Rising commodity prices. Tight margins. Flat growth. To me, this sounds like it could be a stimulus plan for supply chain excellence. However, I am not sure. Will it be enough for supply chain leaders in consumer products to change their ways and improve their processes? The jury is still out. Many are struggling. Some are getting wrong signals that they are doing well. I feel that unless they change their ways, they will struggle against looming market challenges.
Last week, at the Gartner Supply Chain Conference, amid much fanfare, ten consumer products (CP) companies were crowned supply chain leaders. It is the 8th year of the study, and while I am glad to have a serious study on supply chain excellence, I think that the methodology is flawed. <More on that later.>
While many might point to the consumer products sector and declare them winners, in this blog, I am going to be the contrarian. I am going to question this ranking and shame a few companies into taking supply chain more seriously. In my opinion, consumer products supply chains are mediocre at best.
No, Gartner did not reach out to me to ask my opinion for peer voting. The voting did not include my voice; so, here I share the Shaman’s take. It is my belief from working with companies across many sectors for the last nine years that:
-Consumer Products … Average. Consumer products companies, with the exception of Procter & Gamble, are average; yes very average, on supply chain leadership. I believe they form the median of supply chain excellence. On average, consumer products are better than retail or pharmaceutical companies, but they lag companies in Aerospace and Defense (A&D), the chemical industries and high-tech & electronics in the delivery of supply chain results. Why? The margins have been too good for these companies to get serious about their supply chains.
-High-tech does it Best. The best supply chains are in high-tech and electronics. They have been forced to innovate supply chain practices to survive. Waste is an imperative and they understand cycles. The declining margins of products on new product launch leaves no question that the supply chain is important. Seven high-tech and electronics companies made the Gartner Top 25 list. I would have voted Cisco, Intel and Samsung up the stack.
-The Chemical Guys Deserve a Mention. The second best supply chains, in my opinion, are found in the process chemical sector. Tight margins, tighter compliance, and scarcity of materials have driven supply chain importance. They were leaders in defining supply chain centers of excellence and best practices in logistics. I would have voted BASF, Dow Chemical, Exxon Mobil and Shell higher on the list.
Yet, not one chemical company made the Gartner Top 25 list. Nor, based on the methodology, will they ever. They should stop trying. Why? One of the issues with the Gartner Supply Chain 25 is the weighting of three-year Return on Assets (ROA) score. The index weights the ROA number as 25% of the score. As a result, the industries that own assets (e.g., the chemical industry) will never make the top of the list.
The methodology heavily favors companies that have outsourced manufacturing and have no assets. By definition, A&D and the companies in the chemical sector, that own assets, will never win this beauty pageant. <In my opinion, this type of comparison is like comparing a termite to a butterfly. Yes they are both insects, but what is the value in the comparison?> To be valuable, the methodology needs to recognize that each industry is driven by a different definition of value.
Why I Think Supply Chain Excellence in Consumer Products Is Overrated
Margins have just been too good in consumer products for the companies to get serious about supply chain management. In figure 1, I outline five year growth patterns. Over the past ten years, there was a race to establish a beachhead in global markets. It was a rush to glory. In established markets, the industry has largely been focused on a game of cost reduction, as opposed to driving supply chain leadership as a strategic initiative to drive competitive advantage.
As many of you know, I have worked many years in this industry, and I have spent the last year evaluating the peer group based on twenty years of financial data. The Gartner picks would not have been mine. I would have picked Procter & Gamble and I would have given a nod to General Mills. I would have never rated Coca-Cola over PepsiCo. Here are the trends:
Growth is Flattening. While chemical, oil and gas, and high-tech companies are experiencing growth, downstream, the supply chains of consumer products and retail are slowing. For many this will be painful, but I have my fingers crossed. This might just be the catalyst that the industry needs to take action to be more serious about responsible supply chain management. At least, I am hopeful.
Over the last twelve years these companies have attempted to grow using several strategies:
Growth in New Markets. The Gartner methodology is rewarding successful growth in new markets. Most of the success of consumer products has come from this type of growth; but it is slowing, and I think that this is only one piece of the story. The lack of responsibility for packaging waste, water usage, and sustainable resources will be a hangover for many of these companies.
Gaining Power Through Acquisitions. Today, consumer products companies are mega-brands. Over the last twelve years, ten mega-companies rolled up 57 smaller companies. As power shifted to the retailer, each company tried to acquire more brands to exert more and more power in the market. Was it successful? I think that the jury is still out. Many of these supply chains are a mess. This level of M&A activity was a barrier to building supply chain excellence. Few did it right. Most companies are still digesting their investments. The average consumer products company now has over 640 technology systems and the user satisfaction with IT systems is low.
Growth Through New Products. While the average consumer products company, over the last ten years, spent 8.1% of revenue on R&D, the companies are more successful with line extensions than breakthrough innovation. For reference in 2011, 1500 new products were introduced into North America and 211 of the products were pacesetters. (A new product pacesetter is defined by Symphony/IRI as a product that in the first year of new product launch generates 7.5 million in new product sales.) In analyzing the data on the R&D cost per new product, I find that it costs Colgate 3.9 million to launch a pacesetter, P&G 4.7 million, Unilever 6.8 million, Kimberly Clark 8.2 million and Nestle 8.5 million. Over the period of 1997-2010, Colgate had 38 pacesetters, P&G had 382, Unilever had 184, Kimberly Clark had 36 and Nestle had 163. You may be shaking your head that the Gartner numbers make sense, but I don’t think so. Consider that General Mills, that did not make the rankings, had 180 product pacesetters in this period for an average cost of 1 million or that Kraft, despite the myriad of acquisitions, achieved 281 product pacesetters for an average cost of 1.5 million. The issue is that General Mills was slow to grow global markets and Kraft has struggled with asset utilization. For all, reaching the right balance on cost and success in innovation is an opportunity.
I want the leaders to do more. I want them to act more responsibly and take greater ownership for their extended supply chain. I want them to be stewards of social responsibility. For most, I feel, it is often too little too late.
Shifted Costs and Inventory Backwards in the Supply Chain. There is not an industry that has talked more about collaboration and done less. As inventory results have flattened for the consumer products companies, they have shifted more and more costs backward in the supply chain to their suppliers. Ironically, these companies are less able to afford the working capital and cost impacts. The overall impact has been to raise overall supply chain costs (reference figure 2).
Lack of Innovation. While over 500 million was thrown at Transora (a failed ebusiness network by 50 consumer product leaders in the early 2000s), the industry has been slow to invest in technology innovation. Digital manufacturing can be transformational. Social marketing is locked down deep in the walls of eCommerce. Companies struggle with how to take social marketing initiatives and turn them into social business strategies and craft Digital Path to Purchase road maps. Power has shifted to the shopper, and now is the time to take the supply chain to the shelf, to the home. Why are they waiting? Why are they so slow to get off the blocks?
Responsible Supply Chains. The industry learns about responsible supply chains the hard way. When one company fails, the industry moves forward. The peanut butter recalls should have been a wake-up call for field to fork enablement; yet, I feel that only 5% of food and beverage companies are ready for pending legislation. The lawsuits in India against Coca-Cola continue. Water conservation, product labeling, and corporate social responsibility are supply chain imperatives. As I travel in India and China and see the plastic and waste littering the streets and clogging the roadways, I feel that many, like Coca-Cola, will soon face their time in the court of an emerging country appealing their case.
I do believe that supply chain leadership can save the world. However, I think that it takes responsible leaders. The supply chain is about balance and leadership. I write this post because I don’t want to see the industry misread industry trends; and, I frankly feel that the consumer products industry needs a kick in the pants. The supply chain needs to be much more than about costs. Thanks for listening to my rant. What are your thoughts?