Bringing Products to Market with an à la Carte Approach
By Dave Powell, Althea Peng, and Emily Schlosser
The promise of growth depends on mastering complexity; that is, finding new products, markets, and niches that quickly meet consumers’ varied and evolving needs. Yet the promise of cost reduction depends on eliminating complexity; that is, producing high volumes for long periods with minimal variation.
Many consumer packaged goods (CPG) companies are torn between these two models. The commercial side pursues growth through innovating products, but gets accused of driving up costs. The operations side pursues savings through rigid simplicity, but gets accused of responding too slowly to customers. The result is a failure to deliver on either promise. It may lack meaningful innovation, flexibility to meet unpredictable demand, and the aggressive cost structure that would generate meaningful margins.
These problems pressure every division of the company. R&D must improve innovation; procurement must improve cost cutting; sales must improve customer service; manufacturing must improve its agility and automation, and prototyping, and forecasting. But what if the problems result not from how well your divisions are doing, but from the one-size-fits-all model under which they’re trying to do it?
The value chain – that is, the physical supply chain plus information flows – extends from suppliers through the manufacturing processes and delivery pathways, and includes design, engineering, manufacturing, packaging, etc. Most companies divide these functions based on the tasks they perform because each requires certain capabilities and skills. But today, it may make more sense to segment the value chain by goals such as a ratio of growth vs. efficiency. Different goals also require different capabilities and skills.
With Value Chain Segmentation, CPG companies can identify a small number of differentiated models with menu options for the design and management of their value chain. By focusing on a smaller set of management objectives, the models help companies better evaluate and prioritize value chain improvement initiatives, which can unlock benefits that support both growth and cost reduction. The results are targeted improvements in growth positioning, customer service, and efficiencies.
Growth vs. Efficiency
Growth initiatives involve developing innovative products and line extensions, increasing promotional activity, penetrating new markets (geographies or product segments), and sometimes even acquiring new companies (with entirely new processes and outlooks). Multi-faceted portfolios of products with highly varied attributes result in complex manufacturing requirements. New target markets – channels, geographies, and product types – result in complex and variable customer delivery requirements. And all the changes, accentuated by promotional activity, lead to high variability in demand.
All of these trends would be easy to handle if they were not in conflict with concurrent efficiency initiatives. They put a great deal of pressure on manufacturers’ value chains at a time when many companies are asking more of these value chains. To an already-stretched supply chain, it’s like getting this message from the boss: “OK, everything you’re doing now needs to be done better –and faster. The budget’s been cut—and oh, here are several new assignments needed right away.”
Value Chain Types
If companies can segment customers, products, and markets, why can’t they segment the value chain? They can group complex product portfolios into types that have similar value-chain needs. Companies can then design a value chain around each type, making design decisions from menu options that – instead of trying to meet grand but conflicting goals – meet tailored objectives.
Four different value chains will cover the needs of most manufacturers, though they can certainly be tailored. The Innovative value chain achieves growth objectives through investment in the technologies and processes that quickly bring new products to market. The Dynamic value chain is responsive to customer needs when stock-outs would devastate revenues. The Efficient value chain focuses relentlessly on cost-effectiveness for products with stable, predictable demand characteristics. And the Event-Focused value chain is all about rapid, flexible production to improve the profitability of promotions.
To illustrate, let’s look at the likely direction of decisions involved in three sample activities: strategic sourcing, raw material replenishment, and supplier management:
1. Innovative: Local suppliers, evaluated based on lead time and scalability, with frequent replenishment and real-time supplier visibility –because supplier collaboration and time-to-market help quickly turn ideas into revenues. 2. Dynamic: Co-located supply with frequent shipments and an in-house raw material buffer, and suppliers evaluated based on reliability and responsiveness –because it’s investing in customer service and consistent product availability. 3. Efficient: Source from a few consolidated global suppliers, evaluated on cost, and use infrequent forecast-based replenishment with little supplier visibility – because cost savings trump all other concerns. 4. Event-Focused: Resembles the innovative supply chain for these particular activity choices, except that it may tend to evaluate the supplier relationship based on ability to fulfill continuous promotional cycles rather than a product’s potential rapid takeoff.
Growth and Efficiency
Value chain segmentation can unlock benefits that improve growth positioning. For example, better-targeted investments in the ideation or go-to-market capabilities of Innovative value chains can cut innovation cycle time, increasing both market access and agility to react to demand changes. Meanwhile, by focusing other value chains on enhanced service, you can gain better fill rates and fewer out-of-stocks for high-margin products. These Dynamic value chains can also increase flexibility to reduce lead times or provide better collaboration with customers on extending product lines.
Meanwhile, by segmenting out Efficient value chains, those growth initiatives no longer need to conflict with complexity management or efficiency initiatives. Companies can more effectively target cost reduction initiatives to the value chains where they will generate the most savings with the fewest potential negative consequences. They can reduce inventory days on hand, streamline localized differences in supply chain design, and increase automation and batch sizes, all of which can breathe profitable margins into old-standby products.
Companies have different objectives, markets and models. So why not create a menu of value chain options to meet them? CPG companies can support both growth and efficiency objectives at the same time – by providing an alternative to the expectation that a single value chain can accomplish everything.
David Powell, Althea Peng and Emily Schlosser provide manufacturing expertise for A.T. Kearney.