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A Simpler Way to Modernize Your Supply Chain

The article below will focus on the CPG manufacturer's firm implementation of the
supply chain modernization that takes 12 to 24 months. Contrary to the popular assumption that a
major corporation's supply chain costs tens of millions of dollars, this new approach costs a few
million dollars. The company faced deficiencies in its existing system, which included multiple
and time-consuming manual processes, excess inventory, and a large amount of expired and
damaged products, making it a particularly intrusive case. The CPG manufacturers implemented
the new strategy through the steps indicated below.
Building a Unified View of Demand
The journey begins by rethinking the demand planning process. The traditional
approaches, as previously used by the firm, though helpful, have their drawbacks. It takes a long
time to generate the various forecasts and reach a consensus that satisfies all business
requirements. A much better way to generate a unified view of demand is to start with sets of
data that all participants agree will yield the most accurate picture. The CPG manufacture, for
example, chose four kinds:
 Internal data on shipments to retailers, prices, discounts, promotions, and various product
characteristics
 Data on consumer demand, which can be accessed through retailers point of sale
technology or provided by companies such as IRI and Nielsen
 Macroeconomic information-including quarterly GDP, the Purchasing Managers' Index,
the Consumer Price Index, and unemployment and inflation rates-that helps explain
consumer behavior, seasonality, and trends
 External data on other factors that can indicate or affect demand, such as web searches,
social media mentions of products, average temperature, precipitation, holidays, and
competitor's prices
Using such data and advanced analytics, firms can set up an automated five-step circular
process that generates supply, financial, and trade plans for the next 50-80 weeks, the
planning horizon for most companies. Here's what that process looks like at the CPG
manufacturer;
First, trade planning information (about future promotions, discounts, and marketing
investments) is combined with consumer, macroeconomic, and external data to generate a
market demand forecast by SKU and retailer for each week of the entire horizon
Second, the demand forecast for each retailer is combined with historical data on the
company shipments to that retailer to generate a weekly forecast of the retailer's orders of
each SKU for the horizon
Third, the company aggregates all the order forecasts and converts them into a feasible
supply plan. The plan considers available resources, including raw materials and finished

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goods inventories, manufacturing capacity constraints, and market targets. The CPG firm
focused on minimizing total supply chain costs, but the chosen objective will vary from firm
to firm.
The fourth step is to use the weekly SKU supply plan for all retailers to generate revenue
and gross margin forecasts at the brand level for every month of the planning horizon.
The fifth step is to compare that financial forecast with the firm's business objectives. A
gap between the two may trigger a change in the trade plan
The following questions were raised as the CPG firms' managers were considering while
adopting the new process,
What degree of forecast accuracy can the process achieve?
Research has proved that variability in customer demand is significantly lower than
variability in retail orders. More accurate order, or shipment, forecasts translate into a more
effective supply plan. This reduces lost sales, boosts revenue, and improves service levels and
the customer experience.
Will we be able to understand what drives the behavioral and other changes the plan
predicts?
Can a single SKU weekly forecast be decomposed into its basic components? At the CPG
firm, the answer is that sales are affected by the way pricing, promotion, discounts, and inventory
decisions are executed by retailers. The good news is that today's analytic technology is mature
enough to decompose the data into its parts.
How can we ensure that all the functions follow the new approach?
Establishing a forecast center of excellence brings together people from various
functions, information technologists, and data scientists. Their role will be to agree on the data
and let the analytics generate the forecasts and the supply according to the five-step process.
How frequently should we run this process?
Most businesses should update the demand forecast, retailer order forecast, and supply
plan weekly or biweekly. But there are clear exceptions. Some of the CPG manufacturer's
products have short life cycles of only six or seven weeks. In such cases, companies need to
update their demand forecast twice a week. The same is true for fashion product makers.
Redefining The Supply Chain Strategy
The objective of a responsive strategy is to compete on time in the market, satisfy
demand quickly, and eliminate stock-outs. Traditional supply chain strategies have focused on
operational efficiency or responsiveness. Some require a strategy focused on efficiency, while
others on responsiveness and product design and distribution. Until recently, executives didn't
have the tools to segment products and decided which strategy was appropriate for a particular
segment.

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The higher a product's profit margin is, the higher the risk of missing an order. Analysis
has revealed that the CPG company had four product segments, although other companies may
have more. The first segment comprises products characterized by high volatility, which requires
a responsive supply chain strategy. Volume, in contrast, is inversely proportional to risk; that is,
the higher the volume, the lower the impact of missing an order, and the lower the risk.
The second segment comprises products with high volume and low volatility, which
require an efficiency strategy. Conflicting drivers characterize the remaining two segments; low
demand volatility and low production volume. One objective should be to identify synergies
across the segments that will allow the firm to benefit from economies of scale. Once a company
has done the segmentation, it needs to develop detailed sourcing, manufacturing, and logistics
strategies.
Balancing Supply and Demand
An analytics-driven optimization system generates the SKU-by-SKU supply plan. This
plan will inform everything from master production schedules to material planning to logistics,
including inventory and transportation decisions. S$OP involves analysis at the business unit
level or the product family level, not the individual product level. Because it's a manual process,
it generally takes months.
While not every company or business unit needs to produce a plan weekly, such
frequency is critical for products whose demand is highly volatile and whose marketing and
promotion strategies often change. The new S&OP process also calls for monitoring activities.
Firms should collect information throughout the supply chain about key performance indicators
(KPIs) such as supply lead times, raw materials and finished goods inventories, and service
levels.
Smart execution involves three automated capabilities: (1) the real-time capture of
internal and external data that reveals potential deviations from the plan, supply disruptions, or
changes in demand. An AL system can predict the impact of a supplier default on on-time
delivery and product quality. An automated optimization system can identify an alternative
supplier for sourcing the material. The CPG firm's approach to supply chain digitization allowed
the firm to transform the organization in less than half the time and at less than a quarter of the
expense.
In conclusion, the CPG manufacturers firm has experienced the benefits of modernizing
their supply chain. Through good execution of the new initiatives, they've lowered the supply
chain costs and higher revenue because of fewer stock out and improved service levels.
Consequently, enabling the company to increase customer retention.

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