECR and CPFR to RFID and Data Sync, every year something has come out that promises to fix all of these problems plaguing the industry," says Monahan, vice president and leader of A.T. Kearney's supply chain practice.
"While none of these ideas has provided a solution in and of itself, in their responses, many companies have incrementally built new capabilities that they can now begin to leverage to provide real, significant benefits. Companies need to start leveraging these new capabilities if they are to succeed in the highly competitive CPG environment that is emerging."
Monahan and colleagues offer several recommendations to help companies prepare themselves with the underlying information technologies they'll need in order to perform to the demands they'll be facing in the CPG distribution world of 2010 and beyond.
First, Monahan says, people need to understand that no single organization can or should try to leverage every single one of the host of new, cutting-edge capabilities that have been the focus of so much discussion.
"Rather, they must prioritize [their] resource investment to build those capabilities that best align with the strategic intent of the organization, in their specific environment, with their key customers," Monahan says.
To try tackling all the latest supply chain trends with their enabling technologies would be overwhelming, he points out. Not only that, but in the attempt, a company would miss a key strategic opportunity that is becoming ever more important in the modern business landscape: differentiation.
What manufacturers need to do, Monahan suggests, is to identify the distinctive attributes their particular supply chain will leverage to carve out their particular competitive position. Then, a company should build its supply chain to perform to those parameters.
Aligning With Customer's Goals
With the tools and techniques available today, manufacturers have the latitude and ability to create any kind of supply chain they want. Given some general design specifications, such as target lead times, fill rates, levels of pallet configuration, transport methods, etc., a company can plan and build a supply chain to meet whatever objectives it chooses.
In developing a supply chain design manufacturers need to look not only at their product lines and other internal considerations, but closely at their customers.
"Each customer wants something different," Monahan points out. "Each has its own capabilities, priorities and strategies that suppliers need to align with."
To help planners conceptualize and analyze the attributes they'll opt to build into their supply chains, A.T. Kearney has added its own acronym to the list: SHELF3. It stands for: "Specific, Hybrid, Exact, Lean, Fast, Frequent, Flexible."
All these adjectives represent key qualities and capabilities that will, in varying degrees, characterize the shape of logistics and fulfillment operations in the CPG industry going forward, Monahan suggests.
- Specific refers, for example, to the ability to support non-standard/custom SKUs tailored to individual customer requirements, such as bonus packs or custom case packs.
- Hybrid encompasses non-uniform case and pallet configurations tailored to unique customer requests, e.g. store/aisle "brown case" pallets.
- Exact will be a universal prerequisite for anyone who wants to operate on the new playing field. It's defined as "delivering the perfect order—on-time, in full with accurate invoice," says Monahan. "This is going to be the new standard. Everyone will be expected to provide better than 99 percent perfect order performance in the not too distant future."
- Fast references the order-to-delivery cycle, but can also mean compressed lead-times in other areas, too, such as product development and launch, and promotional activity.
"Eventually," Monahan adds, "we can envision much of this activity taking place in a scan-based environment,"—where manufacturers are paid on scan, i.e. on product movement at the retail point-of-sale.
To better align their operations with the needs of customers, manufacturers will have to develop far greater levels of sophistication in planning and forecasting, including the ability to do collaborative forecasting with customers, and planning down to the SKU level by individual store location.
Currently companies plan their activities at the DC level, or the region, or perhaps the store," notes Sumit Chandra, A.T. Kearney principal. Going forward, retailers will want manufacturers to align their supply chains to the needs of individual categories and SKUs at specific stores.
What kind of information systems will be required to support all these new varieties of operations?
"The level of information: the level of detail, the frequency at which it's being updated, and the sheer quantity of data that must be acted on far more rapidly, will represent an exponential increase" over what companies are used to today, Chandra says.
Having a good Enterprise Resource Planning (ERP) foundation with transparency and interoperability across all operations and platforms will form the groundwork for whatever else a company wants to build as far as IT resources, he suggests. Increasingly important, also, will be ability to exchange data and create close linkages with a variety of trading partners, including logistics services providers, if they're part of the chain. To create the IT architectures and build the resources they'll need to function in this brave new, fast, flexible world, companies need to do some proactive planning now, is A.T. Kearney's overriding message.
"As we look at our clients' IT agendas, most are pretty focused on the problems of today, with their resources mainly committed to whatever they see as their needs for the next six to 12 months.
"However, management also needs to take a longer view. Companies should appreciate the enormous challenge facing them in terms of the amount of information they'll need to store and the sophistication and flexibility with which they'll need to be able to act on their data," says Monahan.
"This means they need to set aside a sufficient portion of their portfolio, in terms of effort and funding, to address their strategic items for the next three to five years, not just what's immediately on their plates for the next six to 12 months," he stresses.
"Companies need to step back and see if they actually have a clear business strategy as far as what they want to accomplish, that goes out several years," Monahan adds. "Then they have to look at the supply chain, and establish some clear supply chain targets to support."
These should be more specific than mere "functional excellence," which has been the focus for most manufacturers to date. This approach has allowed companies to achieve some localized optimization, but to optimize an entire supply chain, planners have to look at strategy, and collaborate with partners on an integrated plan of attack.
Filling The Gaps
Once they've gone through the exercise of developing a strategy and designing the supply chain to carry it out, the next step for most companies is to perform a gap assessment, Monahan notes.
"Management needs to say here's what we want to do, here's what we need to support that, here's what we need to add to our current capabilities to make it possible."
Companies who complete this exercise, and compare it to the portfolio of projects currently on their IT department's plate frequently discover a pretty big gap between the projects budgeted and those needed to fulfill their long-term strategic plan, Chandra observes.
"But if they step back to do the analysis, prioritize their operational and strategic needs together, and then work on a portfolio-based approach, they may not be able to fill every hole, but they can do a better, smarter job with whatever limited resources they do have to fill their holes," he adds.
To effect large-scale, supply chain reconfiguration, companies need to move to a more bottom-up vs. top-down budgeting process, Chandra also comments.
"Instead of specifying at the beginning of the year that IT can spend 3 percent of budget on supply chain and then ration projects based on the available dollars, companies need to turn the process around and say: Here's my strategy, here's what I need to carry it out, here's how much I need to invest—then decide what part can be built now and what perhaps can wait for later."