Digital Evolution in Fast-Moving Consumer Goods Supply Chain and Procurement Processes

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1 SAP Ariba Solutions for Direct Spend Digital Evolution in Fast-Moving Consumer Goods Supply Chain and Procurement Processes Innovating by Digitalizing and Virtualizing Direct-Spend Procurement and Supply Chain Collaboration 1 / 13

2 Table of Contents 3 The Changing Face of the Fast-Moving Consumer Goods Sector 5 Full Digitalization of Direct Procurement and Supply Chain Collaboration 7 How SAP Ariba Solutions Can Help 10 The Benefits of Digitalizing Supply Chains for Direct Procurement 11 Proving the Value: Customer Successes 2 / 13

3 The Changing Face of the Fast-Moving Consumer Goods Sector New forces are reshaping the fast-moving consumer goods (FMCG) sector and SAP anticipates that they will spur more change in the next five years than has been seen in the last 50. While the sector s focus for the last half-century was getting consumers into retail stores to shop, we anticipate a focus shift to seizing moments of opportunity. This involves serving consumers when and where they need it. Sourcing and supply chain leaders are playing a key role in driving this evolution. Innovators in the FMCG sector, especially manufacturers of household products and personal care products, are investing heavily in digitalization and virtual supply chain collaboration. Three trends are driving these investments: The need for rapid and coordinated new product design and introduction (NPDI) Increased focus on profitability Trading partners competing as ecosystems Let s explore how these trends are spurring digital supply chain and procurement innovation. NEED FOR SPEED IN NPDI AND MANUFACTURING Today s FMCG companies simultaneously face exciting growth prospects in developing markets as well as opportunities and threats in maturing markets in North America and Europe, where demographics are shifting. NPDI drives and sustains growth in all these markets with regionalappropriate new products and formulas to capture higher-margin segments, localized recipes and specialized packaging in emerging markets, and products that appeal to consumers as they age. At the same time, trade and end-consumer promotions drive the need for speed and flexibility in manufacturing, where synchronizing demand and production with contract manufacturers and copackers is vital for the execution of successful promotions. Finally, as consumer interest in sustainability, environmental impacts, and corporate social responsibility increases, FMCG companies are innovating to differentiate in these areas. 3 / 13

4 INCREASED FOCUS ON PROFITABILITY Recent mergers and acquisitions, combined with global expansion into growth markets, have led to a myriad of different systems and processes across regions and business units. This diversity tends to increase cost and complexity, even when companies are focused on improving and maintaining margins in a segment. As a result, FMCG companies are embracing cost and performance management initiatives such as zero-based budgeting. They are also seeking to harmonize processes and supply bases globally, primarily among routine, undifferentiated commodities and packaging. PRESSURE TO COMPETE AS ECOSYSTEMS Global supply chains in the FMCG industry are highly distributed, characterized by contract manufacturing and packaging models as well as cross-company inventory management methods, such as supplier-managed inventory and consigned inventory. Contract manufacturers, copackers, multiple tiers of suppliers, and third-party logistics providers (3PLs) all play a key role. High product quality is critically important to protecting and enhancing FMCG brands, while high on-time, in-full performance is key to avoiding trade penalties associated with stock-outs. Combined with the disaggregated nature of the industry, these demands place pressure on FMCG companies. As a result, success will increasingly require companies integrating vertically and virtually to create and compete as ecosystems of partners and suppliers. In other words, companies will compete supply chain against supply chain. Within some industries, SAP even envisions tightly integrated ecosystems or networked industry mashups of companies in different industries working together to provide distinctive, significant value to customers by creating and delivering more complete offerings. 4 / 13

5 Full Digitalization of Direct Procurement and Supply Chain Collaboration To meet these challenges, innovative FMCG leaders are digitally connecting their people, processes, systems, and trading partners end to end across their source-to-settle processes. Let s explore how. AGILE NEW PRODUCT DESIGN AND INTRODUC- TION AND TIME TO VOLUME Sourcing and supply chain leaders in the FMCG sector are supporting rapid NPDI by transforming sequential and time-intensive processes into digitally enabled, agile processes. Put simply, this means integrating and digitalizing key processes, so they can: Strengthen the link between product development and sourcing processes to speed up handoffs Share forecasts and demand information with suppliers early, addressing issues before they impact production Integrate suppliers and management into sourcing, to ensure only environmentally and socially responsible suppliers are selected SIMPLICITY IN OPERATIONS Digital transformation eliminates complexity and cost. In one example, a manufacturer of packaging and labels has globally transformed its sourcing and category management processes. This effort has included both process and IT transformation, and it has allowed this manufacturer to achieve the following: Build a centralized strategic sourcing organization that interfaces with local experts: This enables the manufacturer to tap local expertise while leveraging buying power and simplifying sourcing with consistent, repeatable, scalable processes. One such repeatable process, for example, is a formal quotation process that supports sourcing and supplier selection with well-defined steps that are used in all key regions and categories. To achieve this process harmonization, the enterprise created a new, small global sourcing team to manage the quotation process. And it adopted a strategic sourcing IT system that enforces the processes globally. Today, category managers own the SAP anticipates that the fast-moving consumer goods sector will see more change in the next five years than has been seen in the last / 13

6 supplier relationships, while the sourcing leads liaise between the sourcing system and regional category managers. Define global road maps and strategies: This organization has established multiyear strategic sourcing road maps with strategies that cover up to three years. The multiyear road map includes year-by-year goals, strategies, and measurable KPIs. Supplier relationship management documents within the plan help to guide category managers on how to manage the relationship. This structured process has helped this enterprise s procurement team support growth and change. It has also helped category managers gain better visibility into spend and plan more effectively. In addition, when the organization integrates sourcing processes with contracting and manufacturing execution processes, it minimizes contract leakage and delivers negotiated savings that realize hard cost savings. LIVE AND REAL-TIME SUPPLY NETWORKS FMCG leaders are also orchestrating their extended supply chains to compete as frictionless business ecosystems. In one example of this, a major global FMCG manufacturer with tens of billions in annual revenues is using a packaged cloud solution to collaborate with its direct spend suppliers. This enterprise has a business case that is initially focused on automating invoicing, verifying invoices, and matching invoices with schedule agreements. It is already using this software to collaborate with thousands of direct suppliers, which account for approximately 85% of its entire spend. Some suppliers are also being converted over to its supplier-managed inventory (SMI) program, which the new IT solution will support with visibility into inventory across multiple sites and trading partners, including in-transit inventory. Over time, as it embraces further collaborative processes, this organization can run a demanddriven business and respond more quickly to changes in supply and demand. The key to building successful ecosystems is shared, real-time visibility across plan-to-deliver processes with trading partners. This requires connected, digitally enabled processes and centralized data running in the cloud, ready to integrate with all ecosystem member systems and processes. Enterprises can achieve a 12% reduction in days inventory outstanding with dynamic, frequently updated forecasts. Source: SAP Performance Benchmarking 6 / 13

7 How SAP Ariba Solutions Can Help As summarized in the following table, SAP Ariba solutions for direct spend can help you accelerate the digital transformation of supply chain and sourcing. Leading consumer products companies are using cloud-based SAP Ariba solutions to simplify and accelerate processes and gain new savings. The result is a serious competitive edge and improved business agility. Functionality of SAP Ariba Solutions Supplier qualification matrix Supplier categorization and segmentation Supplier risk assessment Product lifecycle sourcing End-to-end source-to-contract process management Forecast collaboration with suppliers Associated Benefits Qualify suppliers down to the plant level using a flexible matrix for supplier qualification and segmentation. Use comprehensive tools to onboard, qualify, segment, and manage supplier performance, as well as control whom to invite to bid in order to direct spend to preferred suppliers on the approved vendor list. Use a unified vendor data model in the cloud, which suppliers can keep up to date using a self-service model; this helps ensure the business has accurate supplier records. Obtain targeted risk intelligence and enable compliance across source-to-settle processes to help ensure a focused approach to risk due diligence during the selection, onboarding, and contracting of suppliers. Proactively monitor and address risks throughout the entire supply base. Import bills of materials directly from a product lifecycle management system, and source and select suppliers from them. Use advanced capabilities, such as product costing and split allocations across multiple suppliers, to enable sourcing teams to maximize direct spend cost savings. Integrate sourcing and contracting processes with manufacturing execution through an ERP system to ensure that terms negotiated during the sourcing process are fully executed. Achieve this in an automated, fast, and efficient way using integration. Extend supply chain planning, ERP, and other related systems to suppliers to give them visibility into demand and to obtain their commitments over planning horizons. Provide connectivity options that meet the needs of suppliers of all sizes and technical abilities. 7 / 13

8 Commodity price indexing (planned future functionality) Sourcing and cost optimization Purchase order collaboration Multitiered supply chain collaboration Quality collaboration Use sophisticated cost-optimization tools (such as what-if analysis) to develop base pricing on a particular commodity price index (for example, oil) to base contracts on the price plus or minus a discount or surcharge. Develop best- and worst-case what-if scenarios to optimize awards based on the likelihood of certain commodity pricing systems. Note: These are planned future capabilities on the road map. Negotiate best-value sourcing agreements and help ensure that sourcing teams use only the suppliers that have been qualified at the commodity, region, or plant level. Check the real-time status of order confirmations and supply availability while giving contract manufacturers, copackers, and suppliers greater transparency into longer-term and near-term demand. Manage the complexities of multitier supply chains by connecting and collaborating with all suppliers including tier 2 and beyond. Tier 2+ suppliers can receive key demand signals and view, as needed, responses from a tier 1 supplier. Share quality information, including inspection results and deviations on ingredients, work in process, and end products with contract manufacturers, copackers, and other suppliers. This helps ensure alignment before, during, or after manufacturing, shipment, or invoicing. Create a joint record and resolution process for quality issues initiated by internal or trading partners quality assurance teams across multiple quality notification types (deviations), and request and obtain inspection results from trading partners. Obtain certificates of analysis, confirm or make usage decisions and stock postings based on inspection results, and collaborate with partners to exchange and review quality documents, including unstructured communications such as batch record reviews or change control requests. Equip quality managers with better visibility into the quality of supply. 8 / 13

9 Supplier-managed inventory (SMI) collaboration Single platform Comprehensive supplier onboarding services Intelligence and collaboration dashboards Integration with ERP and advanced supply chain optimization tools Gain instant visibility into inventory managed by direct spend trading partners. Collaborate with them on schedule agreements, inventory and minimum and maximum information, replenishment signals, advance ship notices, and goods receipt notices to help optimize inventory levels across the supply network. Use a networked-based, single system that harmonizes processes and provides a single face to contract manufacturers, copackers, third-party logistics providers (3PLs), suppliers, and other trading partners across multiple tiers of trading partners. Use turnkey supplier onboarding services and on-demand technology including supplier enablement and help desk services that are built in with every deployment. Quickly onboard thousands of global trading partners, including contract manufacturers, copackers, 3PLs, and other suppliers, and flexibly connect their systems and processes to internal systems. Deploy newly enhanced collaboration tools to provide intelligence that surpasses the capabilities of electronic data interchange. Benefit from real-time status information, measurement of trading partner performance, and prevention of potential supply chain disruptions using proactive exception alerts that flag potential issues. Apply streamlined integration with back-end systems so that sourcing agreements flow to ERP software from SAP Ariba solutions. Achieve smooth flow of execution documents such as forecasts, purchase orders (POs), subcontractor orders, and quality notifications between internal and supplier systems. Choose from a portfolio of integration options, and get support for more than 100 preconfigured processes to accelerate digital supply chain transformation. 9 / 13

10 The Benefits of Digitalizing Supply Chains for Direct Procurement So what will a digitalized supply chain for direct spend as described above mean for your business? When you adopt SAP Ariba solutions for direct spend, you unlock a whole new world of benefits for your business. For example, you can: Respond quickly to changes in consumer demand and execute successful trade promotions Speed up the sourcing process and help ensure smooth handoffs from product development Increase sustainability by reducing the risk of selecting suppliers associated with environmental or social risk or issues Reduce cycle times Decrease errors in the process Avoid trade penalties associated with stockouts using forecast collaboration Create hard cost savings by reducing cost of goods sold Reduce process costs through harmonization and repeatability Simplify the IT environment with an integrated, cloud-based solution Increase revenue through reduction of stock-outs Decrease levels of buffer stock Reduce days inventory outstanding and improve working capital Lower brand and financial risk Our goal that we put in place four years ago was to achieve 70 million pesos of savings in three years and we managed to achieve triple those savings in that time. Javier Carnevali, Chief Procurement Officer, Grupo Herdez S.A.B. de C.V. 10 / 13

11 Proving the Value: Customer Successes Companies in the FMCG sector are already adopting SAP Ariba solutions for direct spend and realizing impressive results. Consider the following real-world customer examples. STRATEGIC SOURCING TRANSFORMATION AT AVERY DENNISON Avery Dennison, a packaging and adhesives provider with more than US$6 billion in annual revenues, has successfully streamlined its category management processes from regional and tactical to global and strategic. The company now has multiyear category road maps as well as annual strategies with objectives and measurable KPIs. Category managers own the supplier relationships, while sourcing leads liaise between the sourcing systems and regional category managers. Avery Dennison runs about half of its direct raw materials spend through a tendering process on SAP Ariba solutions, generating significant savings. And perhaps more important, the procurement process itself has been structured for scalability and repeatability. Having this structured process helps Avery Dennison grow its sourcing team and process to support business growth, change, and agility. It has also helped category managers obtain better visibility into spend and develop more strategic plans for the coming months. To learn more, please view this Webinar. Cloud-based SAP Ariba solutions for direct spend are helping top FMCG companies achieve a competitive edge and become more agile. 11 / 13

12 DIGITALIZATION OF STRATEGIC PROCUREMENT AT GRUPO HERDEZ Grupo Herdez is a leader in the food and beverage segment, with annual sales of about US$1 billion. Headquartered in Mexico, it maintains a brand presence in 18 countries. Grupo Herdez is a major player in both the ice-cream category in Mexico and the Mexican food segment in the United States. Digital transformation is a key initiative for Grupo Herdez. In light of the intense pressure that many FMCG manufacturers face to reduce costs and minimize supply risk, the company decided to focus its digitalization efforts on the procurement of direct, indirect, and services spend as well as capital expenditures. It initially started with 60 categories of spend and is now managing more than 250 categories on SAP Ariba solutions for direct spend. Because the fresh products used in manufacturing often have uncertain availability, the company cannot depend on local suppliers alone. Grupo Herdez needed to identify alternative suppliers and substitute products and ingredients for example, in case of scarcity. To enable this, Grupo Herdez transformed its sourcing and strategic procurement process from one that is focused on transaction and reaction to one that is proactive and strategic. The transformation started with processes and organizational design: Grupo Herdez first created a new department called strategic sourcing, and it adopted SAP Ariba solutions to enable that team to execute its new role. When Grupo Herdez started the transformation initiative, it had a goal: to achieve 70 million pesos of savings in three years. It managed to achieve three times that goal the equivalent of approximately US$12 million. To learn more, please view this short video. FMCG companies are implementing cost and performance management initiatives and looking to harmonize processes and supply bases globally. 12 / 13

13 THE PAPERLESS FACTORY AT DULUXGROUP DuluxGroup is an FMCG manufacturer with product lines that include paints, coatings, construction products, and garden care products. Headquartered in Australia, Dulux- Group has annual sales of about US$1.3 billion. A growing company, DuluxGroup brought a new factory online in 2017 and envisioned it should be paperless to reduce manual processing costs. Such costs were incurred, for example, in the handling of orders, ship notices, and especially invoices, as the accounts payable staff processed 50,000 invoices per year. NEXT STEPS Learn more about SAP Ariba solutions for direct spend here. DuluxGroup adopted the SAP Ariba Supply Chain Collaboration for Buyers solution to automate the exchange of orders, ship notices, goods receipt notices, and invoices, as well as to enable three-way matching of POs, invoices, and delivery documents before authorizing invoice payment. In addition, DuluxGroup is building upon and leapfrogging traditional collaboration means (such as electronic data interchange) to extend supply chain and direct spend procurement collaboration efforts to both large and small suppliers. Its business case has already been realized, as the elimination of manual data entry alone has paid for the licensing and subscription of SAP Ariba Supply Chain Collaboration for Buyers. To learn more, please view this short video. 13 / 13

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