Skip to main content Skip to Footer

ACCENTURE STRATEGY


June 19, 2018
The consumer goods supply chain: Growth engine or growth enemy?
By: Chris Roark

Consumer Packaged Goods (CPG) giants have enjoyed soaring profitability, largely underpinned by rigorous cost takeout initiatives. However, many industry leaders have struggled to turn unlocked resources into new forms of growth and new cost headwinds have emerged. Recent earnings announcements reveal the breadth of this impact. Accenture Strategy analysis of the top 100 publicly traded global CPG companies shows that market valuations are down an average of 15 percent over the past 12 months—with nearly a third approaching 25 percent or more. That equates to a one trillion dollar drop in industry valuation in just one year.1

With long-time profit gains at risk—and amid upheaval in the industry—leaders face intense pressure to take strategic and more aggressive actions. The imperative goes far beyond just managing costs more effectively. CPG companies must reset cost bases and reinvest—often at levels not historically observed—in acquisitions, new business models, product innovation and operational agility to achieve growth and competitiveness.

Hard choices, easy rewards

CPG is hardly at the end of its value creation journey that has started with zero-based principles. Broad and untapped potential lies in cost of goods sold (COGS) for companies that are prepared to make hard choices and think differently about supply chain cost reduction, capabilities and reinvestment. Accenture Strategy experience shows that zero-based supply chain (ZBSC) approaches can deliver transformative profit unlock in COGS—$150 million for a $10 billion CPG company in the first year of implementation. Yet only 42 percent of executives surveyed across industries included ZBSC in today’s cost agenda.2

This is not to suggest end-to-end supply chain efficiency and effectiveness programs have not been industry staples. However, most companies have focused on incremental cost recovery initiatives by design. They are realizing 3 to 4 percent in cost reductions every year to offset inflation.3 Few have tackled the root causes that could redefine cost curves if addressed—and only 33 percent of supply chain executives call their cost interventions durable.4

This is where a zero-based mindset comes in. Holistic and forward-focused, ZBSC is a disciplined approach to resetting the supply chain cost base that delivers durable results by inherently accounting for change and stretching performance targets as business needs change. This delivers the dual benefit of fast returns and the ability to future-proof the supply chain, a competitive differentiator that has become more important than ever.

Industry leaders have realized that achieving supply chain’s potential impact on growth requires asking hard question about where to build capabilities and invest capital. When executed properly, tomorrow’s supply chain compresses the time for innovation to market, enables, new delivery models, provides a platform for acquisitions and new market entry, and allows for customization to microsegments.

Hitting the bullseye

As the industry that led the broad adoption of zero-basing cost bases, CPG stands ready to capture its supply chain potential. In Accenture Strategy’s experience, CPG companies can unlock up to 600+ basis points of profitability over time with ZBSC interventions.5 Structural interventions related to commodities and inputs, value engineering, and reimagining the network are key levers—particularly over 18 to 36 months. In the near-term, costs such as maintenance, transportation, direct labor and overhead often offer an untapped sweet spot.

Extreme visibility and surgical value targeting are at the heart of ZBSC. It isolates cost drivers. It smashes internal silos. It cuts through calcified cultures. And it resets costs with new management models, technologies and network optimization. All of this is critical as demand is shifting materially with shorter production runs and product complexity.

The success stories speak for themselves. For example, when its manufacturing, warehousing and management systems could not profitably react to new sources of growth, a global food company used ZBSC principles to reimagine network design that funded by eliminating profit leakage in logistics. Another food company turned to ZBSC principles to pinpoint how to reduce fixed cost and drive operational initiatives within the four walls of its facilities. Finally, a third commodities focused company introduced analytics to better balance supply and demand of its global product flows, eliminate complexity in core processes impacting supply chain asset utilization and maintenance, and increase its responsiveness to strategic customers.

Keeping pace with change

This depth of insight from ZBSC’s closed loop is invaluable, and the results are sustainable. For one, analytics and control towers feed management and operators with relevant, timely and quality data. In addition, unlike periodic budgeting exercises, ZBSC broadly expands the continuous improvement mindset. It focuses on how the supply chain should operate tomorrow, not how it did yesterday. This allows organizations to account for the impact of dynamic forces on how work is done and managed, and adjust performance targets accordingly.

Take technology for example. With ZBSC, CPG companies zero in on how technology advances fundamentally change cost curves. Artificial Intelligence (AI) is already enhancing productivity and decision making. It is radically reinventing the human-machine dynamic in manufacturing plants. Analytics and control towers are improving operational efficiency, customer performance and risk management.

Start your growth engine

Managing supply chain costs with ZBSC has yet to gain traction in CPGs. Only 37 percent of industry players are applying their zero-based methods to their supply chain, according to Accenture Strategy research.6 This is a missed opportunity. With a zero-based mindset, companies can unlock supply chain savings for reinvestment now. They can also get clarity on how to direct supply chain transformation to fuel growth in the quarters and years to come.

RELATED CONTENT


1 Accenture Strategy analysis
2 Accenture Strategy research, Beyond the ZBB Buzz, 2018
3 Accenture Strategy experience
4 Accenture Strategy, “Is Your Supply Chain in a Death Spiral,” 2017
5 Accenture Strategy experience
6 Accenture Strategy research, Beyond the ZBB Buzz, 2018

Popular Tags

    More blogs on this topic

      Archive