Going Beyond Lean

Leading consumer goods (CG) companies now recognize that a low cost, and what some might call a "lean" operating model, just isn't enough in today's hyper-competitive, consumer-driven market. The most successful companies across today's industry are also the most responsive to ever-changing market demands, and they are exploiting sudden shifts to maximize profits and minimize supply chain disruptions. These sudden shifts could be short-lived (low-carb diets), long-lasting (bottled water), or uncertain fads (colorful, rubbery footwear). In other words, CG companies need to be both market responsive and operationally excellent to stay on top. This is the hallmark of what we call "Building the Market Responsive Company^SM."

 

ADAPTING TO MARKET SHIFTS
So there's been a strategic shift. What's changed and why now? Certainly globalization has opened up all kinds of new and varied competition for CG companies. But, it goes beyond that. The two key forces currently driving change beyond globalization are consumer demands and spending trends coupled with changes in industry structure.

 

Consumers are demanding healthier, fresher, eco-friendly and more convenient products. Oh, and by the way, they want to be able to choose where and when they can buy these products, and want them available at an ever-increasing number and type of sales locations. Capitalizing on these trends is resulting in the consolidation of food service operators and retailers at one end of the spectrum. And at the other end, there is a dizzying array of smaller companies trying to beat their larger competitors by delivering killer new products and exploiting new categories. This combination of consolidation and nimble competition continues to erode CG manufacturer and distributor power, and correspondingly, their revenue and margins.

 

Although many CG companies have worked hard and done well to streamline operations through operational excellence strategies, more needs to be done not only to survive, but to thrive. Even the largest retailer in world seems to be running out of ways to grow by simply driving down costs and promising low consumer prices.

 

TAKING THE LEAD
So what do I see the leaders doing today? First, CG innovators are shifting rapidly to strategies that will help grow revenue and margins through new products, much tighter channel partnerships, and more sophisticated segmentation, pricing, promotion and merchandising programs. Second, the best run CG companies are realizing that in the push for operational excellence their manufacturing plants over emphasized cost reduction to the detriment of flexibility. Hence, in the world of winning through market responsiveness, these companies are hamstrung by production facilities, which are relatively slow to respond.

 

Recently I had the opportunity to talk about market responsiveness with a large CG manufacturer. Quickly the conversation turned to how to better collaborate with retail channel partners. The gist of this company's concern was how to share data for faster decision making about products and pricing targeted at segmented merchandising areas. This company was setting a goal of making these kinds of decisions at least daily, if not inside of a business day. This was deemed critical to its strategy to become more market responsive. However, when asked about the cycle time for a manufacturing plant to change product mix, the answer was "in days and sometimes weeks."

 

What, you may ask, is the value of daily market decision making in an operating model that requires much longer lead times to respond to that decision? Surely there is some value, but it may not be as great as originally thought when put up against the lack of flexibility in manufacturing, transportation and inventory policy.

 

This, for me, encapsulates the obstacle that many CG companies face today. In the drive to build the market responsive company, there must be balance between investing in technologies, processes and partnerships on the market-facing side, with a clear understanding of how to leverage that advantage given your operating model.

 

One of the best run CG companies I know is rethinking its "lean" initiatives to rekindle an understanding of how to lower costs and continually improve, while building in flexibility. Quite possibly, small lot manufacturing may be making a comeback. If you have been around long enough you will remember the power that Single Minute Exchange of Die (SMED) had on plant flexibility in the late 1980s and early 1990s.

 

Refocusing lean initiatives is only one aspect of Building the Market Responsive Company^SM. It also requires bringing greater discipline and accountability to product, pricing and demand shaping business activities.

 

A midmarket CG manufacturer recently asked me about metrics and best practices for managing trade spending. During this discussion I asked about how the annual plan, both financial and product, is tied to management metrics. In other words, who owns the ROI for the trade spending against the product plan? And if this ROI is not achieved, can you expect to meet revenue and margin objectives for the year? In this case, the company is installing sophisticated trade spend management and price optimization software products. It is now realizing that without metrics linked to annual plan business performance, the chances of achieving the benefits of this technology investment will be diminished. Discipline, metrics and accountability around product, price and promotion activities are strong indicators of market responsiveness.

 

Measuring your market responsiveness is not an exact science. But there are many indicators of whether or not the fundamentals are in place. This brief overview discussed two of the more important indicators: Responsiveness and flexibility of plant, transportation and inventory assets; and discipline and accountability around product, price and promotions. So, how market responsive is your company? For more on Building The Market Responsive CompanySM, visit www.hitachiconsulting. com and navigate through industries to consumer goods and retail. CG