40

Consumer-value operations:
An integrated approach
to operational excellence

Best-practice consumer-goods companies are focusing on commercial

outcomes, enhancing their capabilities in all operations functions, and
exploiting opportunities at the intersections of these functions.

Søren Fritzen, Many executives in charge of operations at an all-time high. Retailers, in light of slow growth
Deepak Mishra, and consumer-packaged-goods (CPG) companies and the success of discount formats, are exerting
Frank Sänger
strive to deliver value within isolated functions. pressure on pricing and promotions and
For example, heads of manufacturing try to demanding more custom SKUs—not only making
rationalize overcapacity in plant networks, it hard for manufacturers to pass on higher input
procurement officers consolidate their purchasing costs but also driving up complexity costs. And
to leverage scale, and supply-chain executives although emerging markets in Eastern Europe
seek to centralize their scattered supply-chain continue to show tremendous growth potential,
organizations. competing profitably requires investing in
anticipation of growth—a tall order in an era of
Such piecemeal efforts, however, won’t make profit warnings and budget cuts.
much difference unless they’re part of a broader
operational-improvement effort. Europe’s CPG Against this backdrop, isolated operational
companies are battling a multitude of challenges. improvements will have limited impact—and may
Growth is slow to flat in most Western European even be detrimental. Because operations
markets. Commodity inflation and volatility are at functions are highly interconnected, any move to
 41

optimize one function independently can quality, safety, service, and environmental
undermine another function’s performance. A compliance.
drive to achieve lowest-cost material supply, for
example, can at times increase manufacturing Segmented supply chain and planning
and downstream costs. The idea of segmenting the supply chain—to serve
Keiko Morimoto each customer the right way, instead of serving all
A big part of the answer for CPG companies lies in customers the same way—isn’t new, yet only a few
what we call “consumer-value operations”—an CPG companies have fully implemented it. A
end-to-end approach to operations that is guided company could, for instance, prioritize customers
primarily by the consumer perspective and takes based on profitability and strategic importance,
into account which products and activities truly and segment products based on volume and
drive commercial advantage. Best-practice CPG demand variability. This segmentation results in
companies are basing their operations agenda on distinct “value streams,” or combinations of
commercial outcomes, not just “four walls” customers and products that should be measured
operations performance. Examples of these and managed in an integrated way.1 By
outcomes, to which operations can make big segmenting its supply system into value streams,
contributions, include increasing customer one CPG company reduced inventory by 20 to 30
satisfaction to drive share growth, delivering percent and total costs by 6 percent, while
more new products faster, and competing cost- significantly improving on-shelf availability at
effectively against private labels. retail stores.

To deliver such outcomes, leaders are managing Next-generation procurement

operations levers holistically (exhibit). Rather Most CPG companies are already building
than cherry-picking among functional areas or procurement scale, consolidating suppliers, and
pursuing a “sum of its parts” operations program developing centralized procurement functions.
with disconnected initiatives, they are striving for But to offset the volatile commodity
excellence in all core functions. They are also environment, leading companies are making
working much more closely than before with the more assertive moves. They’re pursuing more
nominally commercial functions—marketing, opportunities to capture scale benefits, such as
sales, and research and development—to exploit by joining buying consortia for indirect
opportunities at the intersections of the procurement. They’re developing commodity
functional areas. In this article, we outline the strategies based on distinctive knowledge of
elements of consumer-value operations and offer upstream supply economics and “clean sheet” or
perspectives on how companies can begin to “should cost” models. And they’re building
benefit from it. risk-management capabilities to mitigate
ongoing volatility. By taking these steps,
Excellence in core competencies best-in-class companies realize more than 10

1See Yogesh Malik, Alex

Operational excellence requires top percent reductions in direct spend and more
Niemeyer, and Brian Ruwadi, performance in five distinct competencies, in than 15 percent reductions in indirect spend,
“Building the supply chain of
addition to the “table stakes” of achieving an with 80 percent of these improvements
the future,” mckinseyquarterly
.com, January 2011. adequate performance level in areas such as achievable in the first two years.
42 Perspectives on retail and consumer goods Spring 2013

McKinsey on Consumers 2013

Consumer value operations
Exhibit 1 of 1

Exhibit Leading CPG companies strive for excellence in the core functions
and at the intersections between functions.

Interfaces Interfaces with

with R&D and Source Make Deliver customers and
suppliers consumers

Segmented supply chain and planning

Next-generation Manufacturing Distribution

procurement and sourcing network
strategy design

Lean operating system

Product and portfolio strategy

Supplier Customer
collaboration collaboration

I
Quality management

Manufacturing and sourcing strategy responsiveness. In addition, strict business-case

Leading CPG companies distinguish between requirements, careful design optimization, and
highly efficient “volume” and highly agile sophisticated project-management approaches
“innovation” factories or lines within their can deliver capital-expenditure savings of 20 to
manufacturing networks, and manage them with 30 percent and improve return on invested capital
different metrics. They use contract by as much as 4 percent.
manufacturing in a deliberate way—not so much
to manage the balance sheet but rather to provide Distribution-network design
flexible low-cost capacity or technology expertise Given soaring transport costs, CPG companies
not available in-house. They take a long-term view can’t afford to ignore inefficiencies in their
of network investments and build the capabilities logistics operations. A company should design its
needed to refresh their strategies when market network based on precise knowledge of what
and input costs shift. Well-designed networks customers need and which activities add value. In
typically result in 10 to 20 percent lower Western Europe, for example, our analysis shows
conversion costs and increased flexibility and that 14 to 18 strategically located distribution
Consumer-value operations: An integrated approach to operational excellence 43

centers (DCs) can make overnight deliveries to company subsequently introduced lean
most large retail stores, 9 are sufficient for techniques in planning, procurement, and
deliveries within 24 hours, and 6 can handle transportation and warehousing.
two-day deliveries. Concentrating inventories in
fewer DCs leads to inventory savings; on the other Winning at the intersections
hand, centralization increases transport costs due The most successful companies don’t make
to longer distances and underutilized capacity. To trade-offs among functional competencies.
correctly measure the inverse cost effects, Instead, they aspire to best-in-class performance
companies must build a sophisticated model that across—and at the intersections of—all functions,
covers all relevant factors. In our experience, as well as in their interactions with suppliers and
companies can typically reduce logistics costs by customers. They develop and execute operations
up to 10 percent while maintaining or even raising strategies in close cooperation with the R&D and
service levels. commercial functions. We see four intersections
between functions, and between a company and
Lean operating system its customers and suppliers, where improvement
Leading CPG companies are not only initiatives can deliver outsize rewards.
reinvigorating their lean programs in the
manufacturing environment—typically achieving Product and portfolio strategy
15 to 25 percent reductions in conversion costs as CPG companies face the conflicting priorities of
well as improvements in capacity, flexibility, and speeding more new products to market on the one
responsiveness—but also applying lean hand, and improving gross margins and reducing
philosophies across the entire value chain. A CPG portfolio complexity on the other. Leading
company, for example, undertook a three-year companies break through the inherent trade-offs
lean transformation that started in one by developing three institutional capabilities:
manufacturing plant in one business unit, then assortment optimization, “design to value” (DTV),
expanded to other locations, business units, and and complexity management.
processes in a carefully sequenced rollout. The
44 Perspectives on retail and consumer goods Spring 2013

Assortment optimization consists of defining the based on both consumer research and a detailed
ideal assortment from a consumer perspective. understanding of competitive products’ cost
Leading companies assemble an assortment that structures.2
covers all consumption occasions and consumer
needs without duplication, methodically Finally, leading CPG companies excel in
dropping non-value-adding SKUs that don’t complexity management, having moved from
serve a strategic purpose and rigorously filling sporadic SKU-rationalization exercises to a
relevant gaps. structured product-platforming approach similar
2See Ananth Narayanan, to the automotive industry’s. They harmonize
Asutosh Padhi, and Jim Leading companies also apply a cross-functional products and specifications to create a small
Williams, “Designing products
for value,” mckinseyquarterly DTV approach to all new and existing products, number of platforms (recipes, material standards,
.com, October 2012. designing and redesigning products to deliver and packaging formats) based on consumer
3See Jim Brennan, Philip
Christiani, Frank Sänger, and greater consumer and customer value while preferences, optimal assortments, manufacturing
David Spiller, “When less is
more: How to manage portfolio lowering cost of goods sold (COGS) by as much as efficiencies, and other COGS drivers.3 They drive
complexity in consumer goods,” 200 to 300 basis points. They optimize these platforms aggressively throughout the
csi.mckinsey.com, January
2011. specifications, recipes, and packaging designs portfolio and set up their supply chain for
 Consumer-value operations: An integrated approach to operational excellence
45

late-stage differentiation to enable faster launch 15 to 25 percent reductions in packaging-

times and multimarket launches. material costs.

Supplier collaboration Customer integration and collaboration

In an industry where supplier-related costs Collaboration efforts between manufacturers
account for approximately 70 percent of COGS, and retailers have proliferated in recent years.
more CPG companies are realizing the need to go Many CPG companies, for example, are
above and beyond standard procurement partnering with retailers to tailor the supply
practices. Sophisticated supplier collaboration chain and planning approach for new products.
and development efforts enable companies to Successful retailer collaboration is neither quick
create value through reduced packaging, nor simple, but the effort pays off. Deeper
ingredient, and processing costs; greater supply-chain collaboration—on optimizing
innovation; and meaningful improvements in processes, sharing data, and building logistics
quality, service, and sustainability. networks—delivers a return equivalent to a
profit uplift of 4 to 6 percent through a
A leading food-and-beverage manufacturer used a combination of increased sales from better
clean-sheet-based negotiation approach— on-shelf availability and reduced costs.
comparing its current suppliers’ costs to best-case
scenarios achieved by the most efficient Quality management
companies—to identify areas in which its Quality costs—both direct (such as warranties
packaging suppliers could substantially reduce and replacements) and indirect (including
costs through leaner production methods. It rework and scrap)—are an often-overlooked pool
worked with its suppliers to set production- of costs that can be turned into ready cash in the
improvement targets, established joint teams to short term and profit-improvement
optimize material specifications, and improved opportunities in the medium term. A
data sharing for timelier and more accurate comprehensive quality-improvement program
forecasts. Combined, these efforts delivered can not only reduce quality costs by 10 to 15

Best-practice companies develop a clear understanding of

consumers’ quality expectations and perceptions.
46 Perspectives on retail and consumer goods Spring 2013

A global CPG company launched an operations trans- before rolling them out more broadly. The second guiding
One CPG
formation program that focused initially on manufacturing principle was to focus on capability building: the company
company’s
and procurement—the areas in which the company matched capabilities to the initiatives and built capabilities
experience initially perceived the greatest opportunities. But strong to fill any gaps. It sequenced the implementation of
transformation results in those areas, along with initiatives in waves, employing “train the trainer” approaches
broader business pressures, compelled the leadership and establishing stringent performance metrics and
team to expand the scope of the transformation to structured performance dialogues. It also built a team of
cross-functional topics such as supply-chain and internal continuous-improvement experts to drive higher and
portfolio management. more sustainable impact and to encourage widespread
changes in mind-sets and behaviors.
Given the scope of change, the company adhered to two
guiding principles. The first was to start small, prove the The results included 300 to 400 basis points margin
solution, and then deploy. For example, when the company improvement, 20 to 30 percent cash savings, and
designed new production-planning and scheduling increased operations capabilities.
processes and tools, it first piloted them in one country

percent but also spur sales increases of as much customer complaints per million units; a KPI for a
as 5 percent due to greater customer demand for distribution center might be the rate of “perfect”
the new, higher-quality products. (on-time and accurate) deliveries.

Best-practice companies first develop a clear Executing a holistic operations strategy

understanding of consumers’ quality expectations Companies intent on implementing consumer-
and perceptions—for example, through consumer value operations understand that it requires a
surveys, third-party rating systems, analysis of multiyear transformation. They set high
social-media mentions, and focus groups. They aspirations and dedicate their best people to lead
ensure that their quality strategy and targets the change (see sidebar, “One CPG company’s
reflect these expectations when it comes to the experience”). And they make deliberate choices
product concept, the product itself (for example, about their operating model and IT, both of which
its trustworthiness or health benefits), and the are critical to success.
shopping and service experiences. They then
translate these quality targets into metrics and Many CPG companies have moved from country-
key performance indicators (KPIs) for each specific to regional—or, in some cases, global—
functional department. One KPI for a operating models to capture economies of scale
manufacturing plant might be the number of and deploy more highly skilled talent. However, in
 Consumer-value operations: An integrated approach to operational excellence 47

so doing they limit their flexibility to meet local tailor their IT solutions accordingly. They must
demand requirements, which is essential to establish governance bodies encompassing IT as
support growth in emerging markets. Companies well as business units, and these governance
that strike the right balance between operating- bodies should determine IT-enablement priorities,
model centralization and flexibility make choices firmly rejecting IT-related requests that don’t
based on business characteristics, differentiating align with the strategy. They must also develop a
as needed among markets. 4 They ensure business-driven (not IT-driven) road map that
alignment between the operating model and the delivers quick wins while ensuring that personnel
commercial model by instituting cross-functional are trained in new ways of working.
processes with joint accountability, especially
with respect to sales and operations planning,
financial planning, new-product introduction,
capital-expenditure strategy, and product- A transformational operations effort can begin
portfolio management. with an objective, fact-based maturity
assessment, in which the company compares its
IT is another crucial enabler of consumer-value current processes to best practices in each
operations. Most CPG companies make major element of consumer-value operations. This
investments in enterprise-resource-planning and assessment should include an analysis of key
supply-chain-management systems to support the gaps and potential roadblocks, as well as a
analytics, integrated information flows, and data quantification of the opportunity. Such an
harmonization required to deliver on operations exercise—if it takes into account the perspectives
transformation. But such systems won’t of stakeholders across functions and regions—
4See Martin Dewhurst,
automatically yield results. To capture the can energize and motivate the entire
Jonathan Harris, and Suzanne
Heywood, “The global anticipated value through IT capabilities, leaders organization, making it an important first step in
company’s challenge,” must define their operations strategy, operating the journey toward operational excellence.
mckinseyquarterly.com, June
2012. model, and sources of value up front, and then

Søren Fritzen is a director in McKinsey’s Copenhagen office, Deepak Mishra is a principal in the London office, and
Frank Sänger is a principal in the Cologne office. Copyright © 2013 McKinsey & Company. All rights reserved.