The Consumer Products Supply Chain: Shopping for Solutions
"2005 was a remarkable year for the consumer products (CP) industry. A devastating hurricane season displaced consumers, closed retailers' doors, drove huge demand swings across categories and caused sizable price increases for many products. The hurricanes further increased high fuel costs, which strained budgets among low-income consumers and pushed packaging and distribution costs sky high.
Add to this mix the new trans-fat labeling requirements that went into effect in January 2006 and stimulated massive product reformulations across food categories. And, let's not forget the intense pricing pressure that all categories are experiencing with value channel expansion."
This is how Chicago-based market research firm IRI sums up 2005 in its annual state of the CP industry report. But the sector is nothing if not resilient, and manufacturers and retailers alike battled back from these challenges to post reasonably decent results.
Improved supply chain management practices had a lot to do with the CP sector's performance in the face of adversity. But study after study show that opportunity for further improvement is still plentiful.
"As with almost every other industry, CP companies are looking to lean out their supply chains to eliminate waste," says Rich Sherman, worldwide industry manager, supply chain, Microsoft. At the same time, CP supply chains have become increasingly global, which makes it tough to reduce inventory and eliminate waste.
"Globalization increases the risk of supply chain network disruptions, so CP companies have to find ways to become resilient without building up inventories," he continues. "The best companies are doing this in large part by evolving to a collaborative supply network business model that is based on open and seamless relationships with supply chain partners and real-time visibility."
Here's a look at the current state of the CP industry, and the progress it is making toward a more collaborative supply network model.
Soaring Transportation Costs
U.S. trucking costs reached $583 billion in 2005—an increase of $74 billion over 2004, according to the 17th Annual State of Logistics Report, sponsored by the Council of Supply Chain Management Professionals.
In addition to these transportation cost spikes, CP companies battled capacity shortfalls in many markets—a result of the worsening truck driver shortage and new federal driver hours of service rules that cut the time drivers can work in a week.
Outbound transportation makes up the largest component—40 percent—of logistics cost for CP manufacturers, according to the Grocery Manufacturers of America's 2005 Logistics Survey, conducted by IBM Business Consulting Services. Outbound and interfacility transport combined account for 62 percent of total logistics cost.
Shippers are responding to these cost spikes by shifting modes where possible, as evidenced by increased truckload and intermodal volume with a decrease in less-than-truckload moves.
"Many companies are employing more continuous moves, improving trailer utilization, increasing the use of drop trailers, and partnering with carriers to secure capacity," reports the GMA study.
Value-Added Services Pushed Upstream
"Retailers continue to push value-added services upstream to the manufacturers, and to request customized products and services, such as floor-ready displays, pallet programs, and promotional packaging," according to the GMA report.
Retailers' demands for specialization are becoming increasingly complex. Naturally, such demands increase CP manufacturers' costs.
"CP companies have managed these escalating distribution costs by increasing outsourcing, providing incentives for customers to buy standard product configurations, and adjusting pricing to include compensation for additional services," according to the GMA report. In addition to providing specialized customer services to retailers, CP manufacturers are focused on boosting service overall.
"On-time delivery performance improved from 89.6 percent in 2002 to 90.5 percent in 2004," the GMA report notes. "Most survey respondents say they are reducing order-to-delivery cycle times to less than four days on average, and are targeting even shorter cycle times of three days."
Despite available systems and technologies that can monitor demand in real time, and create replenishment scenarios based on the data, most CP companies and their customers still use traditional forecasting methods. Only 7 percent of GMA survey respondents receive customers' forecasts and demand plans. Their forecasting, consequently, remains mostly historically based.
"Traditional forecasting is largely guesswork about customer buying preferences," explains Sherman of Microsoft.
The Story Behind The Story
The GMA statistics capture a snapshot of the CP industry's day-to-day performance. But what forces actually drive these numbers?
Three major trends are at work—polarized consumers, increasing retailer power, and regulatory burdens, says Michael LaRoche, global supply chain strategy practice leader with IBM Global Business Services.
"The supply chain plays an essential role in addressing these forces, but most companies' supply chains are ill-equipped to do so," LaRoche says.
1. Polarized consumers. At the macro level, the CP sector is facing pressure from all sides.
"Consumers are polarizing toward both low-cost and premium products," LaRoche says. "CP companies built their supply chains to handle an average distribution of product spread across the supply chain. Polarization, however, pushes large amounts of volume to one end or the other. And the capabilities required at either end of the product scale are quite different—a fact that puts great stress on the CP supply chain."
Service At A Premium
Companies that produce low-cost or "mass value" products need to be efficient, achieve short cycle times, produce high volume, and manufacture goods less expensively and more effectively than their competitors, LaRoche says.
"For premium products—however, manufacturers' capabilities should be built around service, responsiveness, and the ability to sense changes in the market quickly and innovate to respond," he explains. LaRoche characterizes the latter as the "sense-and-respond" supply chain.
Products in the mass value channel typically do not enjoy strong consumer loyalty—shoppers purchase alternative brands if one particular brand is not available on the shelf. CP manufacturers' chief concern in this supply chain, therefore, is to provide greater service levels to retailers so their products are consistently available on store shelves.
In contrast, a sense-and-respond supply chain delivers a high level of service for premium products. Consumers specifically seek out these products and will delay purchases or shop elsewhere if the product is not available.
2. Retailer power. Retailers have increased their power over, and performance expectations of CP companies, particularly in the United States, as the retailer base consolidates.
"As retailer power continues to grow in this country," says LaRoche, "the mega retailers increasingly dictate terms of trade, and mandate greater cost efficiency, more rebates, and higher levels of promotions."
Additionally, retailers are starting to look to suppliers to help differentiate themselves from competitors. Retailers are creating extended supply chains in which they work with suppliers to more effectively serve shoppers.
In the area of replenishment, for example, retailers might require certain suppliers to co-locate on site at their distribution center to help manage inventory, generate replenishment orders, and set inventory targets.
"CP companies have to address these supply chain and trading partner relationship complexities, all while handling greater volume at lower cost," LaRoche notes.
3. Regulatory burden. CP companies face a bewildering array of new and growing regulatory pressures—ethical, environmental, tax, Sarbanes-Oxley, traceability, terrorism and security, and consumer privacy.
"CP companies have to label properly for genetically modified organisms," explains LaRoche. "They need to be sure their product is produced under ethical labor practices; they have to be able to track lot numbers from source to consumer; and they need to protect product from bioterrorism and other threats. These issues become exponentially more complex as supply chains stretch across the world (see Furlani's sidebar, below).
The consequences of non-compliance can be significant for CP companies. Negative publicity or a major product recall can damage brands. In addition, retailers may "delist" products, and banks or analysts could deem some companies too high an investment risk. Non-compliant CP manufacturers are also at risk for significant regulatory penalties.
"The key challenge," says LaRoche, "is not simply to comply, but to make the required changes in supply chain operations at the lowest possible cost to the organization."
Leading CP manufacturers are already moving toward the demand- or consumer-driven replenishment (CDR) model.
"At its core, CDR relies on consumer information such as point-of-sale or point-of-consumption data," explains Nona Cusick, vice president, consumer product retail distribution, CapGemini. "This data is readily available at most retail stores, and is captured during the checkout process."
"CDR uses this information as foundational data, then applies advanced algorithms to generate a sales or consumption forecast that includes market intelligence such as the effect of promotions, price changes, competitive pressures, store resets and remodels, and weather changes," explain Gabi Ledesma and Shashi Subramanian of CapGemini in a recent white paper.
"This demand signal is then netted out of on-hand, in-transit, and on-order information to generate a long-term replenishment plan, and a suggested short-term order plan based on retailer ordering policies," they note.
CP manufacturers use the resulting production and distribution plans to ensure their distribution centers have the correct products to support retailers' orders. At the same time, a suggested or recommended order is passed on to a retailer for approval. The retailer reviews and resolves any exceptions, creates purchase orders, and sends them back to the supplier.
"CDR allows a supplier to use retailer ordering parameters to model a replenishment plan through the extended supply chain. This way, retailers and suppliers are on the same page at all times, eliminating any bullwhip effect," Ledesma and Subramanian say.
Successfully pursuing a demand-driven supply chain model offers big rewards. Companies that excel at developing a supply chain based on demand- or consumer-driven forecasting average 15 percent less inventory, a 17-percent increase in perfect-order fulfillment, and 35 percent shorter cash-to-cash cycle times, according to AMR Research, Boston. At the same time, these companies have one-tenth the stockouts of their peers.
Overall, successful CP supply chains will evince the following attributes, according to LaRoche:
- Close and deep collaboration with customers, suppliers, and service providers.
- A single consistent set of information visible across the whole supply network—for example, inventories, committed orders, and forward production schedules.
- Near real-time information, blurring the distinction between planning and execution systems.
- Web-enabled and "e-market capable" systems to facilitate connectivity speed and ease.
- Automated and intelligent exception-based decision-making and process management.
- Focus on profit optimization while maintaining supply continuity.
While consumer products manufacturers and their retailer customers have progressed toward streamlined, agile supply chains, they have a long way to go.
CP manufacturers still average 42 days of inventory on hand, LaRoche notes. This is an improvement over the 2002 level of 45 days, but a far cry from the 36 days the industry hopes to reach in the next year or so.
CP companies' overall situation can be viewed in a positive light, however. "The wonderful thing about the consumer products supply chain," says Sherman, "is that because we can't yet beam goods around, we have infinite opportunities to improvement how we bring product to the shelf."
TAL Apparel and JCPenney: Real-time Demand Data a Perfect Fit
Chances are that stylish dresser you saw in the mall last weekend was wearing a TAL Apparel Ltd. shirt. The Hong Kong-based manufacturer produces garments for labels such as J.Crew, Calvin Klein, Banana Republic, and JCPenney, and supplies one in seven dress shirts sold in the United States.
With global sourcing in low-cost countries so prevalent, however, TAL faces unprecedented competition. "The price of TAL's shirts fell almost 20 percent over five years as low-cost textile manufacturing exploded in China's Guangdong province," explain Gabi Ledesma and Shashi Subramanian of CapGemini.
In addition, it struggled with inventory inefficiencies. TAL's U.S. distributor had two years' worth of out-of-style shirt inventory, and JCPenney—with 1,049 department stores in 49 states, Puerto Rico, and Mexico—was holding nine months of TAL inventory, twice what most competitors kept.
Despite these bloated inventories, JCPenney stores missed sales of hot-selling styles because it was holding less-popular models that it had to sell at a discount.
To address these challenges, TAL and JCPenney worked together to implement a demand-driven replenishment system. TAL now collects point-of-sale data directly from the retailer's stores.
"With real-time visibility into JCPenney's store sales, TAL can respond instantly to changes in consumer demand, stepping up production if there is a spike, or dialing it down if there's a slump," Ledesma and Subramanian note.
TAL controls inventory management for its product in Penney's stores, including replenishment ordering. It creates the forecast at store level to drive store replenishment and manufacturing, and its crossdocking system enables it to pack merchandise to individual retail stores. When shipments reach the retailer's distribution facilities, they are scanned and routed straight to the appropriate dispatch truck for immediate shipment to the store.
Thanks to the demand planning system, JCPenney's store-level inventory for TAL merchandise is down by 50 percent; TAL's planning system has replaced Penney's ordering system; Penney's warehouses carry no TAL inventory; and it restocks hot-selling TAL shirts within one month.
Hudson's Bay: Managing the Last Mile
What's sitting on the dock of Hudson's Bay? Everything from lipstick and women's clothing to appliances, mattresses, and furniture.
The Hudson's Bay Company, with 2005 sales and revenue of $7 billion and more than 500 stores, is Canada's oldest corporation and largest department store retailer. Hudson's Bay offers home delivery for its large-size/large-ticket items, last year making 150,000 such deliveries throughout Canada.
In the past, Hudson's Bay booked customer deliveries using a combination mainframe and manual system.
"It was cumbersome to manually link up postal codes with available delivery time slots, and it wasn't real-time," explains Bryan Tremblay, the company's director of supply chain optimization. "Also, we used many carriers and didn't have visibility of total cost of delivery, damage, and customer-not-at-home."
To gain better control of its home delivery process, Hudson's Bay outsourced the activity to third-party logistics service provider TNT Logistics, Jacksonville, Fla.
"TNT performs two services for us—the actual home delivery, and our delivery management system," Tremblay says.
When a customer places an order, the information is fed into the delivery management system, which schedules the delivery. The store's sales associate inputs the customer's postal code, and the system calculates a specific delivery time slot that the associate can confirm with the customer. The system also prints manifests, directions, and any special delivery instructions for drivers.
The TNT system gives Hudson's Bay visibility into its home delivery shipments across the country, regardless of whether TNT or another carrier transports the freight.
"We now have visibility into those last few steps, and can capture the true costs of delivering products to customers' homes," Tremblay notes. "Because we have visibility of inventory in the chain, we receive detailed metrics on in-stock by store, supplier positions, and other data.
"Every SKU in the big-ticket system has a lead time from the supplier to the distribution center, and from the DC to the store or customer home," he adds. "When a customer walks into our store and says, 'I want this red couch,' an associate can input the order, and the system calculates the lead time in front of the customer. With our old system, we only had lead time estimates.
"With the new system, we meet customer delivery dates 99 percent of the time," Tremblay concludes. "Our customers love it."
Furlani's Food: A Trace of Garlic
Something smells good at Furlani's Food Corporation in Toronto—the chopped garlic, spreads, breadsticks, and garlic bread it produces and ships to retail and restaurant customers throughout Canada and the United States.
The company recently smelled a problem, however—it must meet Canadian and U.S. food safety, traceability, customs, and security requirements—not an easy recipe for success.
"Without stock visibility, lot traceability, or an efficient recall program, food companies are operationally challenged," notes Rod Rego, Furlani's director of finance and special projects. "Three government agencies and two regulatory agencies, plus major retail customers tell us, 'You need to track lots and perform recalls online.'"
Furlani's needs to trace all products it delivers to customers back to the raw materials used to make them, and must access the information quickly for regulatory reporting or to execute a recall. To be able to do this, the company upgraded its ERP system and installed a wireless bar-code scanning solution in its distribution facility.
The system controls and tracks all material receipts, stock transfers, and finished goods movements in real time. Location, pallet, quantity, and lot codes are encoded in the bar-code label, providing full traceability. Products can be tracked by lot, supplier, and best-if-used-by dates, and traced to specific customer shipments or inventory locations.
"This project was a must-do for us because of the traceability it provides," says Rego. "However, it has also reduced costs and improved efficiency."
For example, a customer recently wanted to audit Furlani's ability to manage a recall, so it asked for a lot-level trace on a received order. "We provided the information in minutes," Rego recalls. "It would have taken at least two days when we were working with paper production sheets without bar coding."
Furlani's has realized a number of other benefits with the system:
- It uses lot-level traceability and real-time bar-code data collection to conduct cycle counts (which it previously didn't do at all) and gain the information it needs to rotate stock efficiently. This capability enables the food company to eliminate expired write-offs.
- The system's data accuracy allows Furlani's to more effectively optimize forecasts and production schedules.
- Using wireless handheld terminals for receiving, materials transfers, and inventory management significantly improves labor productivity. Furlani's is able to handle its strong growth—shipping thousands more cases of product—with essentially the same number of workers.
"Inventory reduction and labor savings weren't the goals for this project," explains Rego, "but they were a welcome benefit. Business is growing, and new customers have shorter order times. Now we have real-time information so we can meet our regulatory requirements and efficiently serve our customers."