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How CPG Companies Can Overcome Supply Chain ‘Inertia’

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Consumer packaged goods (CPG) companies often depend on acquisitions of smaller, faster-growing rivals to maintain their own growth. While that is a time-tested way to increase market share, these companies can find the supply chains they have inherited are complex and inefficient.

“We find that most companies’ supply chain operating models have evolved largely through inertia — a series of well-intended but isolated decisions — rather than through a deliberate, systematic process to determine whether the chosen model is right for the organization’s needs,” McKinsey & Co. said this week.

To address supply chain flexibility concerns, consumer businesses tend to take one of three different approaches. In a new article, McKinsey noted that no single model will work for every company — “different industry dynamics and elements of execution will invariably lead to different answers, with varying levels of centralization,” it said.

The models are:

  • A centralized operating model that integrates planning, procurement, manufacturing and logistics across both existing business units and new acquisitions. Mckinsey said a global foods manufacturer realized “hundreds of millions in cost savings, despite a mature business.” with this approach.
  • Companies that sell very different products to different end-markets might prefer a decentralized operating model, where they create distinct supply chain networks for each business unit or region. “At a major home- and personal-products company, a decentralized operating model enables unit leaders to respond more rapidly to different consumer and channel needs across geographies,” McKinsey said. “Global heads of manufacturing, logistics and planning ensure overall strategies are rolled out and best practices are shared across regions.”
  • With a hybrid operating model, certain aspects of the operating model are centrally controlled while others are handled by individual business units. An example: “Scale considerations and diverse product types have led one CPG manufacturer to encourage separate manufacturing capabilities by business unit. But the company centralizes logistics, maximizing distribution efficiencies for a customer base that cuts across business units. This setup has enabled the company to achieve consistent cost improvements every year.”

When debating which model works best for your business, McKinsey recommended that companies “should consider not only higher-level strategic objectives but also granular, bottom-up design considerations — and the interim steps to deploy them on the ground.”

Of course, “Not every company needs a complete redesign of its operating model,” McKinsey concluded. “While an initial assessment should be thorough, the changes to be implemented can vary from minor tweaks to a full-scale transformation. The timing may vary as well, depending on leaders’ estimates of the organization’s capacity to absorb change. But the ‘next normal’ presents an ideal moment to apply a critical lens to the operating model and determine what will matter most in the next round of business competition.”

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