My colleague Arnold Kogan and I presented at the FMI Fresh Foods Leadership Council meeting in Orlando last week. We discussed the emerging challenges plaguing the retail landscape and how leaders are transforming the supply chain for the post pandemic future.
The New Norm Post COVID
Supply chain performance suffered starting 2020 due to a myriad of COVID and E-Commerce related disruptions. In short, all parties in the retail landscape from FMCG to wholesalers to retailers took revenue and P&L hits. Based on our BCG/FMI supply chain benchmarking, in the first quarter after the onset of COVID the industry observed:
– FMCGs and retailers saw on average 8% drop in OTIF. Wholesalers saw an even stepper 21% drop in service level
– This has translated directly to shelf availability and loss of revenue for all parties
– In response, companies spend 4-6% more on logistics cost as well as invested more in carrying more inventory
– CPG and wholesalers invested 14% and 22% more days on hand inventory respectively
In addition, the post COVID domino effects are now creating a second wave of challenges across the retailing value chain:
– E-Commerce acceleration is pushing retailers to further drive speed
– On average we see a 4-day decline in order-to-delivery lead times, putting significant fill rate pressure on FMCGs
– Driver and labor shortages led to 20 ppt rise in attrition and continue to exert P&L pressure
– Inflation triggered price increase of 150-250 ppt across a wide range of commodities
Where Companies Are Investing
Based on our recent client work at BCG, we see CPG and retail clients investing heavily across two supply chain areas for agility and resilience.
1) Advanced Warehouse Automation
FMCGs and retailers are actively investing in warehousing automation to get ahead of the tight labor and E-Commerce trends.
We see many clients starting to fundamentally re-think their manufacturing and supply chain network strategy. They are segmenting product flows based on velocity and deploying warehouse case and pallet automation solutions to meet future needs.
Successful deployment of fulfilment automation can drive 10-20% case fill rate improvement, P&L cost benefits, and significant (40%+) ROI on CapEx investment over a 4-5 year horizon.
Retailers are also actively investing in eaches-picking automation to improve cost economics for scaling same/next day delivery. There is a plethora of emerging same/day next day automation solutions such as Grid based (e.g. Ocado, Autostore), Robot (e.g. Alert Innovation, Fabric), and AGV (e.g. Geek+). Retailers must pick the right solution based on their footprint (speed) and SKU (density) segmentation strategy for last mile.
2) Digital Planning & Orchestration
Companies are also investing heavily in transforming their supply chain visibility, planning and decision making. Many have budgeted for SAP upgrades and/or investing in cloud based planning platforms such as JDA and O9. While systems are an important enabler its only 30% of the answer. During COVID, we saw leaders do the following to rapidly pivot their planning capabilities to drive case fill rate improvement:
– Identify the root causes driving case fill rate losses rather than boil the ocean
– De-average the baseline across SKUs, customers and channels to find the underlying issues
– Focus on fixing underlying processes (i.e. weekly S&OE, network planning, material planning lead time, etc.), supported by rapid digital control tower or planning analytics MvP (minimal viable product) solutions. These new processes and tools become the foundation for driving enterprise planning system upgrades and not vice versa.
– Embrace a cross-functional agile approach, championed by the C-suite to drive quick decisions and trade-offs
Companies that adopt the above agile cross-functional, process driven approach can unlock impact 6-12 month faster. They also have 2-3X more likelihood of successfully scaling their digital planning systems investments.