Within our Supply Chain Matters 2014 Predictions for Global Supply Chains, (full research report available for complimentary downloading in our Research Center) we specifically addressed extraordinary challenges for consumer product goods supply chains during 2014, where combinations of external forces are fueling these challenges. These forces include, among others, an economically stressed global consumer leading to contraction of global growth rates and margins, intense competition from private brands as well as a certain group of activist investors demanding more cash value for their investments in CPG companies.
In our most recent CPG industry supply chain posting in February, we analyzed recent supply chain directional indicators from CPG companies Campbell Soup, Mondelez International, The Hershey Company and PepsiCo. We analyzed presentations from each of these firms that were delivered at the Consumer Analyst Group of New York (CAGNY) Annual Conference. It was clear to us that current signs of slowing growth among emerging markets as well as the U.S. have placed a pointed emphasis on improved operating margin and cost savings. Once more, such savings are generally re-purposed into product innovation, acquisition and/or increased sales and marketing initiatives to accelerate consumer demand.
More evidence of CPG industry supply chain stress comes from an announcement yesterday from General Mills indicating that that amid a slowdown in U.S. sales and consequent stalled earnings growth that company must initiate more aggressive cost savings specifically directed at North American supply chain operations. Revenues from the company’s latest quarter fell 2.9 percent from the year earlier period. While earnings rose, they reportedly missed analysts’ expectations.
The company indicated that it will initiate a strategic review of manufacturing and distribution to identify potential cuts in capacity and overhead costs. According to various media reports the initiative would likely lead to a series of required cost cutting initiatives directed at North America with a consequence of closing production lines and/or plants, to reduce costs in order to improve margins.
Like others in this industry of-late, the company has made large bets that international growth would improve margins. General Mills CEO Ken Powell has indicated: “Our No.1 objective in the new fiscal year is to accelerate our top-line growth.” He described sales and operating profit results as disappointing while marketing related promotional spending in developed markets has been less effective than planned. Commodity costs were slightly above forecast while one media report indicates that the company’s commodity costs increased 3 percent.
According to reporting from the Wall Street Journal, each year for the past decade, General Mills outlines its Holistic Margin Improvement program. In the new upcoming fiscal year, the company has targeted $400 million in margin savings, and apparently, much of it will come from supply chain related operations.
With the latest developments and evidence concerning General Mills, Supply Chain Matters re-iterates our prior insights regarding the unique challenges occurring across CPG focused supply chains. The notions of “business as usual” striving for product forecasting accuracy, driving incremental improvements in business performance based on historic metrics, or elongating timetables for achieving certain levels of supply chain maturity no longer make the cut with today’s rapidly changing industry dynamic. They are now are a relic of the past.
CPG firms and supply chain leader’s need to quickly come to the realization that the supply chain changes being sought require hands-on leadership, empathy and understanding to the tradeoff of such changes to areas such as supply chain disruption, quality management and morale. There can no longer be a tolerance for supply chain functional stovepipes and pet initiatives. It is now about evidence-based decision-making, smarter and more response-focused capabilities. Monetary incentives to reward required changes cannot be solely limited to the executive suite
We, as thought leaders and/or consultants, need to stop feeding the fallacies of the past CPG industry and deliver more straight talk. The notion of multi-year focused supply chain maturity timetables do not cut it when industry C-level executives are under the gun to deliver short and long-term top and bottom-line results.
© 2014, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog, All rights reserved.