Effective supply chain management in the drinks sector is dependent upon visibility and control of all aspects, from crop to glass
Drinks companies have a history of being manufacturing focused, but in today’s world, the rules have changed. The growth of developing markets is driving the strengthening of local distribution channels and the opportunity to globalise local brands to international ones. At the same time, a rise in demand driven innovation has led to a growing product portfolio, both in terms of brands and presentation formats.
Supply chains need to be responsive and profitable – whilst ensuring that first rate customer service remains unchanged. Success depends on having aligned people, visible processes and optimised systems, underpinned by productive and flexible relationships with suppliers who share the urge to improve and grow.
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Crimson & Co is pleased to announce Director Crispin Mair’s blog on drinks companies in Supply Management online.
‘Drinks companies are losing competitive advantage as they obsess about production assets and don’t pay enough attention to managing suppliers and their routes to market,’ says Crispin.
‘Competition within the drinks business is vast, and fluctuating economies and a rise in demand driven by innovation has led to huge shifts in customer bases and product portfolios. It’s a complex headache for supply chain leaders, who are already struggling with bandwidth.
‘Those in the drinks sector are making life more difficult for themselves, simply because they are focusing on the wrong end of the supply chain. In drinks, there is often an obsession with manufacturing but actually production is one area that the sector usually has under control with sharp, robust processes in place,’ says Crispin.
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Director Crispin Mair says that as businesses expand more into emerging markets they need to consider how their supply chain will cope in an article in the October issue of Real Business.
‘Supporting emerging market growth is a key consideration for consumer goods companies today, and although many claim to be, most are actually not doing nearly enough to prime their supply chains to support this part of their growth strategy,’ says Crispin.
‘Although many say it is a major part of their focus, the reality is that supply chain directors don’t spend enough time thinking about distribution from the factory gate to the end customer. If you really wanted to challenge them you could ask ‘Can you describe, with some acceptable level of accuracy, how many distributors with stock holding points there are between your factory and the end customer in the deepest, darkest part of China?’ That’s really how they need to think about it these days.
The last ten years have been spent espousing the end-to-end supply chain, from the customer all the way back to the supplier. Nowadays the spotlight is shining brightly on the customer distribution channels within this whole end-to-end view, especially in emerging markets.’
Crimson & Co is pleased to announce Head of FMCG, Nick Miller’s latest column in FMCG News.
One of the biggest stories within the FMCG market of the last 20 years has been mergers and acquisitions, and large organisations getting even larger, creating ‘Global Giants’. US and European companies have dominated this growth, as seen with BAT, Diageo, Coca Cola, Unilever, P&G and Nestle to name but a few. This has, undoubtedly, driven great benefits and success for these companies, leading to significant growth, cost reduction and valuation rises. But how long is this set to last?
The likes of BAT and Diageo have surpassed FTSE averages by enormous margins over the past five to ten years, which in turn has meant great returns to shareholders. They have also demonstrated how their scale can be leveraged through branding and marketing to enable expansion into important emerging markets, and used to benefit every aspect of the business. Supply chain benefits have also been significant, especially in non-perishable products such as tobacco, personal care and drinks. For example, manufacturing can be rationalised, purchasing power can be used to squeeze suppliers and scale used to drive down costs all along the supply chain.
However, 2013 figures would suggest that growth through M&As is flagging – many of these ‘giants’ showed indifferent performance last year, below general stock market growth. Many of the rationalisation benefits have already been banked, and competing in developing markets is proving tough. Competition is coming from different types of companies.
Regional players based in developing countries have been a particular success story. They are venturing outside their home markets and skilfully leveraging their favourable cost positions, and proximity to a rapidly expanding customer base, together with emerging-market know-how. These factors have outweighed the business models the ‘giants’ are using, flexing global scale. As a result, their sales growth in emerging markets (19 per cent CAGR in the 2009–12 period) far exceeds that of US-based CPG companies (5 per cent).
Similarly, smaller UK companies have also done well in 2013 – Irish based food company, Greencore Group and British dairy products company, Dairy Crest being examples. As the ‘giants’ have stagnated with the challenges of competing globally, the successful mid-size companies are growing fast in specific sectors. Greencore has focused on convenience foods in the UK and US, and carried out targeted acquisitions to strengthen its position. The market has recognised the strength of this position and the value of this focused expertise.
We can therefore deduce that, often, focus and expertise in a specific sector within smaller companies will trump scale. Equally, those who can leverage their lower cost base and locations to compete with international brands will outperform – regional companies in the developing world have a strong starting point here.
The FMCG ‘giants’ are no longer the sure bet they have been. In order to maintain their status and continue their growth in sales and profits, they need to look at a number of processes. They must firstly continue to drive efficiency in execution, levering their scale to drive out cost whilst staying nimble. They must establish a lower cost base through moving functions such as R&D to low cost locations. Finally they must develop a core expertise in entering new markets; this requires an operating model template that is flexible, scalable and can be localised.
Through evolving markets and business processes, and enabling and affordable technologies, the ‘big players’ now have very real competition from both medium and small organisations. Scale can still be leveraged to a certain extent to achieve competitive advantage, but the gap is closing and the advantages are becoming less so. Organisations must plan for the future, and for changing markets, with a business model that remains competitive against new threats.