A number of global phenomena have impacted – and are still impacting – all markets and businesses in 2024. These include: the Covid-19 pandemic; wars in Europe and the Middle East; extreme weather conditions; the decreasing birth rate in industrialized countries; the acceleration of migration flows; and the acceleration of digitalization – in particular the introduction of AI. All of these are likely to continue, presenting consumer goods companies with a number of challenges.
We believe that six of these are of the utmost importance to the sector:
1. Inflation
The cost of raw materials and energy is increasing far faster than the overall rate of inflation. This translates directly into rising prices for consumer goods on the shelves, potentially reducing demand or shifting it towards lower-tier products.
2. Supply chain disruptions
Lengthy and unexpected interruptions to the flow of goods along the supply chain are affecting sales, reducing availability on shelves and exerting further pressure on prices.
3. Complexity
The exponential growth of e-commerce in recent years began a trend of extreme product customization. This created increased complexity which contributed to price increases and problems in value chains - the cost of this complexity has become too high for current markets. Consumer goods companies must now find ways to reduce complexity in order to offset the increase in energy and material costs.
4. Sustainability
Consumer awareness of environmental issues has grown very fast. Consumer goods companies are under pressure to use renewable energy, produce eco-friendly products, leverage green technologies and reduce non-renewable emissions and waste.
5. Digitalization
New digital technologies, especially the latest generation of AI, are becoming a challenge for consumer goods companies. AI technology can provide a competitive advantage but it can also create internal problems if not used correctly.
6. Shortage of skilled employees
In theory, mass migration, digitalization and automation might have been expected to create a surplus in the available work force. However, at least in the short-term, unemployment is very low globally and consumer goods companies are struggling to attract and retain the people with the right skill sets. A combination of low birth rates, low wages, welfare programs in developed countries, and alternative career choices for skilled workers, have contributed to this.
Consumer goods companies: compelling business needs
What are the biggest areas of need for companies in 2024?
1. Cost reduction
In order to survive, businesses need to reduce operating costs to offset the impact of inflation on demand and profitability. This is bringing back all the traditional methods of "loss eradication" such as increased efficiency, increased productivity, and decreased waste along all the links in the supply chain.
2. Resilience
Business continuity is vital even in situations where there are local or global catastrophic events that disrupt the flow of the value chain. To meet this need, we are seeing businesses turn to “network redesign", with a focus on three areas: the shortening of value chains (including the re-localization of raw material suppliers and production); the differentiation of suppliers and production sites; and the digitalization of resource planning systems.
3. Simplification
To lower costs and minimize the risk of disruption, businesses need to reduce the number of product codes and focus only on the most important ones. They also need to be able to minimize losses when introducing new products to the market and to design new products in a way that maximizes value for consumers.
4. Sustainability
All companies are moving towards the reduction of CO2 emissions, non-ecological materials, and non-biodegradable waste.
5. Digitalization
To maintain competitiveness in the markets, companies have to keep up with the adoption of new digital technologies, especially with the emergence of new generations of AI.
6. Attract and retain people
Consumer goods companies need to find people with the skills they need for their business. This means attracting the best people and then retaining them, through competitive financial incentives and opportunities for career growth.
Three approaches to tackling the challenges and meeting the needs
For each of the six challenges and their related business needs, a vast array of solutions is available. These can be roughly grouped into three categories according to size and timescale.
Boost
If a company wants to solve a specific problem in a particular business area and location in a short period of time, then the recommended approach is what we call a "boost". Each boost intervention involves a rapid assessment of the situation, the identification of levers for improvement and the very fast execution of an improvement plan.
Typical boost interventions are those that aim to drastically reduce costs - through increased efficiency and productivity or via the reduction of waste - or those that aim to improve service and reduce inventories.
Build
If, on the other hand, the company wants to build a continuous improvement plan with the aim of developing people's capabilities on a large scale over a long period of time, then the “build” approach is best. This includes the same three phases: assessment, identification of improvement levers and implementation of the improvement plan. The difference is that this approach is not confined to a single problem or location but targets the entire company, or all business areas within a particular function such as manufacturing or supply chain.
When applied to manufacturing this approach is often referred to as "Production System Implementation" and almost always assumes the pillar structure typical of the Toyota Production System. These pillars are aimed at defining and implementing company standards across all plants and areas of manufacturing.
Transformation
If the company is interested in a radical change rather than in a gradual continuous improvement, the approach is "transformation". Normally, there are three types of transformation. The first is the redesign of the supply chain, including the choice of suppliers, the location of the plants, and the distribution centers. This type of intervention is often referred to as “network design.”
The second type of transformation is organizational and looks at how the company is structured globally, regionally, or across business units. The third type of transformation relates to the digitalization of the company and can, for example, involve the complete redesign of a digital platform that manages all the company's data and supports management decision-making.
The one thing that all solutions should have in common is the methodology. They should always start with an assessment of the situation, on which to base the identification of the levers for improvement, and end with the implementation of an improvement plan. The first phase should always involve comparing the company’s current situation against a “best in class” benchmark. Areas for improvement are then identified according to the needs and priorities of the company. The process of improvement must always go through the three phases: assessment, analysis and implementation.
The first decision for management is which of these three types of approach to follow – boost, build or transformation – based on its business needs, strategy, and available budget. In these situations it is always important to work with the "rate of return" in mind. Our experience is that, if done well, all three approaches guarantee very significant returns on investment. It's not atypical to spend $100K to get $1m in return or $1m to get $10m.
In all cases there is a need for change management leadership, however. The key elements for successful change have long been known and well documented: a sense of urgency due to a compelling business need, a well-organized leadership team, a strategic approach, adequate communication, the systematic removal of barriers, measurement of short-term successes and the creation of standards that last over time.
Conclusion
The solutions to the challenges that we have described in this article are all aimed at keeping the company profitable even in difficult business conditions, and in markets where there are supply chain disruptions, inflation and problems in attracting and retaining skilled employees. Companies must leverage the skills of their preferred consultant to assess their situation in current and future market conditions and to identify and implement the solutions that will meet the challenges of the future.
The author
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Roberto Giardini, |
