Best Practices in Supply Chain of FMCG Industry
FMCG industry’s supply chain has gone through tremendous changes over the past 30 years. These changes happened in both upstream and downstream supply chains. Irrespective of the changes, the FMCG industry always delivered the intended results.
But, in recent years this industry has faced weak organic growth. During past 2012–16, the FMCG industry grew at a rate of 2.5%[1]. The situation is even worse for big companies: Companies with annual revenue greater than USD 8 billion grew only at 1.5% while those with annual revenue of less than USD 2 billion grew at double the rate of the large companies. This is considerably lower than the rate at which the Global-GDP grew during the same period.
Competitive Landscape
Traditionally the competitive landscape of the FMCG industry was shaped by global leaders such as USA based Procter & Gamble (P&G), Unilever, L’Oréal and Nestlé. They utilized large investments to develop new products and set standards of performance in the industry. However, with digitalization and boom of smaller companies and brands, the landscape changed.
The traditional supply chain problems include meeting product packaging and labeling regulation, coordination with suppliers, lack of infrastructure, etc. With these existing problems, advancement in globalization, digitalization and internet created new disruptive trends that created additional strain on the industry’s profitability and performance.
Disruptive Trends
Disruptive trends are also responsible for the stagnant industry growth. Some of the most prominent disruptive trends are the explosion of small brands, the emergence of discounters, the rise of local competitors, digital intimacy, increasing competition for deals, E-commerce giants and the millennial[2] effect.
The situation is further becoming competitive with the explosion of small born-digital challenger brands. These brands utilize investments from the venture-capital industry and utilize digital marketing and discounts to attract millennials and price-sensitive shoppers. Alone in 2014–17 small brands received $7.2 billion[3] investment from venture capitalists. Most of these don’t survive in the long-term but they do create disruptions for already established players in the industry.
In the presence of new disruptive trends, traditional strategies of using marketing and introduction of new products to maintain the market position are not able to provide a sustainable competitive advantage for FMCG companies. The only thing left for FMCGs company is to improve operations and supply chain performance to ensure that they are operating at maximum efficiency and at the same time are able to serve customers in the quality and quantity they need.
Supply Chain 4.0 & Best Practices
Supply Chain 4.0 is all about using digitization to become faster, flexible, granular, accurate and efficient in supply chain management. A number of new innovations and initiatives are being employed by FMCG companies to improve the performance of supply chains including automated production at factories, autonomous transportation to warehouses, automated warehouse, predictive shipping[4], shipment rerouting by the customers and last-mile delivery using automated vehicles or drones. However, there are concerns and challenges in the supply chain design decisions that can be only eliminated by the adoption of continually developing best practices.
Best Practice-1: Focus on Infrastructure & Workforce Readiness First in Technology-Based Supply Chain Improvements
There are a number of areas that can be improved in an FMCGs supply chain through the implementation of technology in supply chain management.
However, a number of companies’ supply chain improvement initiatives either fail completely or fail to deliver the desired level of performance. There is a considerable level of difference in the performance level of supply chain initiatives between best in the industry companies and others. High volume-variety in products and involvement of a large number of supply chain partners further deteriorates this performance.
The things that best in industry companies are doing differently is the increased focus on infrastructure and workforce readiness during supply chain improvement initiatives. The best practice in undertaking supply chain improvement initiative is to understand the difference between the current and required “infrastructure capabilities and workforce readiness”. This difference should be assessed both at the company’s end and the partners that will be the part of the planned supply chain initiative.
Once the difference between current and required infrastructure capabilities and workforce readiness is determined, the companies must access the number of resources required to eliminate this difference and include this in the initial implementation plan at priority.
There are times that supply chain partners show reluctance to improve the infrastructure due to cost and other constraints. At that time, the FMCG companies must lead them by providing them with all necessary support to ensure that partners also improve their infrastructure and workforce readiness to match the level required for the planned supply chain improvement initiative. This may involve providing the financial support, assurance of long-term business, free training of supplier workforce, etc.
Adoption of this best practice will ensure improvement in the success rate of supply chain improvement initiatives and an enhanced level of performance after implementation.
Best Practice-2: Collaborative Planning, Forecasting and Replenishment
Insightful forecasting in the FMCG environment has become critical and complex these days. The drivers behind this criticality is an increase in product innovations, focus on simplifying ranges at the retail level, and ongoing use of promotions by Discounters, Online Channels, etc. These drivers lead to less stable demand and contribute to forecasting errors. The problem is further complicated by Small Companies in the supply chain that often rely on manual spreadsheets and emails to monitor important data such as point of sales, stock on hand, etc.
This has repercussions such as an increase in response time, costs, inventory and higher forecasting errors. This can cause the retailers to face stock-outs, material-shortage, lost sales and a decrease in customer service level while manufactures can face obsolescence and higher inventory cost that impacts the overall margin.
To handle these issues in supply chain and improve performance, leaders in FMCG Companies are using collaborative planning, forecasting, and replenishment (CPFR) supplemented by real-time access of data e.g. point of sales, stock on hand, etc. This includes the following:
· (Complete Supply Chain) Using network-based models that allow all entities in the supply chain to act as one virtual organization and work as collaborators that share data across the network to manage and fulfill the customer demand.
· (Down-Stream) Integrating 3PL partners and retailers in CPFR to improve the forecasting accuracy, improve availability and reduce cost.
· (Upstream) Sharing data by item, store and day to all suppliers help supplier with lower capabilities to plan their production and distribution.
One of the important considerations in this level of collaborative, planning, forecasting and replenishment is the maturity level. The processes should be mature enough to share data automatically with accuracy and precision. A lack of maturity can create hindrance in developing smart, predictive forecasts and processes.
Implementation of this best practice can lower the level of inventory in the supply chain, improve transport and warehouse utilization, and increase the customer experience and availability.
Best Practice-3: Data Security — Crisis of Connectivity
There is a fundamental structural change is going on in the industry’s supply chain. This involves improving supply chain performance through implementation of technology i.e. companies are increasingly using a large number of data collectors such as access points, sensors, and scanners. This change in the fundamental structure of FMCG supply chains is creating multiple opportunities for a data security breach. A survey[5] of C-level executives (Respondents = 126) indicated that cybersecurity risk, such as data breach and IT incidents, is the top supply chain risk. For example, RFID tags can be a source of viruses and pose cybersecurity threats.
The most critical aspect in this is that the society, legal system, and other stakeholders put the responsibility of managing cyber risks and preventing cyber-attack in supply chains on the leaders in the supply chain that is FMCG organizations. Not managing this risk leads to costly fines and major reputational damages.
The leading practices adopted by top the FMCG organization to reduce this risk in a supply chain includes the following:
a) Risk Identification & Assessment — Proactively identify risk, involve directors and boards and set an acceptable level of risk,
b) Supplier Capability Assessment — Research partners & suppliers, their reputation and linked organizations and IT capabilities including security, invoicing, contact methods, system login methods, and automated systems. Ensure that their level matches with the levels necessary for the protection of data
c) Mandatory Expectations: Input mandatory expectations in contracts i.e. required security levels, assurance checks and setting ownership of the data. Also, set responsibilities in the event of the occurrence of the risk.
Key-Take Away
For improving performance, there are a number of best-practices that are available for implementation in the FMCG supply chain. Most of the managers and companies consider these practices as rigid policies and procedures for sure-shot improvements. However, the best practice is that instead of considering these best practices as rigid policies and procedures, they should consider them as guidelines for achieving improvements. This is because rigidity often creates a reduction in flexibility for the adoption of best-practice in other organization. Managers must understand this in the adoption of best practices in their resp
Footnotes & References
[1] Net of M&A, foreign-exchange effects, and inflation, Source: The World Bank Group: McKinsey Analysis
[2] Millennials are the shoppers that are under the age of 35 and are fundamentally different from the older generation. These are digitally active, more cautious, less loyal and price and service sensitive.
[3] PitchBook Data
[4] Predictive shipping is a patent of Amazon
[5] Source(s): KPMG Analysis, SCM World Future of Supply Chain Survey 2016, Forbes: https://www.forbes.com/sites/kevinomarah/2017/01/12/hacked-to-death-data-security-in-supplychain/#28f65ca33c28
Disclaimer
Originally Published on LinkedIn: https://www.linkedin.com/pulse/best-practices-supply-chain-fmcg-industry-priyanshu-dixit/
Priyanshu Dixit (author) wrote this case solely to provide material for managerial discussion. The author(s) do not intend to illustrate either effective or ineffective handling of the managerial situations. The authors may have disguised certain names and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder.
Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Mr. Rodney Griffith — International Institute for Procurement and Market Research (IIPMR), 10685-B Hazlehurst Dr.#7266 Houston, TX 77043, USA (e) rodney.griffith@iipmr.com; www.iipmr.com
