Necessary Disruption: Why CG Production Needs a Shake-Up

While more than half of consumers believe they have an effective relationship with the top 10% of their suppliers, the reality is that less than 20% have full visibility into at-risk suppliers. Continuing the Pulse Check series, CGT provides a check-in for insight into why disruption of production and packaging materials has been widespread during the COVID-19 crisis. In this segment, we explore how procurement organizations can monitor and address supplier risk both proactively and continuously with intelligent spend management. Read on for an edited version of the webinar transcript, as well as the presentation slides. Albert Guffanti: Good morning everyone. My name is Albert Guffanti, I'm group publisher of CGT and RIS and I’ll be your moderator today. I'm really thrilled to welcome you all to today's highly anticipated webinar entitled, “The Rise of Intelligent Spend Management in Consumer Products.” Today's webcast is an extension of the work being done by CGT, SAP, and Deloitte to benchmark the industry's response to the COVID crisis. The ongoing survey reporting is called the Pulse Check, you'll be hearing a lot about that. In today's webcast, you'll hear fresh data on how consumer products organizations have responded to the crisis, how they are taking a deep look at the supplier side of the supply chain, and how they are really trying to reduce risk and maximize partnerships. The goal of this webcast is to provide you with the information and the tools that you need to adapt in real time. Now, let's dive in. Although more than half of consumer product companies feel the relationship with the top 10% of their strategic suppliers is extremely effective, shockingly, less than 20% have full visibility into at-risk suppliers. This finding from the Pulse Check Survey provides clear insight into why disruption is necessary in the production and packing materials of the consumer goods organization and why this disruption needs to be widespread. As we dig deeper into this research, you'll discover how procurement organizations can monitor and address supplier risk proactively and continuously with intelligence spend management. I am joined today by two incredibly accomplished and experienced guest speakers from Deloitte and SAP. They'll both share their Pulse Check Survey findings, as well as discuss how you can develop smart strategies to develop a risk-free or risk-averse supply chain. With that, I'd like to welcome Sanjib Mukherhjee, managing director at Deloitte Consulting, and Dion Graham, vice president of intelligent spend management at SAP. Sanjib and Dion, it's so great to have you here. I know you guys have a lot of experience and knowledge around intelligent spend management, we're thrilled to have you with us. Dion Graham: Excellent, Albert. I'm Dion Graham, global vice president for SAP Procurement Solutions. I have been with SAP for 27 years, working in a number of organizations, or consulting organizations, solution management, and our customer-facing organizations. With experience in the consumer products, life science, chemical industries as well. I’m looking forward to this discussion, it's a really important topic and I'm glad to be having this conversation with Sanjib. Sanjib Mukherjee: Thank you, Dion. My name is Sanjib Mukherjee, managing director in Deloitte SAP supply chain practice. I have been with the firm for a little over 16 years, and I lead the SAP Procurement Capability. Very glad to be with you all today, it's a very important topic. Looking forward to a good conversation. Guffanti: Thank you, gentlemen. Great to have you again. Let's start things off. We're going to discuss, specifically the Pulse Check Survey that I mentioned at the start — we'll have some brief discussion around the survey, how it was structured, how it was executed, who filled out the survey, what are some of the overall key findings from the survey. Then we're going to dive into, what does it mean for procurement and supplier relationships, and what you need to know to think strategically about this, and then we're going to talk about some key takeaways, and answer some questions. This Pulse Check Survey is something that SAP, Deloitte and CGT are partnering on because we thought it was very important to document what's happening in the industry. Not only today, but we'll continue to conduct this survey later this year, the year after that, and the year after that. The idea is to leave some breadcrumbs of how this COVID-19 crisis is really impacting our industry and what you're doing as consumer products executives to respond to it. As you can see, we've gotten a really widespread participation from our survey respondents. Respondents come from multiple categories: food and beverage, health and personal care, apparel, footwear, consumer electronics, agribusiness, household products, durables, and tobacco. We have a really good cross-section of brands, which is interesting, because each have their own challenges with addressing the COVID-19 pandemic. Similarly, we have a wide variety of sizes of companies. You can see we have a good distribution of small- and medium-sized companies to large and enterprise, as well. Both on number of employees, and annual revenue. It's really interesting to see the responses that have come in from different sized companies. In terms of the overall key findings that largely came up to the surface from the survey, as you can imagine, overwhelmingly, employee health and wellness as it should be, is the number one priority for consumer products companies. That is one thing that they absolutely, unanimously told us, they need to figure out and get right. Close second and third, we have a post COVID-19 recovery and financial liquidity — how to manage your business during this recovery and be smart about it. Then, supply chain resilience, and that's really where we're going to shine a light on in today's topic. Again, it's important to note that there's a cross-section of individuals who filled out the survey anywhere from supply chain operations, executives, procurement, sales and marketing, IT, and so on. You're getting a really well-rounded view of the industry's response. I'm going to turn it over to Dion and Sanjib, what they're going to do is take a magnifying glass and talk about what some of the findings were from the perspective of your supplier relationships and how to effectively manage that. With that, I'm pleased to hand it over to Dion and Sanjib. Graham: Albert, thank you for kicking off the session. I look forward to reviewing the Pulse Check Survey and having a dialogue between myself and Sanjib, and a bit of what we're seeing in the market based on some of our experiences. Let's start off here with the first response, which is, about 90% of the respondents say that they have effective or very effective relationships with top 10% of their strategic suppliers. This is great news, and I would say this is not surprising. I would think that the vast majority of those top suppliers in the CP industry are very likely EDI-enabled. Electronic Data Interchange-enabled. What that allows is for those suppliers to have a very strategic relationship with those customers. The ability to really be able to forecast and plan appropriately, having some digital collaboration where they're able to respond to changes in demand, signals and in order confirmations, and changes in the orders, with quantities, delivery dates, and inventory. That's really important for a resilient supply chain. I see this is really representative in the market. However, what I will say is that in many other conversations I have with clients in the CEP space, the challenge that they're trying to solve is how do they gain that same level of transparency and visibility with suppliers that are not EDI-enabled? Either because they don't have the technical resources to implement it, or maybe cost prohibits it. For some of those strategic suppliers, or medium-sized smaller suppliers that can collaborate, if you will, in that digital model, it's really the challenge that they're seeing, and how can they drive that to create a more resilient supply chain. What's some of the things that you're seeing in this area, Sanjib? Mukherjee: You're absolutely right, Dion. If you look at what has happened because of the last year, I think managing supplier relationships has become one of the most important things, and we call this the black swan of 2020 — COVID-19, right. If you think of the supplier relationship as it was in the past, 80% of the business would lie with preferred suppliers and then there is a heavy dependency on the top 10%, 20% of the suppliers specifically from specific geographic regions. Then there’s a limited supplier base with stronger relationships, and of course a lot of them are EDI-enabled because that technology has been proven over a period of time, but it is a very rigid technology, if you will. Now, from that, the focus moved to diversifying manufacturing and purchasing across geographies, then you had increased supplier collaboration. This is a very important topic, which I think is important in the specific scenario where responses are effective to the supply chain demands and shifts the responsiveness to volatile consumer trends. What we are seeing is a fundamental shift in demand because of market forces. I don't know if you have seen the Dun & Bradstreet numbers, which were published — it was staggering. For example, about 200 of the Fortune 500 companies have a presence in Wuhan where the Coronavirus originated. Then, 163 of the Fortune 1000 Tier 1 suppliers are in the impacted area, and 938 have a Tier 2 supplier in the impacted area. Just think of those numbers for a minute. The effectivity in managing the supply chain relationships with the top suppliers in an effective way — meaning the collaboration delivering results both for the organization and the supplier is extremely important and it is very important to an effective supply chain. Graham: That's a great point, Sanjib. One of the things that we're certainly seeing is that this is really creating interest into the business networks, if you will. The ability to connect to a network and be able to collaborate in that model that you just mentioned with multiple customers, or a buying organization being able to connect and collaborate with multiple suppliers getting away from that point-to-point connection. So, very relevant point that you're bringing up there. Roughly 80-83% of respondents said that they experience some disruptions, if you will. Then, about 82% say they have little-to-no visibility to suppliers at-risk within the organization. So, first around the disruption, the CEO of Campbell's Soup made a statement that supply chain value is not necessarily reducing inventory levels with the ability to be nimble and agile. I think that's one of the lessons learned from COVID — with the sporadic changes and the volatile demand signals that were created with this pandemic, the ability to be agile and responsive really was critical in the supply chain. That’s really important when it comes to that disruption. How can you handle disruptions in the supply chain where your demand signals are changing, your supply base is changing, you're having to make adjustments to SKUs skews. How are you able to rapidly respond to that? That goes back to that point again, about a digital relationship across your supply base, and really managing this through email. Paper is really not a way of maintaining a competitive advantage today. The second point, I would say is probably the biggest lesson learned from COVID is really this visibility into at-risk suppliers. Think about how quickly that happened. January 2020, we noticed that China was sending workers home, was shutting down plants, within days or weeks, we realize the impact on the global supply chain of materials flowing in and out of China. That really created a situation where many companies were in the line, they didn't know what the impact would be to them. Were their suppliers impacted? What was the impact of their Tier 2, Tier 3 suppliers in the supply chain? Are they going to be able to get their materials and ingredients on time and be able to deliver against those commitments? It really was a blind spot in the at-risk supply chain. This is probably one of the biggest areas where intelligent supply chain is going to have an impact over the next 6-12 months. Being able to proactively prove predictive analysis and AI to take a snapshot at the supply chain and provide a quick assessment of what the impact is on your materials, your SKUs, the commitments that you have through your customer, penalties from not being able to deliver at one time in full, all of those things. A smart supply chain driven by intelligence is going to be solving a lot of the challenges in the market. Thoughts that you have, Sanjib? Mukherjee: I think this question is very important because f you think of the results here: add the 67% and 17% and add the 68% and 14% and those totals give you the severity of this situation. Where there is no disruption, there's not a problem. However, at 84% there are few or many disruptions, 68% and 86% has some or no visibility. Those are staggering numbers. Now think about this for a moment: having COVID-19 in our network supply chain has brought so much uncertainty in the community that as a result of this visibility into inventory, production, purchase order fulfillment status, of not yourself but also of your supplier, is extremely important. Due to the changing landscape of your supplier's supplier, these figures may vary. Your supplier's flexibility to shift production and purchase order fulfillment to other locations, how flexible is it to your rapid-changing demand? Or your supplier's prioritization of allocation of your inventory versus other customers? These have a direct impact not only on the purchasing side, but to an overall supply chain eventually impacting your P&L. So, having a technology or a platform which delivers a flexible supply chain to take care of the disruption that has been produced — whether it is for raw materials or packaging — is extremely important. Once that is done, hopefully in the future, you will see the 67% to 17% on the left side moving more towards no disruption. The dependency on the supplier base is also shifting because of the long-term impact of COVID. Then on the right side, this has been a long-standing question: when you talk about visibility of the at-risk supplier, you're not just talking about your supplier, you're talking about your supplier's supplier as well, because again, the digital supply chain and not a linear supply chain anymore. The more you have effective technologies and an effective platform, which delivers transparency within your supply chain and within your supplier's supply chain, is a way to mitigate this risk from a more long-term standpoint. Graham: The next response in the Pulse Check shows that 85% of respondents said they have determined alternate sources of supply or are in process of. One of the questions there is, was that put in place prior to COVID, or was that in reaction to COVID? This is a really important piece. Unilever's president, Hanneke Faber, made the call that they had single source suppliers for feed, as an example. When they had a challenge with that supplier, there was no backup. This is where I think there's going to be some changes as companies start going through the recovery process of COVID, where there may be some changes to traditional sourcing strategies. I can think of three that companies will take a look at or consider. The first one will be particularly for those critical categories and items where they may have sole source relationships in place. There’s certainly legitimate reasons for that partnerships, economy of scale, strong relationships, etc. But I think going forward, companies are going to look at — particularly for those credit-critical categories — looking at some type of sourcing allocation strategy. They may identify three suppliers, as an example 40% to one supplier, 30% and 30%, just so that they have diversity in their supply chain. By doing this they reduce the risk of being too dependent on one supplier, if that supplier was to have some type of disruption that was unplanned. The second one is, as companies are looking at the sources of supply and begin to look at new sources of supply, looking at the ability of that source to be able to provide transparency, visibility, inventory status, all in some type of digital manner. Having that collaboration of being able to be responsive as your plan changes, and that supplier is able to provide that information to you readily so that you can react to the market into your consumers. The third one, I would say is looking at how to accelerate when they are going out for new sources of supply — leveraging supplier marketplaces, for identifying potential suppliers in your particular industry with the actual expertise and the categories that you're looking for, to begin to shortlist that and be able to accelerate identifying suppliers, evaluating, quantifying suppliers, and onboarding those suppliers. Mukherjee: I think you started on this with a very important and interesting push: how the business has determined alternate sources of supply. The answer is yes, but this is because of a force which was unpredicted before March of 2020. Nobody had predicted COVID. You didn't have a need to look at alternate sources of arrangement because the supply chain was working. There was little disruption before this, but since this event came, all of a sudden the organization's had to look towards an alternate source of supply because there was imminent threat to the supply chain. Now, talking about three separate categories of companies from a mitigation of the impact standpoint. The companies which over the last year or so built a robust supply chain, collaboration risk management standpoint, and developed business continuity strategies are better prepared to mitigate the setback because they have thought about diversification of the supply chain, multi-sourcing commodities, re-imagining inventory strategies, and through a digital supply network, they were able to find out what the alternate sources of supply would be. The second group of companies which had built a very strong relationship with the key suppliers and connected through the digital supply network (which are already there prior to COVID), had driven a very specific action based on the priorities. They developed agility within the production and distribution network, quickly reconfigured unmaintained supply to global demand, and invested in the supply chain planning and control tower solutions to better sense, respond, and predict what the supply chain issues are. All of this was possible because there was technology and a platform which supported digital supply network capability, rather than a linear supply chain. The last group, which was not prepared or had not thought about having a flexible and agile platform, started scrambling as to what they should do to react to the supply chain. Now, focusing on single geography as far as our supplier base is concerned, or a certain set of suppliers for key products. If you don't have enough visibility across the extended supply network to see what suppliers risks are and find an alternate source of supply, then not having a collaborative system to provide visibility into the critical inventory status of your supplier, projecting stock-outs or finished goods to optimize the customer allocation. On top of that, the complexity of the flexible logistics networks came in. I think these are the three categories of companies which we saw in the last one year or so. Because of the need of the market, this big organization was able to develop an alternate source of supply. I think over time, because of this learning, this 15% will move to the left side as well. Graham: Excellent point. About 93% of CPG companies responded that they're using external manufacturers co-packaging today, and they plan to continue to use them three to five years out. This is really no surprise particularly in the CP industry. External manufacturing, co-man is very prevalent and there's a number of reasons behind it. One, it offers flex capacity. So, as capacity grows or product areas grow, the ability to quickly be able to expand capacity and meet market projections, shorter time-to-market for introducing and launching new products. External manufacturing is certainly a benefit or advantage there. The third one is expertise and productivity improvement, cost reductions in niche areas particularly around packaging, label, recipe printing, product displays — those are really areas that many CP organizations leverage external manufacturers to drive. Certainly no surprises here. What I would say is that external manufacturing, co-pack is very consistent with the message that we deliver, or have been delivering. In this case, you're dealing with an external entity outside of your four walls and that collaboration is even more important. The ability of exchanging forecast information, planning information, inventory levels, production status, visibility into in-process items that are being delivered, and all of the order changes are completely critical in this process. Again, this is where a digital supply chain really becomes a requirement going forward, managing these key critical external relationships as an extension of your overall supply chain. Mukherjee: I completely agree, Dion. I'll focus on one word co-competence. Because of the unpredictability of COVID, organizations were trying to scale to improve revenue while cutting costs, and as a result, cut a lot of work that is not strategic in nature, but is strategic to somebody else in the ecosystem — the co-pack and the co-man facilities. The relationship between the company and the co-man or co-pack facility is extremely crucial to driving what the supply chain outcome will be because it impacts how you deliver products, and your service to the end customer. Over a period of time, we will see more and more of this. Now, the question is relevant is do we have this sufficient platform technology and infrastructure to support the co-pack, co-manufacturing so that it is transparent and efficient. Not just within the organization, but within organizations. Again, this is talking about the network's supply chain, rather than your internal supply chain. We will see growing use of automation, focus and productivity, different technology disruptions, real-time analytics, usage of real-time analytics between yourself and your co-pack and co-manufacturer. This time is coming, there's no question about it. Graham: Excellent, Sanjib. So, real quick on the key takeaways. The first one, resilient supply chains require digital collaboration. I think that's been a key message, to have a resilient supply chain you need to have a digital relationship with your suppliers to provide the agility and flexibility required. The second piece is that intelligent technologies will play an important role in making the entire source-to-pay process smarter. Analytics, AI, and RPA will be technologies incorporated into source-to-pay solutions to make that process much smarter and drive more value throughout your organization. Sanjib, do you want to talk about the third one? Mukherjee: Third, the source-to-pay technologies of the future will connect your organization to the supplier's organization, and eventually, if you extend this to the customer side, to the customer's organization. So, there are four attributes which are very important. The technology needs to be intelligent and responsive, meaning your technology and your supplier's technology needs to respond to each other. It needs to be clean, it cannot be point-to-point which takes a lot of time because time is money here. It also needs to be inclusive, which means that the flexibility needs to be there as a part of the supply chain. These attributes of technology will drive value, transparency, and consistency over not just your supply chain, but your supply chain in collaboration with your supplier's supply chain. Guffanti: Thank you, gentlemen. Fascinating discussion, and that is reflected in some of the questions that have come through. We do have time for a couple. There was definitely a common theme around some of the questions that were asked, and that theme really is around your supplier's supplier. The thinking is, your whole supply chain operation is only as good as the weakest link, and you may not even know what that link is because you're not dealing directly with some of these folks. Specifically to you, Sanjib, it was pretty powerful when you were discussing the need for more visibility or technology, when you're dealing with a supplier's supplier, right? Can you go into that a little bit further for the benefit of our audience? Mukherjee: Absolutely. Think about this for a moment: Any organization focuses on core competence, and that's the reason why you saw 85% versus 15% as far as co-pack and co-manufacturing is concerned, right? The same is happening with the supplier. That supplier is also focusing on his co-man and co-pack. That is the reason it's a network supply chain. It is not just about your supplier, because your supplier's raw materials are also coming from somewhere. It is important to find a way to not just connect to your Tier 1 suppliers, or maybe your Tier 2 suppliers. Your Tier 1 suppliers have some suppliers in their network because an impact to any one of these has an impact to you. It is a highly-connected supply chain, not just with your supplier but to your supplier's supplier, as well. Any technology, any platform should be able to seamlessly travel across this network. Graham: If I could just add to that, that is actually one of the areas that SAP has put a lot of time and resources into, that part of our business network so to speak. The ability within the business network of being able to make those connection points that Sanjib just mentioned. You have a contract manufacturer, that contract manufacturer has Tier 1 and Tier 2 suppliers that they're working with and has complete visibility through those Tier 1 and Tier 2 suppliers (not only on their production and their replenishment, but all the way through the supply chain), being able to see when the materials are shipped back to you or shipped directly to the end customer that you're supporting. Certainly, that's where — from a technology standpoint — there are significant areas of opportunity to improve visibility into the supply chain. Guffanti: Great. The second question is around demand changes, I'll direct to you Dion. No one could have predicted the impact, or no one could have even conceived of the pandemic and the crisis and everything that unfolded over the last year or so. You talk about being agile, how do you achieve that when something as dramatic as COVID-19 is possible and all the demand changes that occur with that? Graham: That's a great question. Certainly, we haven't seen anything like COVID in our lifetime. Disruptions will continue to occur, whether it is climate-driven disruptions, natural disasters, geopolitical, there will be disruptions that we will continue to encounter going forward. A resilient supply chain is not going to prevent disruptions to your business. What it's going to do is provide the shock absorber so that those disruptions don't break your supply chain, but allow you to be able to respond to it. By having digital tools to be able to quickly respond to changes on the demand side — as you're seeing changes with your consumer behavior, changes in the market — to quickly be able to respond to that and exchange that information with key suppliers. If you're seeing demand is quickly spiking on particular SKUs or products, you want to be able to relay that increased demand to your suppliers proactively. You want to be able to exchange and provide updates and material needs to suppliers. Trying to do that via spreadsheets, phone calls and emails, it's not going to be able to do it. That's where a responsive supply chain is based on digital collaboration, where you're reducing the time and becoming more agile and flexible to changes in shifts in the market, as well as future disruptions. Mukherjee: I would like to add a word to what Dion just said. There are different ways of handling this, right. Supplier discovery in this world of unpredictability — quickly adapting to the changing demand, and how you want to address this. Whether providing transparency to your supplier, having a quick collaborative platform which takes into account this supply shift demand shock, or finding alternate sources of supply and evaluating risk components of that supplier. All of this feeds into how you will fulfill your customer's requirement. Guffanti: We saw on the survey that there were companies of all sizes, filling out the survey — large, small, medium, etc. — all types of brands, all types of manufacturers. Coming out of this webcast, no matter what size you are, we all can agree that there are blind spots, right? There are several instances where you might not know what you don't know. What are the one or two things that you would suggest to a consumer brand who really wants to get their arms around the supplier relationship? What are the one or two bits of advice that you would impart? Dion, let's start with you. Graham: I think the first one is building strong relationships across your entire supply base. Part of that is putting a model in place to have continuous supplier input and feedback. Doing supplier 360s once a year, I don't think supplier relationship management is proactive enough. I think you need to have that continuous capturing of information from your suppliers, tracking the performance of those suppliers, and providing continuous feedback where the supplier may not be meeting the needs and where the supplier is improving. I don't think we can function going forward in a model where that's a bi-annual type of activity, any strategic supplier relationship needs to have a continuous flow of information. Mukherjee: I would say three or four things. First, COVID illuminates your supply network. You find digital approaches to get better visibility into your supply network and critical components of supply. Second, manufacturing needs to understand that the world going forward is going to be technology-driven manufacturing — AI, ML, all of these are very important components. Leverage the technology and automation which is needed to drive smart manufacturing. Third is analytics. When I say analytics, I don't mean classic procure-to-pay metrics. I'm talking about metrics which are across you and your suppliers, identify what those key performance indicators are and measure that. Fourth, which is the most important, is to streamline the supplier relationship by leveraging technologies of supplier risks, supplier diversity, and so on. Guffanti: Fantastic, that was a great conversation. Clearly your expertise and experience was on display. I hope everyone watching was taking notes and received a lot of value from the knowledge of our speakers. Sanjib, Dion, thank you so much for the great conversation today. Graham: My pleasure, glad to be here. Mukherjee: Thank you. Guffanti: Finally, I'd like to thank all of you, our attendees, for taking the time to attend this webinar. I hope you found it to be valuable. I hope you all have a great day and I hope you all are safe and staying well. Thank you very much.

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