Executive Leadership Tracks Out with the Bad, In with the Good: How Leaders Should Think About Complexity Saturday, July 30 10:30 AM 11:30 AM Crystal Andy Callahan, President, Retail Packaged Brands, Tyson Foods, Inc. John Ellenberger, Senior Vice President, U.S. Dairy Foods, Land O Lakes, Inc. Timothy Toll, Chief Customer Officer, Pharmative LLC Moderators Kari Alldredge, Master Expert and Entity Partner, McKinsey & Company, Inc. Curt Mueller, Partner, McKinsey & Company, Inc.
Executive Leadership Tracks Out with the Bad, In with the Good: How Leaders Should Think About Complexity Kari Alldredge Master Expert and Entity Partner, McKinsey & Company, Inc.
Executive Leadership Tracks Out with the Bad, In with the Good: How Leaders Should Think About Complexity Curtis Mueller Partner, McKinsey & Company, Inc.
Executive Leadership Tracks Out with the Bad, In with the Good: How Leaders Should Think About Complexity Andy Callahan President, Retail Packaged Brands, Tyson Foods, Inc.
Executive Leadership Tracks Out with the Bad, In with the Good: How Leaders Should Think About Complexity John Ellenberger Senior Vice President, U.S. Dairy Foods Land O Lakes, Inc.
Executive Leadership Tracks Out with the Bad, In with the Good: How Leaders Should Think About Complexity Timothy Toll Chief Customer Officer, Pharmative LLC
GMA 2016 Managing and Mastering Complexity July 2016
CPG companies are grappling with increase complexity Leading brands (original variety) Today s varieties McKinsey & Company 9
Agenda for today s discussion Sources and evolution of complexity Value of mastering complexity Market back and supply forward solutions Perspective from industry leaders (panel discussion) McKinsey & Company 10
The consumer industry is changing Customization Between 50-100 new toothpaste varieties launch every year in the U.S. Consumers are becoming more demanding Channel variety 55% of consumers are willing to buy groceries online Premium quality When it comes to purchase decisions, quality is 2x price as an importance factor Value for money 80% of consumers still look for price and value when making a purchase decision Healthy ingredients 1 out of 4 consumer shop based on looking for the shortest ingredient list Supply chains are becoming more complicated Locally sourced 25% of consumers want food that is locally grown Direct to consumer More than 40% of CPG companies expect to sell DTC, up from 24% in 2012 Optimized operations More and more companies are leveraging data-driven applications for supply chain optimization McKinsey & Company 11
Those changes are driving complexity in CPG companies Market Back Supply Forward SKU portfolio rapidly expanding as organizations innovate and channels evolve Increased level of promotions with dedicated SKUs Increased pressure to drive operations efficiency and new raw materials challenges Constrained operation network as the system has been optimized for efficiency McKinsey & Company 12
Challenges from complexity Unraveling complexity takes bold moves Traditional SKU rationalization approaches aren t enough Until they become overwhelming to the network Complexity challenges build slowly over time Even aggressive SKU efforts can only slow down the pain Holistic market back and supply forward efforts are needed to unwind complexity Time McKinsey & Company 13
What you should consider Complexity optimization has the potential to reduce cost, increase speed to market and drive growth There is good complexity (i.e., increases profits, drives growth) and bad complexity (i.e., makes you slower, increases cost) Where complexity adds incremental value, tools can be applied to master it; where it is not valued, it must be managed McKinsey & Company 14
Market back and supply forward approach is required What distinct manufacturing capabilities are required to unlock growth? Is there a better way to isolate bad complexity in operations? Supply forward Market back Do retailers reward or expect the presence of the SKU? Do consumers value the SKU relative to others in market? Multiple scenarios informed by supply chain 'break points' and consumer/customer hypotheses to iterate for profit optimizing approach McKinsey & Company 15
The trick in complexity is solving the full portfolio ILLUSTRATIVE Example SKU mapping SKU Incrementality Percent 100 90 80 Size = $ loyal revenue Power SKUs clear keep 70 60 50 40 30 20 10 Long tail clear cut 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 Distribution Percent ACV McKinsey & Company 16
Supply Forward Market Back and identifying complexity hot spots to enable smart complexity reduction Company A Company B Company C The questions that define your complexity fate Low High Is M&A core to our growth strategy? Have we rapidly increased the rate of new product introductions? How much do we personalize/customize our assortment based on channel and consumer trends? How complex are our promo tactics (e.g., advanced analytics)? Do we serve a diverse set of channels? Is our manufacturing technology and footprint flexible? Does our distribution capability enable channel growth (e.g., last mile)? Are we able to adjust pricing and sourcing tactics effectively to react to commodity volatility? Do we have partnerships (e.g., sourcing, co-man, JVs) that enable network flexibility? Do we have capacity and capability in key categories? SOURCE: McKinsey research McKinsey & Company 17
Sources of value will vary based on the complexity you face Company A Company B Company C Complexity story Significant M&A Mix of branded, private, label, and foodservice products Frequent innovation Low cost network at scale Low flexibility for innovation Backward integration and commodity cost fluctuations Limited portfolio with potential pockets of consumer demand growth Low cost manufacturing network driven by scale Highly customized and complex product portfolio Significant channel complexity through serving a broad range of customers Well-developed innovation pipeline Significant exposure to commodity risk Sources of value Assortment optimization Integrated margin and price management Supply chain flexibility Price pack architecture Integrated margin and price management Innovation and stage gate process assessment Supply chain (re)design Promo and demand shaping McKinsey & Company 18
Let s bring this to life with industry leaders that are tackling these issues Andy Callahan President of Retail Brands Tyson John Ellenberger Senior VP and GM of Dairy Foods Land o Lakes Tim Toll Chief Customer Officer Pharmavite McKinsey & Company 19
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