Special Report: Communication Breakdown

In today's Wal-Mart world, one would think that a majority of manufacturers deem the mega-retailer to be its most profitable customer. However, a recent study by consultant Bain & Co. found that out of 38 companies that derive 10 percent or more of their volume through Wal-Mart, only 24 percent sustained above-average profitability. Not surprisingly, Procter & Gamble (P&G), which sells 18 percent of its goods through Wal-Mart, was one of the 24 percent. The reason? P&G cooled its stance on basic products such as paper towels, which can easily be knocked off by a private label, to higher-margin goods like its line of Olay skin products.

Re-invigorating billion dollar brands to spike profit margins is certainly a viable strategy but according to Deloitte Consulting, it is duly important to uncover what the true cost is to serve customers in order to determine a more accurate view of profitability. "There is a surprisingly wide variation between what it really costs to serve different customers," says Jim Schuetz, a partner in Deloitte Consulting's Consumer Business practice. "If you don't understand that, then you don't understand what true customer profitability is."

Consumer goods manufacturers have long focused on internal efficiencies -- looking for everything they can do to wring out inefficient practices within their own operations. "You find the greatest opportunity for improvement at the boundaries between functions within an organization," says Schuetz. "If that is where you tend to find improvements within an organization, think about the inefficiencies you find when you start to look at the boundary points between two separate organizations -- between manufacturers and their retail customers. This is where cost to serve comes in."

Cost to serve helps manufacturers understand how their interface with customers (see chart) drives cost structure and profitability. It helps identify needless complexities and inefficiencies in the trading relationship. "Armed with these insights, manufacturers are in a position to proactively work with their customers to drive inefficiency out of the system," says Schuetz.

Retailers have already invested in this area and have a good understanding of product and supplier profitability. Most consumer goods manufacturers still judge customer importance by looking at sales volume and gross margin. More and more organizations are trying to re-orient themselves to judging customer importance based upon profitability. "It's important to keep an eye on volume but even more important to keep an eye on true profitability," says Schuetz.

A new global survey of over 100 retailers and consumer products companies released by IBM Business Consulting Services (BCS) also reveals a major disconnect between the views of retailers and the priorities of consumer products companies. IBM's findings, from surveys conducted by IBM Business Consulting Services and the Economist Intelligence Unit, reveal that retailers view their suppliers as falling short in key areas.

 Only 9 percent of retailers surveyed felt their suppliers had a good understanding of their business objectives. Retailers expressed low satisfaction with suppliers across many key areas of their relationships, especially those that help retailers differentiate themselves, such as consumer insight development and promotional design and execution.

"Having historically focused on the consumer as their only 'customer,' consumer product companies must now seek ways to better understand and provide added value to their retail trade customers, as well," says John Breuer, Consumer Products Industry Partner, IBM BCS. "They have to balance the rapidly evolving needs of savvy consumers with powerful retail customers who are demanding exclusive services, pricing and products. To do that effectively, CP companies must redefine the way they do business."
While the findings show that 95 percent of retailers and a comparable number of consumer products firms believe that it is important to jointly develop consumer and shopper insights, the scarcity of successful models for collaborative insight development has led some leading retailers to develop shopper insights on their own.
Driving Profitability
The IBM report also found that in order for consumer product companies to be successful with retailers, they need to both drive account profitability and help their customers achieve their own business objectives. The survey revealed that a barrier to this success is that account managers often lack the strategic management and analytical skills required to achieve these two key elements of success. Consumer products companies have clearly recognized this as an issue. Among the companies interviewed, account team skills development and joint planning and goal setting with retailers were mentioned most frequently as the customer management capabilities needed to improve profitability.

 The IBM report reveals that to improve performance in this area, account managers and selling teams at consumer products firms must shift from a focus on "selling products" to one that addresses the customers' business needs -- which will require them to develop new skills to address retailers' shifting objectives with greater agility and impact.

While the breadth of available consumer and shopper data is exploding, it is clear that consumer goods companies and retailers often lack the technological capabilities to effectively manage and analyze that data, either independently or together.

 In order to take advantage of this information, consumer goods companies will need to develop the technical capabilities and infrastructure to help them quickly integrate specific, relevant data to be analyzed in response to particular needs or questions. Today, many companies are analyzing different data sets separately. In the future, these companies will require large-scale data integration in order to provide the company with a holistic view of an issue or question and enabling it to formulate a more comprehensive and effective response.