Building a More Responsive, Intelligent and Demand-driven Supply Chain

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To improve supply chain performance, consumer goods companies must effectively respond to five key drivers: economic volatility, changing consumer preferences, regulatory compliance sustainability issues and technology advances.

Transcript of Building a More Responsive, Intelligent and Demand-driven Supply Chain

  • 1. Cognizant ReportsBuilding a More Responsive, Intelligentand Demand-Driven Consumer GoodsSupply Chain Executive Summaryprice multiples even if earnings per share and Achieving supply chain management excellence growth rates are similar between the companies.1 requires organizations to sit at the intersection of supply and demand and deliver exemplary Yet, leading up to the Great Recession, supply customer service without inadvertently allowingchains across many consumer goods sectors inventory to swell. Thats easier said than done.were not exceptionally nimble or flexible. Few In the intensively competitive PC industry, Dell,companies were able to adjust supply to declining for example, has deployed analytics to zoomdemand, and even those that could were unable into not normal peaks and troughs to balance to show bottom-line improvements that were supply with demand.directly related to better use of capital. But Dell is an exception to the rule. Supply chain In addition, there are several external factors management practices have a long way to go inthat influence the consumer goods supply chain helping organizations achieve this long-sought-(see Figure 1). These drivers, and their implica- after demand-driven equilibrium. In fact, it istions, include the following: really only in the last decade or so that the direct link between supply chain management and Economic volatility. With globalization, corporate cash flow generation is well understood emerging economies are growing at a rela- or, more accurately, has received a broad level oftively faster pace than established markets. interest that can enable organizations to moreConsumers in these markets are demand- effectively utilize precious capital. ing more, causing demand volatility, which requires increased supply chain flexibility. According to Gerry Marsh, a supply chain financial Consumer preference. Consumer tastes and consultant who works with some of the worlds preferences change at lightning speed and largest companies, businesses that are able tovary from region to region. Supply chains must use the supply chain to generate more cash flow be optimized to address these ever-changing than their competitors typically have higher stockpreferences. cognizant reports | december 2011

2. Regulatory compliance. With the advent of offered chips that tracked their carbon foot- government initiatives such as the U.S. Foodprint along the supply chain. The company was Safety Modernization Act, it is mandatory for able to command a premium for this product importers to track and trace the entire supplyline, until recession-induced pricing pressures chain for irregularities. This has benefits for emerged. customers but adds cost to the supply chain. Technological advances. This relates to the Sustainability. Consumers are showing exponential growth in basic computing power increased sensitivity to their carbon footprints. and the enormous quantities of data available They want to ensure that the products theyto companies across the value chain. Compa- consume originate from a supply chain that is nies can make use of big data to optimize environmentally friendly. It has become evertheir supply chains and enhance their profit- more critical to integrate sustainability objec-ability by intelligently responding to contin- tives with the broader supply chain objectivesgencies. By analyzing big data, they can more of the organization. Before the downturn of easily create supply chains that are green, 2008, for instance, a UK semiconductor makerresponsive, flexible and intelligent.Drivers of Change in CE Supply ChainsDriversImplicationsRecommendationsEconomic volatility Worldwide demand has increased for Use flexible supply chains to enable regional Growth in emergingconsumer goods products, as has thecustomization. markets need for regional customization. An example is Frito Lay, which has applied Pricing fluctuation a successful practice of developing Design agile supply chains that can cost-effectively ofraw materialsregionally popular snack food flavorsoffer regional customizations. in India to North America, where it now offers flavors developed to suit the palate of different areas of the U.S.2 Pressure has intensified on operating Accommodate price volatility by shifting costs. production to the segment of the supply chainwith minimal price changes.Changing consumer Demand patterns are changing from Optimize the supply chain by using demand-sensingpreferencesregion to region.applications, which apply customer order flows,sales histories and shipping calendars. This enablesorganizations to more accurately forecast demand andaddress changing demand patterns.Regulatory compliance Adverse supplier responsibility reports Proactively embed regulatory aspects into the supply can damage company reputation. chain. This can lead to the generation of real-timealerts that identify non-compliance. The U.S. Food Safety Modernization Act stipulates that importers track and trace Use IT to track and trace the entire supply chain. everything in the entire supply chain. Use existing solutions to track the food supply chainfrom farm to fork, which helps consumer goodscompanies manage compliance at much reduced costs.Sustainability issuesHealth concerns, environmental awarenessIntegrate sustainability objectives within supply and food scares are increasing. chain strategies.Technology advancesLegacy technologies help supply chainsEnhance supply chains with big data to reduce latency respond with some inherent latency. and create more responsive supply chains.Figure 1Improving Supply Chain Managementwhich is a 4% increase from June 2011. In fact, inThe U.S. consumer goods industry has seenMarch 2011, the monthly value of shipments hadrapid growth, despite minor hiccups, since Juneexceeded the pre-crisis peak level. As shipment2009. This is indicated by the growth of shipmentvolumes increase, timely fulfillment requires avalues from $120 billion to $130 billion3 in the more robust and efficient supply chain. In fact,intervening period (see Figure 2, next page). Newthe consumer goods industry is only as good asorders increased to $201.5 billion4 in July 2011,the various supply chains that support it.cognizant reports2 3. Monthly Value of CG Shipmentsits operational complexity. Consumer goods130 companies must respond with supply chains125 equipped to accommodate vast differences inpreference and demand elasticity.120CG Shipments ($B)115 Supply chains need to be flexible and agile;110one size does not fit all. The volatility of exchange rates and pricing of raw materials,105 as well as wage increases across the value100chain, are wreaking havoc on supply chains. A CG company with a manufacturing facility Mar-11 Sep-10Dec-10Jun-10 Mar-10Dec-07 Sep-09Dec-09 Sep-08Dec-08Jun-09Jun-08 Mar-09 Mar-08 in China and retailers and customers in the U.S., for example, could face problems if theSource: PricewaterhouseCoopers and Grocery ManufacturersAssociation. U.S. dollar were to decline against the Yuan, Figure 2 Chinas currency. If this happened, the price of raw materials would rise, as would the cost of shipping, since fees collected by offshoreOne way consumer goods companies haveshippers tend to be denominated in dollars.prospered is by dividing their supply chains This would put the supplier in serious jeop-into smaller, more manageable pieces. Theseardy as a result of a significant reduction in itspieces are tailored to individual compo- operating margins. The decline in the U.S. dol-nents and stock keeping units (SKUs). Size lar would also increase wages in China in dollaris driven by scale; the smaller the piece, the terms, further reducing operating margins.more optimized the supply chain is likely tobe. This drives the need to create an area ofOrganizations need to ensure their supply chainscomfort for each SKU/group. For instance, aare flexible enough to avoid the aforementionedmultinational CG company was able to reduce issues. Building a more flexible supply chainits cost of goods sold by 15% by using efficientlyaround product segmentation is one proven waysegmented supply chains.to address these challenges.To improve supply chain performance, we believe A U.S.-based CG company, which had shifted allconsumer goods companies must effectively its manufacturing to China, faced this problem.respond to five key drivers: economic volatil-Its China plant was accustomed to producingity (growth in emerging markets and price fluc- the companys entire range of products, as welltuations of raw materials), changing consumer as the underlying components. Amid an increasepreferences, regulatory compliance, sustainabil-in global demand volatility, customer complaintsity issues and technology advances. spiked as a result of product delivery delays.Some customers also experienced service issues,Economic volatility and forecasting was a problem, as well.Amid ongoing global economic turbulence, geo-graphically distributed demand, volatile exchange The company analyzed its portfolio of products torates and wage inflation in emerging economies, learn more about the volatility of demand for eachsupply chains are becoming exponentially more SKU, as well as the overall volume of each SKUcomplex. The following are two cases in point:produced every week. This analysis was performedusing cluster analysis on proprietary software. With globalization and growth in emerg- The impact on operational performance of theing markets, the demand for products canvolatility in demand and volume of each SKU wascome from any part of the world. This alsoalso analyzed, using advanced regression models.creates a situation where the tastes and pref-erences of global customers can vary signifi- The company divided its products into four cat-cantly. Colgate-Palmolive,5 for example, hasegories (see Figure 3, next page). For the high-operations spread over 57 facilities in 11 dif- volume and l