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Best practices in
Consumer Packaged
Goods Industries
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F or some years retailers have been facing a
downward pressure on prices. Consequently
this challenge is “shared” with their CPG suppli-
ers. This trend forces both to look for optimiza-
tion beyond their borders and therefore drives the
willingness to collaborate in various domains.
This is why a collaborative supply chain is high
on the agenda of their executives. From the man-
ufacturer’s perspective, the complexity of product
proliferation is another reason to collaborate with
the retailers in order to synchronize both sup-
ply chains. The number of product variants has
been growing for various reasons. Private label
products are taking a larger part of the retailer
shelf in order to differentiate on the one hand
and to establish a consumer relationship on the
other hand. Product innovation is creating dif-
ferent product variants for different subsegments
of consumers. Marketeers continuously stimulate
the consumption through temporary promotions.
The result is an ever growing product portfolio
complexity for the CPG producers. Yet, there is
no room to accommodate a corresponding cost
increase. Last but not least, retailers are request-
ing 99% service level, as they cannot afford to
have empty shelves and bare missed revenue.
T he straightforward answer to this challenge
(for both) could be a raise of safety stock
to absorb the uncertainty of consumer demand.
However, because of the credit crunch, today
more than ever “cash is king”. Every CFO is
looking to reduce working capital needs and
urges supply chain executives to lower stocks.
The challenge of inventory reduction can be
pictured best by the Japanese metaphor that
was used in the days of just-in-time (JIT) thinking.
Inventory is like the water level in a river. The
company is represented by a ship navigating in
that river. The higher the water level, the lower
the probability the ship will hit a rock somewhere
in the river. The aim is to gradually lower the
water level to make the rocks (biggest first) visible.
Once identified, the company starts an action to
eliminate the rocks. When this is accomplished,
one can lower the water level again to force
new rocks to surface. The emphasis is on the
Best Practice in CPG Industries
gradual approach to avoid that the ship encoun-
ters the fate of the Titanic. The story also nicely
reflects the idea of continuous improvement. This
metaphor also explains why the best practices in
supply chain and operations are to be found in a
specific category of CPG: chilled foods.
T he chilled foods industry faces all of the
above CPG challenges and more. Most
chilled products have a short product shelf life
that varies between 5 days and 35 days. Fresh
dairy, prepared meals, packed sandwiches are
products we daily or weekly take out of the fridge
somewhere in a retail store or a gas station. Tra-
ditionally the total product shelf life is split equally
over the producer, the retail shelf and the consum-
er fridge, each of them getting one third of the
time to store and conserve the product. Although
plenty of good reasons could be listed to raise
the stock at the producer level, there is a physical
constraint to generaly keep more than one week
of inventory. The chilled foods CPG producer is
continuously confronted with a though dilemma:
either have too much inventory that eventually
has to be destroyed for shelf life reasons, or
suffer service level issues because stocks are too
low to meet demands. This segment of CPG
industry has learned to navigate in rivers hardly
filled with water. Although this seems like mis-
sion impossible, this industry achieves today 99%
service level at an acceptable cost. This is due
to the fact that their supply chain engine is tuned
like a formula 1 car.
I n chilled foods, all departments have learned
and realized that they have to approach the
challenge holistically. They all have to contribute
their share to achieve this state-of-the-art team
result. Sales carry the responsibility for best-in-
class forecasting to minimize demand uncertainty.
Lean and reliable operations allow for quick
changeovers and small production batches at an
acceptable cost. Maintenance managers focus
on preventive maintenance programs to assure
lines are operating when they are expected to
do so. Supply chain collaborates with the cus-
tomer to manage inventories throughout the entire
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 Best Practice in CPG Industries

chain. Marketing looks for promotions that meet

consumer expectations while avoiding unwanted
complexity in operations. R&D product innova-
tions are also designed to minimize manufactur-
ing complexity. Engineers focus on agility of
operations. Holistic, group thinking, is the only
way to navigate this ship with a minimum depth
of water to keep it floating. There is no room for
rocks and most of them have been taken out a
long time ago. Silo acting has been replaced by
streamlined cross departmental processes. This is
why all CPG can learn from the best practices in
the business of their colleagues in chilled foods.

Author : Peter Verstraeten, Managing Partner

Equazion
Date : 30/8/2010
© S&V Management Consultants 2010

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