Coca-Cola, Mondelez trim SKUs as CPGs tackle pandemic stresses
With 126 manufacturing facilities and 110 distribution warehouses worldwide, Mondelez has plenty of complexity to work with. But demand spikes and complexity don't always mix.
"Our retailing clients needed us more than ever. They were seeing huge demands for the pantry loading," said CEO Dirk Van de Put at an investor conference in late May. Revenue (excluding currency fluctuations) for the company was up 6.4% year over year in Q1, but "costs to serve" or operating expenses were up too.
Van de Put described the company’s supply chain as "resilient" on a conference call with analysts in late April, but conceded that the abrupt shutdowns around the world added difficulty to sales and distribution, and gross profit margin fell more than three percentage points. His plan to meet the moment was to do less to deliver more.
"We are working on making our business simpler," the CEO said.
Mondelez, Procter & Gamble and Coca-Cola are world-renowned for their immense supply chains — built to consistently deliver some of the most ubiquitous products in the world. They’ve also all made moves to reduce the complexity of their supply chains amid stressors presented by the pandemic.
"We’ve seen an increase in demand in developed markets, and we’ve met it by focusing on the most important SKUs," said Van de Put in late April — calling the reduction "significant" without putting a number on it. During the first quarter, Mondelez reduced its total SKU count in search of greater simplicity.
Coca-Cola CEO James Quincey said in late April the company was "ruthlessly prioritizing to deliver on core SKUs" to drive efficiency in its supply chains and streamline operations for retail customers.
"The 'physics' of supply chains means that by adding SKUs, response times, inventories and performance are all adversely affected."
Simon Croom-Professor of supply chain management, University of San Diego
Procter & Gamble too narrowed production focus on core SKUs to ensure supply flow despite an influx of demand. "We’re discovering daily lower-cost ways of working with fewer resources," said COO and CFO Jon Moeller on an April earnings call.
"The 'physics' of supply chains means that by adding SKUs, response times, inventories, and performance are all adversely affected," Simon Croom, professor of supply chain management at the University of San Diego, told Supply Chain Dive via email.
The business models of major CPG companies are built on supply chain efficiency, but the supply chain behind turning one product — for example, a single soft drink recipe — into multiple SKUs means variation in form factor and packaging materials. Even if the liquid inside six different SKUs of Diet Coke are identical, the various sizes and marketing efforts complicate the supply chain.
"If I reduce the variability, my manufacturing unit cost goes down, because I can buy the same part in a larger volume," Peter Bolstorff, EVP of the Association for Supply Chain Management, told Supply Chain Dive in an interview.
Chopping the long tail
Moeller said efforts to prioritize and focus P&G's supply chain may have lasting effects. "There’s potential for this to result in a cutting of the long tail of inefficient SKUs and brands in our categories," Moeller said.
The "long tail" refers to the end of a list of SKUs, usually sorted by total sales.
"SKU rationalization is something all (CPG) companies always look to do … But in good times, it's not something companies spend too much time on," Suresh Acharya, professor of practice in the University of Maryland's online Master of Science in Business Analytics program, told Supply Chain Dive via email. "The ROI on the long tail (products that interest a few but are offered because of its special appeal) is questionable," said Acharya.
SKU rationalization tactics range from a list sorted by sales volume to in-depth supply chain analysis looking at specific inputs and processes — sometimes with the help of technology.
And while algorithms can assist with these decisions, it’s tough to find tools that can incorporate the entire universe of factors incorporated in SKU review, according to Acharya — factors such as market share, margin and product attributes, among others.
"The ROI on the long tail ... is questionable."
Suresh Acharya - Professor of practice, University of Maryland
When Mattel took a swing at supply chain simplification last year, it sought to cut SKUs while drilling down to the input level after realizing 500 varieties of the color red added more complexity than necessary.
The inclination to cut SKUs can be a sign of an overactive and unfocused supply chain. But many supply chain managers don’t control SKU-count in normal times.
"SKU increases when marketing strategies aim to grow market share. I personally see SKU proliferation decisions as an area in which the supply chain has to be included to avoid the detrimental impact," said Croom.
In May, Mattel CEO Ynon Kreiz reported the company reached a 30% SKU reduction eight months ahead of schedule — contributing to a $92 million cost reduction program.
"This is an important achievement that will allow us to improve the match between demand and supply, optimize manufacturing decisions, improve customer fill rates and capture additional revenue opportunities," he said.
Less to measure, less to manage
Less complexity, via fewer SKUs, can improve efficiency beyond the sourcing of inputs and the manufacturing, packaging and transporting of goods.
A major challenge during the COVID-19 pandemic has been forecasting. When Credit Suisse took a tally at the end of April, half of publicly traded companies had pulled financial guidance for 2020, which include demand-driven revenue estimates, according to the Financial Times.
"There's no way to forecast this," Bolstorff told Supply Chain Dive at the end of March when consumer and institutional stockpiling was the supply chain’s "worst enemy."
"It's that population of laggards that are now just waking up and saying, 'Oh my gosh, I gotta do something or I'm not going to survive.'"
Peter Bolstorff - EVP, Association for Supply Chain Management
Two months later, forecasts are still precarious, Bolstorff said, but simplicity can help make them a worthier pursuit.
"It's a lot easier to forecast one thing than it is 10 things … And of course you can't forecast a pandemic. But now that you're into the pandemic, you can see new demand patterns emerge," Bolstorff said.
There are other ways supply chains are simplifying that could help with planning if not forecasting. CPGs and other makers of frequent stockouts in the age of COVID-19 have removed cross-docks and any extraneous stops between manufacturing and retailers to eliminate the risk of delay. Larger, less frequent deliveries are also simplifying operations, said Croom.
Bolstorff said many of these simplifications have been on the radar or even the to-do list of what he calls "supply chain excellent" companies for some time. But for those just catching on, the learning curve may be steep.
"It's that population of laggards that are now just waking up and saying,'‘Oh my gosh, I gotta do something or I'm not going to survive,'" he said.
Source: Emma Cosgrove at supplychaindive.com (june 2, 2020)
