Inefficient supply chains will cost billions, study finds

More than half of consumer products companies (CPG) will miss out on growth opportunities because of their inefficient supply chains.

This is one finding of a new study by consulting group Kearney. It found that about US$800 billion will be left on the table by these companies unless they upgrade their supply chain operations.

The global CPG industry, which includes food and beverage, beverage alcohol, household, and beauty and personal care, accounts for US$5.3 trillion in annual sales and is projected to grow at 5.6 percent, according to Statista. Kearney found the top 48 percent of CPG companies will capture the majority of this growth, eclipsing companies that are still operating outdated legacy supply chain models.

Three differentiators

Kearney found three key areas that differentiate the top performers from the laggards. These are: the ability to make quick decisions with limited information; building regional supply chains that create speed and agility; and, using a ‘best cost’ model instead of ‘least cost’.

In the report, Kearney said the ability of supply chain managers to make quick decisions in ambiguous conditions is “rapidly becoming table stakes. Taking too long to evaluate alternative modes of transportation—ocean versus air, for example—almost guarantees reduced customer service levels.”

Allowing regional supply chains to operate somewhat autonomously is more efficient, Kearney said. “Although top-down, global guidance and control is needed in some functions, in general, globally run supply chains simply aren’t as effective as decentralized models, especially in areas such as raw material purchasing.”

Low-cost supply chains, which many companies have historically built and relied upon, are not viable in a volatile environment such as we are experiencing today. “In the face of escalating demand and persistent materials shortages a “best-cost” approach that increases contract manufacturing spend across a more diverse mix of suppliers and reevaluates inventory levels across portfolios to increase revenue and improve service-level agreements is more effective,” the consulting company said.

Changing the mindset

In order to avoid these pitfalls, executives need to make five changes, Kearney suggested in the report: eliminate silos, embrace quick decision-making, build a culture of embracing risk, give regional supply chains their independence, and team up with competitors and suppliers to gain efficiencies.

The report’s authors advocate taking a systematic approach to effecting these changes. A three-phase approach should take up to three years, depending on how deep the transformation needs to be.