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AMR Research ARTICLE 15682-The New CPG and Life Sciences Business P

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Rajesh Ray
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The New CPG and Life Sciences Business Priority--The

Customer-Facing Supply Chain Network


Thursday, February 06, 2003
Roddy Martin

Looking at the title of this article, you may well ask yourself, well, what is new? For most Consumer Packaged
Goods (CPG) and Life Science manufacturing companies, the priority has always been Supply Chain Management
(SCM) and the customer has always been king. The difference is that in most companies SCM is forecasted
back-end business capacity planning, including manufacturing operations, supply chain planning, and execution.
Considerable investments made in products to support SCM from SAP, Manugistics, and i2 Technologies
improved some areas, such as logistics and transportation, warehousing, demand planning, and manufacturing
execution, but didn’t do much for overall business performance as measured by stock outs and perfect order at
the customer side. It’s “the Moment of Truth” as one leading manufacturer refers to it.

The consumer demand-driven supply network requires a one-for-all approach


Organizationally, manufacturers are not structured to have all the components of the supply chain responding to
customer demand. For example, sales and marketing teams handling customer management processes are
implementing Customer Relationship Management (CRM) software for sales force automation, but it isn’t doing
much for supply chain goals; it also has questionable value except for limited customer analytics.
But things are changing as leading manufacturers turn to the consumer demand-driven supply network, which
embodies back-end business planning and operations, including Product Lifecycle Management (PLM). What
differs from past approaches is that consumer demand is the governing drumbeat for the entire thread of
synchronized business process activities and cycle times from the retailer’s shelf to the manufacturing shop
floor. Sales and marketing functions are, therefore, an integral part of the supply chain team, as are product
development and introduction functions. Modern supply chain strategies, Information Technology (IT) choices,
and vendor developments are influenced by concepts--such as segmented channel management--that monitor
profitability by product, channel, customer, and even package at the customer side for better performance.

The proof is in the benchmarking


Look at AMR Research’s benchmarking data from leading CPG manufacturers. When compared to Automotive
and High-Tech Electronics, the CPG industry uses the most packaged IT applications, while having the highest
incidence of stock outs, late shipments, in transit delivery delays, and orders not meeting customer
requirements; even the average time of 27.5 months taken to introduce new products is mediocre in
comparison. Other staggering statistics include the $250B spent on Advertising, Marketing, and Promotions
(AMP), which only results in a Negative Return on Investment (ROI). While consumer direct promotions--such
as coupons--consume 22% of AMP spending, only 1.2% of these coupons are redeemed today. This is all
because CPG manufacturers have traditionally made products to forecast, pushed them into the supply chain
with high levels of inventory to counter unplanned variability, and then enticed sales and marketing to move the
products. Manufacturers relied on brand equity to create demand but actual consumer demand information was
hidden in components of the supply chain and not made visible in an actionable format. The scenario draws two
conclusions: manufacturing to consumer demand is not a priority--asset utilization, efficiency, and cost cutting
are--and fragmented IT applications did not help integrate and synchronize business process threads from
consumer demand back to manufacturing schedule execution for profitably meeting demand.
In 2002, saving money and managing cash were the goals while growing moderately. Benchmarking results
pointed to low supply chain, purchasing operations, and manufacturing operations costs. But they lost sight of
the consumer--not meeting their demands on time--in an industry that relies on customer loyalty. The fact that
the benchmarking results showed stronger performers delivered significantly more orders on time than weaker
performers with only half the inventory days is telling. The AMR Research continuum for 2003 and the upcoming
AMR Research Retail & Consumer Goods Executive Conference in April address the scenario.

What to do?
Plotting the roadmap and incrementally building the consumer demand-driven supply network requires that
manufacturers address the following:
Build mutually beneficial relationships with retailers to share information and synchronize planning
activities such as AMP management
Mine consumer and industry data to understand consumer demand
Segment the supply chain channels and manage inventory for optimum consumer service and loyalty
performance
Build the right supply network--including the supply side component-- to prevent stock outs and replenish
on demand
Effectively minimize the time to peak sales for new products
Build agile, same-day manufacturing execution capabilities with minimal variability in order to meet
customer demand
Comply with regulatory requirements such as product and consumer safety
Integrate IT applications for synchronized business processes that connect customer demand to business
execution
Introduce Radio Frequency Identification (RFID) technology into the supply chain

To start, here are a few recommendations:


Make sure the customer-facing supply chain team includes the components of the consumer demand-
driven supply network, including IT support
Build the team to aggregate and analyze the islands of incoming market and performance data from
external sources to create a segmented view of the supply network and customers
Using integrated systems to “connect the dots”--as one leading manufacturer states--from incoming
market data through segmented channel management views back to business planning and operations for
Enterprise Performance Management (EPM) capabilities
Use specialist vendors, such as eIntelligence, IRI, and E.piphany, to help build, manage, and
collaborate around the plans and performance of the segmented, channel management strategy

Is Life Science that different?

The answer is, not really. Replace consumer with patient, make-to-demand with replenish-on-demand,
distributors versus wholesalers, 27.5 months to launch a product versus 10 years, add clinical trials, significantly
increase regulatory compliance requirements and then take a look at the two supply chains. Similarities include
segmented channels, inventory visibility, the need for communities, and supply chain network, which lead to
similar strategies and challenges. The software vendors are different because of regulatory compliance issues.
The overarching point is that the modern CPG and Life Sciences supply chain is based on customer or patient
pull, and the ability to meet customer demand puts a company on the starting block. Even if you think you
make to stock and analyze the impact of demand on your operations, you will see that demand and inventory
visibility have more value than forecasts.

Copyright © 2003 AMR Research, Inc.

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