Disruptive Value Chain Integration in the Consumer Retail Industry Winning in the New Market Norm

Size: px

Start display at page:

Download "Disruptive Value Chain Integration in the Consumer Retail Industry Winning in the New Market Norm"

Ann Cummings
5 years ago
Views:

1 Disruptive Value Chain Integration in the Consumer Retail Industry Winning in the New Market Norm April

5-10 Years 3-5 Years Emerging market trends will

Consumer Trends Post-Recession Consciousness:

leaders Trading down and waiting for sales Pay

Aging Boomer trends convenient retailing and age

due to changing ethno-graphics Macro Global Trends

inflation Secular trend of demand outpacing supply

Competition: Accelerated pressure from emerging

2 5-10 Years 3-5 Years Emerging market trends will change the NA consumer product and retail industry Consumer Trends Post-Recession Consciousness: Limited ability to raise prices, even for brand leaders Trading down and waiting for sales Pay premium for true innovation Changing Demographics: Aging Boomer trends convenient retailing and age friendly products Increasing retail localization due to changing ethno-graphics Macro Global Trends Secular Commodity Scarcity: Double digit cost inflation Secular trend of demand outpacing supply in oil and petro-based materials Globalized Competition: Accelerated pressure from emerging global competitors in NA market Source: Morningstar; Reuters; US census; A.T. Kearney analysis; 2

Globalized Competitor Entry The New Market Norm Increased Input Materials Cost

3 We are entering a new norm of accelerating complexity and increasing consumer needs Trends Post-Recession Consciousness Changing Demographics Commodity Markets Scarcity Globalized Competitor Entry The New Market Norm Increased Input Materials Cost Volatility Increased Demand for Differentiated Products & Services Increased Retail Format Complexity 3

Future market needs will demand Triple Value Creation instead

Scarcity and Cost Volatility Increased Demand for

Complexity SC&M Challenges Increasing Collaborations

Alignment Managing Product Complexity Developing Alternative

Convergent Technology Supply Chain Imperative Triple Value

Innovation Enhanced Flexibility Source: Major company 10Ks;

4 Future market needs will demand Triple Value Creation instead of value trade-offs The New Market Norm Increased Material Scarcity and Cost Volatility Increased Demand for Differentiated Products & Services Increased Retail Format Complexity SC&M Challenges Increasing Collaborations Developing Configurable Networks Enhancing Organizational Alignment Managing Product Complexity Developing Alternative Channels Differentiating Product Flow (JIT) Enabling Convergent Technology Supply Chain Imperative Triple Value Nirvana Sustained Cost Reduction Accelerated Increase in Innovation Enhanced Flexibility Source: Major company 10Ks; Competitor IC survey (over 7 firms profiled); GMA; 2020 Future Value Chain; Kantar retail presentation; Wal-Mart interviews 4

5 Traditional SC&M tactics and levers will not be adequate to deliver the triple value nirvana Despite broad SC&M investments Performance gaps exist in today s SC&M networks 69% of SC executives surveyed focusing on Inventory and S&OP optimization 69% indicated that improving delivery performance was a focus area in % reported investing in improving order fulfillment performance vs. cost tradeoff 55% will continue to pursue global manufacturing and outsourcing strategies Sustained Cost Reduction Accelerated Innovation Enhanced Flexibility >50% of CPG identified SC cost inefficiency as a major gap >90% of all CPG new product launches defined as incremental (3) Lack of flexible manufacturing assets a key barrier to NPD (4) >65% expect an increase in product variations What do manufacturers and retailers need to do to perform and win in the future? Source: (1) The State of the Retail SC RILA, 2010; (2) GMA Manuf. Excellence Share Group Meeting 2010; (3) ProductScan (4) A.T. Kearney client interviews 5

Manufacturers and retailers must break free of local optimization to value chain integration Current Supply Chain Paradigm

ability to capture cross-firm synergies: economies of scale and scope Focus on local optimization with a zero-sum game

) Future Supply Chain Paradigm Integration Manufacturer Value Chain Retailer Value Chain Design Make Store Enables

6 Manufacturers and retailers must break free of local optimization to value chain integration Current Supply Chain Paradigm Manufacturer Value Chain Design Plan Procure Make Deliver Chasm Retailer Value Chain Plan Procure Deliver Store Limited ability to capture cross-firm synergies: economies of scale and scope Focus on local optimization with a zero-sum game mentality (e.g. retailer focus on inventory results in demand signal bull-whip for manufacturer, etc.) Future Supply Chain Paradigm Integration Manufacturer Value Chain Retailer Value Chain Design Make Store Enables manufacturer-retailer integration across supply chain functions to realize economies of scale and scope Plan Procure Deliver Focus on global optimization and win-win pie expansion 6

Sector leaders have started pursuing value chain collaboration, few have achieved broad integration

Technology Enablement Establishing a opmodel for joint commodity directed buy across several

Social media for joint demand forecasting & community and planning forum tools to enable to streamline

pooling with contract manufacturers Harmonize packaging/ product forms across brands Joint investment

structure Working with 3PL to design plug & play warehouses that eliminate a layer Direct to store or

7 Sector leaders have started pursuing value chain collaboration, few have achieved broad integration Integration Enabled Synergy Levers Plan Procure Make Deliver Economies of Scale Economies of Scope Technology Enablement Establishing a opmodel for joint commodity directed buy across several manufacturers Joint forecasting and planning Advising a leading retailer and CPG on a business model Social media for joint demand forecasting & community and planning forum tools to enable to streamline inventory Consumer led innovation and logistics efficiency Cross-firm pooled commodity sourcing (e.g. PET, cocoa, freight, etc.) Best of breed shared services (e.g. commodity risk management) Global procurement platform Capacity pooling and asset sharing Volume pooling with contract manufacturers Harmonize packaging/ product forms across brands Joint investment in nextgeneration manufacturing assets Collaborative logistics Share DC capacity Re-shape industry structure Working with 3PL to design plug & play warehouses that eliminate a layer Direct to store or customer delivery Cross-firm slow in movers traditional break-pack pooling manufacturer and retailer network RFID and real-time synchronization to enable case-level tagging at store 7

Apparel and Consumer Electronics are further along the integration curve than other sectors Cross-firm value chain integration maturity

8 Apparel and Consumer Electronics are further along the integration curve than other sectors Cross-firm value chain integration maturity curve Apparel Durable Goods Food/Bev PHC / Beauty Consumer Electronics Small Scale Collaboration Large Scale Integration Stage 1 Stage 2 Stage 3 Stage 4 Limited participants: Few firms Limited to select functions (i.e. distribution or procurement) Across manufacturers only Multiple firms participating Virtual integration and coordination across numerous functions Across manufacturers only Broad adoption across sector Virtual integration and coordination across numerous SC functions Across manufacturers only or retailers only Broad adoption across sector Virtual integration and coordination across the entire breadth of SC functions Across manufacturers and retailers 8

9 3rd party brokers catalyzed value chain integration in the Apparel sector in 1990s-2000 Pre SC&M Integration (circa pre-1990) Broker SC&M Integration (Post 1990) Manufacturer Plan Procure Make Deliver A B C D E X Manufacturer Procure Make A B C D E X Plan Procure Procure Retailer Plan Procure Deliver Store Retailer Plan Deliver Store Retailer: Limited assortment flexibility and long lead time due to small # of manufacturing partners Limited global sourcing capabilities Manufacturers: Capacity inefficiency due to promotional and seasonal spikes Retailer: Leverage cross-retailer scale to unlock Triple Value: Reduced cost from cross-firm volume pooling Improved lead time and assortment flexibility from broader capacity and manuf. technology base Manufacturers: Scale and scope efficiency (e.g. seasonality smoothing, cross-brand volume bundling) Unlocked 30%-40% of cost savings out of the entire apparel industry! 9

10 Moving from Stage 1 to Stage 4 for the NA FMCG industry can unlock ~500B (1) Savings Benefit from Value Chain Integration ($B) $ ~$35-40 Source: (1) Frost & Sullivan; EIU; First Research; A.T. Kearney dry ambient goods distribution benchmarking; A.T. Kearney analysis Note: We define FMCG as the Packaged Food & Beverage, Personal & Household Products and Beauty sectors 10

11 We see two potential models for integration in the consumer product space Open Broker Model Industry shared platform Participants opt-in via plug & play Vertical Alliance Model Multi non-competing firms alliance Participants need to gain membership Benefit Drivers Mode of Participation Orchestration Participants benefit from industry level economies of scale 3 rd party dedicated focus Open standard platform 3 rd party broker Functional scope and scale benefits as participants can collaborate and seek cross-brand / category synergies Closed alliance members only A governing unit composed of network members Value Sharing Organizational Structure Value split amongst customers and broker based on free market dynamics Participants are a customer for 3 rd party Value split amongst participants based on benefit contribution to the alliance Joint organizational board Voting right based on value and risk contribution 11

12 Open Broker Model unlock industry wide synergies by integrating through specific functions Open Make Platform Illustrative Manufacturing pre 1990s LCC Contract Manufacturers Global Broker Model LCC Contract Manufacturers Able to achieve industry wide scale benefits Open Deliver Platform Logistics Flow Today Manufacturer Retailer Plant MC DC Stores Plant MC DC Stores Potential Emerging Broker Platform Plant Plant Broker Stores Limited functional scope (each platform only addresses a particular value chain function) Plant MC DC Stores Plant MC DC C Stores 12

13 Alliance Vertical Alliance unlocks cross-firm wide synergies through end-to-end value chain collaboration Vertical Alliance Platform Retailer Value Chain Collaboration Scope Manufacturer Procurement Customer Service Top 3 toy maker Top 3 PHC company Broad functional scope alliance members can simultaneously seek synergies across multiple value chain areas Distribution... Top 3 Beauty company Illustrative Limited scale potential network scalability constrained by crossfirm coordination complexity 13

14 Desire for Competitive Polarization Low High Competitive position and trade-off between scale vs. focus can determine model adoption choice Guiding Principles Model Preference 1.Competitive Polarization Maintain market leadership position Increase cost and/or service advantage over laggards Secure best of breed capabilities across non competing firms Vertical Alliance Hybrid (Open Broker + Vertical Alliance) 2.Scale & Focus Achieve industry-wide scale benefits Pursue organizational focus and liberalize the balance sheet Set new industry standards Low Open Broker Desire for Scale and Focus High Model Preference Discussion: Which of the proposed model is better aligned with your company s strategic goals? Which operating model can help your firm increase long term competitiveness? 14

15 What can your company do today to gain momentum? Assess the Opportunity for Change Identify key market trends and assess impact on your 3-5 year business strategy Conduct scenarios to understand critical value chain capability and performance gaps to win in the future market Select Integration Model Option Develop a Migration Blueprint Assess which integration model is right for your firm? (Vertical/Open Broker/Hybrid) Size of benefit and risks across key supply chain functions Strategic fit between model and your competitive position War-gamming analysis of key competitor response Define roadmap and operating model for engaging collaborators and industry change agents Identify and sequence key adoption hurdles for your firm and network participants Build internal and external momentum with key partners and stakeholders 15

16 Thank you please don t hesitate to contact us Kumar Venkataraman Principal kumar.venkataraman@atkearney.com Michael Hu Manager michael.hu@atkearney.com 16

Organizing IT for Success

Organizing IT for Success Leveraging IT As A 9 th October 2012 Nick Weinrib - Advisory Solutions Principal EMC Consulting 1 Agenda Why Organizations Are Transforming Transformational Drivers Why IT Must