Supply Chain Optimization, Part 1: Why Collaborate Around Supply Chain?

When consumer packaged goods companies, retailers and suppliers collaborate vertically around supply chain, the collaboration frequently is short-term and tactical. But doing the heavy lifting to create more ongoing, strategic partnerships has myriad benefits, according to a survey conducted jointly by the Path to Purchase Institute, A.T. Kearney and Menasha.The benefits are being realized in small pockets today, but shopper marketers need to impress upon their supply chain colleagues the need to forge such vertical collaborations by pointing out the positive impacts on the bottom line as well as the competitive disadvantage that results if they do not, A.T. Kearney believes.When the concept of collaboration comes up, supply chain and even some shopper marketing personnel often react by saying that they’re already collaborating. Typically, however, this characterization is a stretch, according to A.T. Kearney executives. Such partnerships usually amount to “firefighting” because of issues like deliveries coming late and products reaching out-of-stock status.“Some folks I like to lean into because I trust them. They’re going to give me the real skinny on the stuff.”— John Barnette, Food LionWhen supply chain personnel complain that they don’t have the time or capabilities to go deeper, the best response is to suggest trying a single campaign or initiative as a pilot, gain support from the top and move forward. Commercial teams need to realize that their supply chain organizations alone will not capture the benefits, Kearney says, and those outcomes aren’t simply about dollars saved or earned but also about authentic deepening of relationships.In more advanced cases, retailers and manufacturers have integrated their supply chain almost as if the two companies have merged, which brings vastly greater operational efficiencies and speed to market, A.T. Kearney believes. Companies work jointly when determining new products to launch, slotting and assortment, shelf sets, shopper marketing campaigns and promotional events.Manufacturers and retailers find themselves at different stages of supply chain collaboration because the buyer-seller relationship creates friction, which leads to inefficiencies and waste, says Arun Kochar, principal at A.T. Kearney. “You are wanting to behave as one company. Don’t treat each other as buyer and seller. That is the holy grail that folks are striving for,” he says. “Collaboration in supply chain and merchandising gives you opportunities to unlock growth.”The major benefits include cost savings, speed to market, fewer people involved, and less waste in the process, says Annette Groenink, group vice president at Menasha. When collaborating with other companies in the supply chain, retailers and CPGs need to be willing to share a certain amount of intellectual property that they traditionally have been guarded about, she says.“People outside your company are going to have different perspectives and views, and those are valuable,” she says. “[The growth in collaboration] represents the realization that new products come and go so quickly. If you’re getting hung up on whether you own 100% of the intellectual property, and somebody else gets out there quicker, you could lose a distinct advantage while you’re sitting around worrying.”“If the CPG and supplier have multiple people involved and are approaching the problem from different perspectives, you’re going to find ways to eliminate cost and time,” adds Greg Dugan, regional vice president for Menasha.John Barnette, vice president for center store merchandising at Food Lion, says he’d be crazy not to work with his business partners around supply chain. “If you’ve got open and honest relationships, discipline around the work you do and a collaborative decision process, more often than not, the outcomes are going to be better,” he says. Initiatives “are more fully vetted. When I think about how broad my business is, it’s kind of ridiculous to think about not leveraging that talent. … They’ve got their finger on the pulse of that stuff [in their category] much closer than we do.”CPGs and retailers cannot be complacent, says Jeff Krepline, vice president of national sales, Menasha. “The ever-changing demands of retail are not letting anybody sit still,” he says. “If you think you’ve got it, you need to re-ground yourself. We’ve all heard about speed to market and late-stage customization – all of that stuff is driving continued need for evolution in the supply chain.”Survey Says …The A.T. Kearney/Menasha survey, which drew 33 responses, revealed five major takeaways:1. To date, collaboration efforts have not gone as far as most organizations would like. Thirty-eight percent of respondents said they currently pursue a portfolio of mid- to long-term initiatives, and only 13% are still working toward that end; but only 19% said they already have achieved end-to-end supply chain integration with their partners, while 50% have that in their sights in the next three years (see chart below).View Full-Size Chart.Dugan says that while “very few” CPGs and retailers have reached that point, he sees it as “kind of the wave of the future. There are a few that will let you inside so you can make an educated decision. The majority still hold suppliers on the outside and give you only what they think you need to know.”Barnette has seen an evolution in the five years he’s been at Food Lion. While some partners seemed more self-serving in his early years, increasingly “we’re comfortable that people are bringing to us insights that will help the overall business and are not just self-serving,” he says. “Some folks I like to lean into because I trust them. They’re going to give me the real skinny on the stuff.”Collaborations are still largely around transactions and spot opportunities that will have an immediate impact, says Joy Peters, partner at A.T. Kearney. “When we look at the 50% who want to get there in three years, that denotes aspiration,” he says. “How do we treat two companies as one?”Kearney has worked with a “middle-of-the-pack” CPG food manufacturer that saw limited gains from short-term joint projects with their retail counterparts. “They said, ‘This is not getting us anywhere,’” Peters says. “We want to have reoccurring, demonstrable improvement in our growth.”Working with A.T. Kearney, the CPG company chose two of its largest and most strategic retailers and found “a ton of opportunities in taking out nodes from the supply chain and bypassing distribution networks to get their product to the retailer, avoiding double-handling and finding opportunities in planning more effectively, which means I’m out of stock less often,” Peters says. “Now they’re in a completely different way of working together. There was a relationship transformation, sponsored at the very top, that changed the way they worked together.”2. The majority of collaboration efforts are initiated by one party rather than both. Fifty percent of respondents said their organization had done the initiating, while 33% said collaboration was jointly initiated (see chart below).View full-size chart.Groenink sees an opportunity for third parties to help facilitate these efforts, although “that’s not happening very much.” But Barnette says that from his vantage point, third parties and suppliers were initiating the process more often in the past, while now “this is a very banner-centric process. We’ve scheduled marketing summits to talk about what’s next: ‘Here are some things we’re thinking about, do you want to play?’ … We’re doing much better solving from within.”3. Collaborative efforts are more likely to be sustainable if they improve the go-to-market proposition of the parties and build trust. Forty percent of survey respondents said improving their go-to-market proposition helped to build a sustainable relationship, while 33% said the same about increased trust and information sharing (see chart).View full-size chart.Barnette sees the go-to-market proposition as the ultimate objective and the others as foundational pillars. Krepline notes that go-to-market proposition and building trust feed off of one another. “Speed, accuracy and customization, they’re all going to prove that go-to-market proposition,” he says. “But for that you need information. And information builds trust.”Dugan has found the same thing. “We’re finding that our onsite teams have a much higher degree of collaboration due to the fact that we’re physically working side-by-side with our customers,” he says. “We’re with them and talk to them so much, they’re kind of like co-workers.”A.T. Kearney worked with a distributor and a manufacturer in the wine and spirits industry that had a multi-decade relationship marred by lack of trust. “The CEOs said, ‘We have to do something about this,’” Kochar says. Once both companies received a top-down mandate, they spent about six months building relationships across the chain of command, and for the last two or three years, with trust in place, “the organizations have transitioned from an exchange of relevant data, to starting to pursue broader portfolios of opportunities,” he says.4. Organizations seek a wide variety of benefits from collaboration, although cost reduction is desired a bit more highly more than others. On a scale of 1 to 5, cost reduction rated an average of 3.1, slightly ahead of revenue growth, improvement in speed-to-market and working capital reduction (see chart below).View full-size chart.5. The results mostly jibe with these desires, although cost reduction is significantly more frequent than the others. Revenue growth is the next frequently achieved benefit of collaboration, according to the survey, followed by improvement in speed-to-market and, somewhat less often, working capital reduction.Dugan finds that revenue growth and improved speed-to-market are the most frequent goals of those with whom he works. Groenink finds it very positive that revenue growth rates highly in the survey. “If revenue growth were the least frequent achievement, that would be sad because that’s what we’re in it for, more value for everybody,” she says.But Barnette says he’s surprised that wasn’t the most important goal. “If you’re asking supply chain and category management people, whose primary responsibility is to negotiate for a lower cost of goods, I get it,” he says. “But if you’re talking to a banner merchant, ultimately they’re looking for top-line growth.”Collaborations around reducing the cost of goods are easy to justify because the benefits are tangible and tend to be apparent within a year or two, Kochar says. For example, the spirits company with which A.T. Kearney worked saw hard dollar savings from the joint go-to-market.Growth, on the other hand, “doesn’t happen overnight, and even with an exclusive initiative, like a product launching, there are so many other drivers that could impact growth,” he says. “It’s hard to isolate that the growth is because of this particular initiative. That’s where it becomes a little harder to justify the effort.”Krepline says measures like working capital reduction, revenue growth and improvement in speed-to-market are well worth considering, but he views them as traditional and looks to “emerging measures” of collaborative success.“For example,” he says, “the execution rate at retail. Are we getting the sales lift that the extra dollars [justify]? How do we know there’s a return on investment for these elements? … All of this is a very broad stroke for the supply chain.”NOTE: This is the first installment in a three-part series. Next month, we will address some of the “how-tos” of collaboration, such as selecting partners, identifying key enablers and establishing a benefit-estimation process. In the third installment, we will look at ways to “scale” the effort, decide on key requirements and select from different operating models.About the SponsorMenasha is a packaging and merchandising solutions company focused on optimizing the retail supply chain. Menasha collaborates with the world’s leading retailers and consumer packaged goods companies to deliver the greatest measurable value across the entire integrated merchandising supply chain. As market leaders within the in-store merchandising industry, Menasha combines an unmatched understanding of the retail sector with a proven methodology for developing efficient, sustainable offerings to meet customer-specific goals.