How to find the value destroyers in your FMCG supply chain

In a nutshell

Newton recently partnered with Solutions by IGD to conduct research into the profitability challenges facing FMCG manufacturers. Many highlighted a need to surface value destroyers that add unnecessary complexity and cost to the supply chain. Director James Watson highlights some of the biggest value destroyers to look out for and explains how to take decisive action.  

James Watson

WRITTEN BY

James Watson

Posted April 18, 2023

We are throwing away multi-millions every single day in this industry because were not disciplined, because weve got forecast variance, because weve got too many SKUs, because we're doing too many changeovers.”  

This quote, from one of the FMCG leaders interviewed for our IGD study, sums up the mood among many manufacturers right now. 

In the face of rising costs, shrinking budgets and unprecedented uncertainty, supply chain teams are having to find new ways to do more with less. Range rationalisation is one idea that has shot up the agenda and leaders say they are more determined than ever to identify value destroyers in their supply chains. 

However, identifying the biggest value destroyers – and doing something about them – is easier said than done. Making changes to the range and moving away from the status quo can feel intimidating when everything around you is in turmoil. 

Overly broad assumptions about SKU complexity are common. 

Throughout our IGD research, FMCG leaders highlighted complexity as one of their top concerns. “The impact of SKU complexity from retailer customisation ripples up the end-to-end supply chain,” one manufacturer said. Another added: “We’re seeing massive levels of value destruction in our factories, doing too many changeovers for small variations in ingredients.” 

However, not all complexity is bad – and not all complexity is caused by unreasonable demands from retailers. 

Good vs bad complexity 

Every organisation introduces complexity at various points. Vegetarian or gluten-free products are a good example. They add complexity because they require extra allergen cleans and extra packaging, but it’s good complexity because there’s a clear customer need. 

Bad complexity, on the other hand, just adds operational clutter. One food to go manufacturer we worked with had 10 different thicknesses of tomato slices going into sandwiches for the same retailer. This created waste and inefficiencies without delivering tangible benefits. After all, does the consumer really notice the difference between a 2.5mm and 2.7mm slice of tomato? 

Removing bad complexity of this kind is an essential step in FMCG manufacturers’ quests for profitability. The challenge for supply chain leaders is stopping bad complexity from entering the portfolio in the first place but also identifying when previously good complexity has turned bad.  

Good communication between commercial and operations teams is essential. We have previously written about this in our blog on planning and forecasting, and it bears repeating here. Poor alignment between these two departments is one of the biggest sources of value destroyers in the industry today. 

As an example, the commercial team at a major FMCG manufacturer we worked with was pushing the sale of small formats to deal with inflation and keep the price point at the shelf edge low. At the same time, the manufacturing team was investing millions in a Capex programme to remove a bottleneck that would no longer exist if sales moved to smaller packs. 

If commercial and operations teams do not stay close enough to each other, poor decisions and the introduction of bad complexity are inevitable. There’s a lot of opportunity for cost-savings to be had at the interface between these two functions. 

Strong alignment between suppliers and retailers is just as critical. Technical and product development teams at both suppliers and retailers can get carried away with ‘finessing’ a product, building in unnecessary complexity and cost (often unwittingly) that the consumer does not value. 


 
Food manufacturing

Quantifying the impact of bad complexity 

Identifying value destroyers is one thing; doing something about them is often an even bigger challenge. A senior leader at one of the world’s largest FMCG manufacturers recently told us about his frustration at finding white plastic tubes in a bewildering range of thicknesses across his operations. This may sound like a minor problem, but it created serious inefficiencies. Having multiple very similar but subtly different thicknesses resulted in reduced buying power and higher unit costs, which in turn meant forecasting was more difficult, leading to higher stock levels, more changeovers and higher tooling costs.  

Despite recognising this as bad complexity, however, this leader told us he was unable to effect a change. It wasn’t his area of responsibility and making changes would have required signoff from multiple functions. 

We see this all the time. Unwinding the decisions that led to bad complexity requires a lot of time, effort and commitment. Many manufacturers feel they simply don’t have the bandwidth to do this, especially when supply chains are under unprecedented strain. What’s more, bad complexity often sounds trivial. Who wants to spend time worrying about white plastic tubes when supermarket shelves are going empty? 

Taking a structured approach to finding inefficiencies, and quantifying potential cost savings upfront, can make a big difference. If you know why you’re chasing the bad complexity – and can show how much the business stands to gain by removing it – you’ll find it easier to get buy-in for change. 

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Not all complexity is bad – and not all complexity is caused by unreasonable demands from retailers.
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Start with what the end consumer values 

Crucially, always bring it back to what’s right for the consumer. Needs and preferences have changed rapidly in the past few years – and will continue to change – so understanding what really matters to consumers has never been more important. It doesn’t take many flawed assumptions to lead to bad decisions that end up destroying value. 

Use robust data to back up your decisions and don’t be afraid to challenge the status quo. Which products or product specifications do not add value for the consumer? For example, a supplier of ready-to-eat chicken was able to dramatically reduce waste once they re-evaluated their approach to cooking times. Previously, an overly cautious approach to food safety had led them to significantly overcook their products, creating unnecessary yield losses and a dried out product that was more expensive and less desirable to eat.  

On the flipside, don’t be afraid to embrace complexity where it serves a need. It’s tempting to go overboard on range rationalisation right now, but if a product serves a clear, incremental consumer need, it’s a value creator that deserves to be in your portfolio – even if it comes with added operational complexity. 

These are just some of the principles we apply when working with supply chain leaders to unlock profitability. We’ll be sharing more of our approach, and diving into more of the findings of our IGD research, in upcoming blogs as well as a whitepaper. To find out how Newton can help you rise to the profitability challenge and our fee guarantee, contact us at james.watson@newtonerope.com 

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