CPG Industry Shoots for Higher Profit Velocity

Causing cost volatility of raw materials and energy, the global economic recession has severely affected profitable manufacture and delivery of consumer packaged goods (CPG), maintains Mark Aloisio, product director for the CPG sector with Aspen Technology Inc. (www.aspentech.com), a Burlington, Mass.-based supplier.

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“CPG companies are pushing to achieve the highest levels of efficiency as possible and are getting back to basics.”

That means, he says, “looking to time-tested, but underutilized, technologies such as supply planning solutions.” Large retail chains are now shifting responsibility to suppliers, demanding that goods be on the shelves when customers come to the store, relates Steve Banker, director of supply-chain management at ARC Advisory Group Inc., (www.arcweb.com), Dedham, Mass. That’s quite a challenge, he observes. “Of course, the consumer-goods manufacturers cannot do that themselves.”

Enter supply-chain collaboration. The current key technology is demand-signal repository, or DSR—a “giant database that sucks in the retailers’ point of sale (POS) [data]. Ideally, it would be daily,” Banker says. POS tells only what’s been sold, though, and doesn’t account for theft and damage. “Ideally, you’ve got to have POS, shipment, distribution-center and store-inventory levels. This gives a really good picture of what’s happening at the store demand level,” he notes. The repository always will have the POS data, “or, if I’m a salty-snack [foods] guy, the direct-store-delivery data.” The repository also has retailers’ store-inventory levels and retail-distribution-center data, Banker observes.

Stock ’em up

Retailers use the retrievable DSR data for shelf-level metrics to indicate profit velocity. “Think of a shelf as real estate. If I have a product that is big and bulky and has low [profit] margin, I’m not driving much profitability,” Banker states. “But if the product is compact, has high margin and I’m seeing a lot of movement? I’m making a lot of money.” That means the retailer’s profit velocity for that specific product is high.

Another way that CPG producers seek now to optimize their end of the supply chain is to harness real-time production data generated by distributed-controls and supervisory-control-and-data-acquisition systems—and, in some cases, data collected by historians, Aloisio adds. To harness the data and convert it to useful and actionable information, companies such as Unilever, Glanbia, DSM Food Specialties, Guinness and others now install performance-monitoring solutions, he says.

Those solutions support the overall collaboration that Banker says supply chains need to succeed. But success at the retail end of the chain might mean suppliers use DSR to show how stores move or don’t move products. As Banker reminds, “It’s not just the product at the distribution center, but also that product the retailer has in the back room.”

Regardless of where it exists in the retail outlet, however, such inventory backup drives who gets what, when and where. Using global giant Wal-Mart as his example, Banker explains that stores’ aisles have “category captains”—for example, PepsiCo-owned Frito-Lay—who purchase DSR data. “Typically, the retailer will pick the biggest manufacturer and designate them as the category captain. For profit velocity, for example, the category captain’s job is to make sure all the products [from all suppliers] have good profitability.”

Though perhaps counterintuitive, this rising-tide-lifts-all-boats strategy makes sense and distributes success/failure accountability along the entire supply chain. Using a visual tool called a planogram, a diagram showing layout of products on retailers’ shelves, the manufacturers present optimal placement of products’ location on a particular aisle, Banker says. This level of planning typically requires big retailers such as Wal-Mart and big manufacturers, such as Procter & Gamble, to have supply-chain representatives working together, even in the same physical office, he remarks. “In these meetings, the supply-chain teams basically say, ‘We’re having problems with a particular product. We think you should reset the replenishment level.’ ”  They hope higher profit velocities follow.

C. Kenna Amos, ckamosjr@earthlink.net, is an Automation World Contributing Editor.

Aspen Technology Inc.
www.aspentech.com

ARC Advisory Group Inc.
www.arcweb.com

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