February 29, 2008
CPG Cos. and Retailers Fail to Cut Inventories
A recent study claims that the best laid plans of leading retailers and consumer packaged goods manufacturers to reduce inventory levels went awry in 2007 despite increased spending on supply chain planning and tracking programs.
Archstone Consulting, which produced the report, analyzed the inventory levels and productivity of companies including Colgate, Costco, Hershey, Kellogg, Pepsico, Unilever and Wal-Mart. It found that many CPG companies have been focused on driving incremental top-line gains through line extensions and product improvements.
According to Archstone, there were 1,700 new CPG product rollouts in 2006 and a similar number was planned for 2007. This number represents a 25 percent increase over the previous three years.
“A surge in new products across the consumer packaged goods and retail industries over the past two years and an increase in off-shore production have absorbed any operational improvements achieved in planning and manufacturing over the last few years,” David Sievers, Consumer Products and Retail Practice Leader at Archstone, said in a press release. “If retail spending weakens further in 2008 given our uncertain economic environment, we predict increased focus on inventory levels across the supply chain as products sit on shelves or in distribution centers longer.”
Among Archstone’s findings were that improvements in inventory productivity in recent years flattened out around mid-2006 and continued through last year. Even companies that made gains such as Wal-Mart failed to achieve the type of productivity improvements they had set as an organization.
Food and beverage manufacturers had mixed results in optimizing inventory levels. Larger companies assessed in the study saw a slight decline in productivity while midsize manufacturers either maintained or improved on past productivity levels.
Discussion Questions: Will we see considerably fewer CPG product rollouts in 2008 than in recent years? Will manufacturers and retailers working together be able to achieve significant reductions in system-wide inventory levels in 2008 and beyond?
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Inventory levels will only come down when two things happen: first, manufacturers quit attempting to extend brand franchises through “new” products and hyped-up marketing plans; and (2) at the same time enough retailers walk away from the one-stop-shopping, all things to all people model of competition. In other words, don’t hold your breath.
New products are important to CPG companies and retailers as they offer both newness (reason to buy) and margin opportunities which can offset lower margins on highly identifiable and competitive items within their assortments. This holds true whether you are a manufacturer or retailer.
The problem with the model is when consumer spending declines and those dollars spent then tend to concentrate in core, commodity category products. In many categories this dampens new product development and launches for manufacturers and makes buyers less open to spending tightened inventory dollars on risky new products.
The cycle is on track to at least “dampen” the volume of new product roll outs and tighten inventory dollars. There is usually very little upside to this necessary evil as customers soon become bored and with any uptick in the economy and disposable income they will be looking to spend their money on the “new” again.
Line extensions are never going to go away. In a tough economy it’s easier to do a line extension rather than introduce a new line simply because the upfront costs are so much lower. Reducing inventory in the supply-chain will always be difficult as long as there are places to put inventory….the store shelf and the warehouse. Reductions only typically come when one or both of them are reduced.
The US financial situation, and the continuing threat of a recession, will slow the economy a bit and result in slightly less product launches. I do not expect the change to be significant.
In 2008 there will be less product rollouts. New products are expensive and in some of these companies they haven’t seen much shelf life before the “flop.” Many of these companies have realized this through great losses to the bottom line. So a reduction yes, but they should always seek the trend and repackage or reinvent the product to follow the trend.
For instance, trending was personalization, so M&M came out with a way to personalize M&Ms about four years ago. Would this have been a natural for candy kisses? It took several years for Hershey to come out with personalization to catch up.
The second question is the key! Manufacturers and retailers working together to achieve system-wide inventory reductions. It goes beyond just manufacturers and retailers to the entire supply chain. Many of the companies listed use third party logistics companies to house, ship and store products. Unfortunately, the connectivity of software and inventory visibility is not always maximized. Therefore, a true picture of inventory is never displayed real time. Taking advantage of technology to give complete visibility and collaboration among all would benefit the total supply chain in reduced cost, higher quality and better profits.
Unfortunately I do not foresee a slowdown of new product introductions in 2008. With the ongoing race for market differentiation, being first-to-market and getting increased shelf presence, we continue to see numerous line extensions, “new and improved” ingredients, flavors/forms and packaging, and far too many me-too products racing through the supply chain.
Collaboration that has long been dreamed of still seems out of reach…but studies like the Archstone findings should cause the entire industry to admit that not only are those involved with CPG confusing the distribution process but we are also bewildering consumers.
It’s time to rationalize!
Archstone Consulting’s press release is only 2 pages long and the details aren’t easily found on their web site. The list of 25 companies studied doesn’t seem to be available. So it’s hard to make any independent evaluation of the results.
From my conversations with industry people I see a disturbing trend. Managing inventory in the supply chain by focusing on replenishment is difficult, demanding and requires collaboration. In addition, it goes against everyone’s training in forecasting (never mind that the forecasts are not accurate). I hear more and more industry people talking about their “refined” or “new” or “updated” forecasting models.
When assumptions about consumers try to identify large segments purchasing the same item, or do not take diverting into account, or do not have timely and accurate data from retailers and/or distributors, or don’t analyze the mountain of purchase data because it is difficult, then forecasts will continue to be inaccurate with inventory problems at every level of the supply chain.
Consumers behave in contrary ways with an independence that is not always predictable. Keeping daily tabs on consumer purchases is the only way to identify deviation and spot trends or changes in consumer behavior.
Introducing new products presents a different problem. The best way to get around guesswork forecasting is to produce small batches of new products, monitor product sales, and manufacture as demand dictates. This process, however, requires collaboration of the supply chain all the way through manufacturers and their suppliers.
Collaboration focused on demand replenishment is demanding and challenging. The alternative is trying to manage inventory based upon guesswork.
Whether the items being launched are truly “new” or otherwise line extensions of existing brands; the need to rationalize current assortments with an eye towards space constraints is a considerable part of the answer.
Using all the relevant data available to assess the viability of the existing mix and the forecast performance of the new items–while recognizing that retail space is a finite measure–will lead to more efficiency and improved sales at the retail level.
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Inventory levels will only come down when two things happen: first, manufacturers quit attempting to extend brand franchises through “new” products and hyped-up marketing plans; and (2) at the same time enough retailers walk away from the one-stop-shopping, all things to all people model of competition. In other words, don’t hold your breath.
New products are important to CPG companies and retailers as they offer both newness (reason to buy) and margin opportunities which can offset lower margins on highly identifiable and competitive items within their assortments. This holds true whether you are a manufacturer or retailer.
The problem with the model is when consumer spending declines and those dollars spent then tend to concentrate in core, commodity category products. In many categories this dampens new product development and launches for manufacturers and makes buyers less open to spending tightened inventory dollars on risky new products.
The cycle is on track to at least “dampen” the volume of new product roll outs and tighten inventory dollars. There is usually very little upside to this necessary evil as customers soon become bored and with any uptick in the economy and disposable income they will be looking to spend their money on the “new” again.
Line extensions are never going to go away. In a tough economy it’s easier to do a line extension rather than introduce a new line simply because the upfront costs are so much lower. Reducing inventory in the supply-chain will always be difficult as long as there are places to put inventory….the store shelf and the warehouse. Reductions only typically come when one or both of them are reduced.
The US financial situation, and the continuing threat of a recession, will slow the economy a bit and result in slightly less product launches. I do not expect the change to be significant.
In 2008 there will be less product rollouts. New products are expensive and in some of these companies they haven’t seen much shelf life before the “flop.” Many of these companies have realized this through great losses to the bottom line. So a reduction yes, but they should always seek the trend and repackage or reinvent the product to follow the trend.
For instance, trending was personalization, so M&M came out with a way to personalize M&Ms about four years ago. Would this have been a natural for candy kisses? It took several years for Hershey to come out with personalization to catch up.
The second question is the key! Manufacturers and retailers working together to achieve system-wide inventory reductions. It goes beyond just manufacturers and retailers to the entire supply chain. Many of the companies listed use third party logistics companies to house, ship and store products. Unfortunately, the connectivity of software and inventory visibility is not always maximized. Therefore, a true picture of inventory is never displayed real time. Taking advantage of technology to give complete visibility and collaboration among all would benefit the total supply chain in reduced cost, higher quality and better profits.
Unfortunately I do not foresee a slowdown of new product introductions in 2008. With the ongoing race for market differentiation, being first-to-market and getting increased shelf presence, we continue to see numerous line extensions, “new and improved” ingredients, flavors/forms and packaging, and far too many me-too products racing through the supply chain.
Collaboration that has long been dreamed of still seems out of reach…but studies like the Archstone findings should cause the entire industry to admit that not only are those involved with CPG confusing the distribution process but we are also bewildering consumers.
It’s time to rationalize!
Archstone Consulting’s press release is only 2 pages long and the details aren’t easily found on their web site. The list of 25 companies studied doesn’t seem to be available. So it’s hard to make any independent evaluation of the results.
From my conversations with industry people I see a disturbing trend. Managing inventory in the supply chain by focusing on replenishment is difficult, demanding and requires collaboration. In addition, it goes against everyone’s training in forecasting (never mind that the forecasts are not accurate). I hear more and more industry people talking about their “refined” or “new” or “updated” forecasting models.
When assumptions about consumers try to identify large segments purchasing the same item, or do not take diverting into account, or do not have timely and accurate data from retailers and/or distributors, or don’t analyze the mountain of purchase data because it is difficult, then forecasts will continue to be inaccurate with inventory problems at every level of the supply chain.
Consumers behave in contrary ways with an independence that is not always predictable. Keeping daily tabs on consumer purchases is the only way to identify deviation and spot trends or changes in consumer behavior.
Introducing new products presents a different problem. The best way to get around guesswork forecasting is to produce small batches of new products, monitor product sales, and manufacture as demand dictates. This process, however, requires collaboration of the supply chain all the way through manufacturers and their suppliers.
Collaboration focused on demand replenishment is demanding and challenging. The alternative is trying to manage inventory based upon guesswork.
Whether the items being launched are truly “new” or otherwise line extensions of existing brands; the need to rationalize current assortments with an eye towards space constraints is a considerable part of the answer.
Using all the relevant data available to assess the viability of the existing mix and the forecast performance of the new items–while recognizing that retail space is a finite measure–will lead to more efficiency and improved sales at the retail level.