Fourth Cut Cpg

8/3/2019 Fourth Cut Cpg

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Consumer Packaged Goods Industry (CPG)

Domain Competency Group


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Introduction to Consumer Packaged Goods

Agenda

Introduction to Consumer packaged Goods Industry

What is a Consumer Packaged Good (CPG)

Categories in CPG industry

What is a CPG Company?

Organization Structure of a CPG Company

The Value Chain The Players

Supplier

CPG Company

CPG Manufacturer

Warehouse/Distribution Center

Distributor

Retailer

Consumer


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Agenda .. Contd.

Key Business Processes in CPG Company

Planning

Buying & Sourcing

Manufacturing

Logistics and Distribution

Sales and Order ManagementMarketing Management

Customer management

Information Technology in CPG Industry

Global Data Synchronization

RFID

Regulatory Compliance

Security


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Introduction To CPG

What is a Consumer Packaged Good

Consumables like food products, beverages, home & personal care, tobacco etc. whichhave a short life span and get replaced frequently.

Market Size

Global market size of $ 1,500 Billion


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Consumer Packaged Goods Industry

Food & Beverages Home Care Personal Care

Makers of generalhousehold items, OTCdrugs, nutritionalsupplements, pet foods

Key Players: Procter &Gamble, Unilever,

Reckitt Benckiser

Makers of personalhygiene, beauty care,baby care products

Key Players:Unilever, Procter &Gamble

Makers of food products,beverages, dry coffees,teas and fruit smoothies

Key Players: Nestle,Kraft Foods, Coca-Cola,

Pepsi

CPG Categories


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Food & Beverage Category - CPG

Dinner Solutions

Fz Dinners/Entrees, Natural Cheese, Soup, Rfg Salad/Coleslaw, Fz Poultry, Fz Pizza, Vegetables, Dry Packed Dinners, Fz Seafood, Fz Plain

Vegetables

Beverages

Carbonated Beverages, Milk, Beer/Ale/Alcoholic Cider, Bottled Juices, Rfg Juices/Drinks, Wine, Spirits/Liquor, Coffee, Bottled Water,Creams/Creamers

Sweet & Dessert

Chocolate Candy, Ice-cream/Sherbet, Cookies, Non-Chocolate candy, Snack bars/Granola bars, Fz Novelties, Canned/Bottled Fruit, BakerySnacks, Gelatin/Pudding Mixes, Fz Desserts/Toppings

Ingredients

Fresh Eggs, Dough/Biscuit Dough, Baking Mixes, Salad Dressings, Spices/Seasonings, Baking Needs, Margarine/Spreads/Butter Blends,Butter, Sugar, Mayonnaise

Breakfast Solutions

Cold Cereals, Breakfast Meats, Yogurt, pastry/Doughnuts, Fz Breakfast Foods, Hot cereal, Toaster Pastries/tarts, EnglishMuffins, pancakeMixes,

Lunch Solutions

Freash Bread/Rolls, Luncheon Meats, Processed Cheese, Frankfurters, Peanut Butter, canned Meat, Cream Cheese/Cream Cheese Spread,Lunches-Rfg, Pickles/Relish- Rfg

Salty Snacks

Crackers, Snack Nuts/Seeds/Corn Nuts, Popcorn/Popcorn Oil, Rice/Popcorn cakes

Baby Foods

Baby Formula/Electrolytes, Baby Food, Baby Diapers


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Food & Beverage Products

Food Products Beverages

CarbonatedDinner Solutions

Sweet and Desserts Non-Carbonated

PackagedWater

Alcoholic Drinks

Ingredients

Breakfast Solutions

Lunch Solutions

Salty Snacks


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Home Care Products

House Care

Toilet Tissue, Laundry detergent, Household Cleaner, Paper Towels, Food & TrashBags, Facial Tissue, Dish Detergent, Light bulbs, cups & plates, CleaningTools/mops/brooms

Pet Care

Dog Food, Cat Food, Pet Supplies, Cat/Dog Litter

General Merchandise

Batteries/Kitchen Storage, Photography Studies, Socks, Blank Audio/Video Media,Office Products, Lawn Fritzr, Childrens Art Supplies, Writing Instruments,Pantyhose/Nylons


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Home Care Products

House Care Pet Care General Merchandise

Laundry Care

Dishwashing Products

Surface Care

Chlorine Bleach

Toilet care

Polishes

Air Fresheners

Insecticides

Dog Food

Cat Food


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Home Care Products - Category Sizes

45000

42543

12939

8829

5423

4779

3013

2946

2798

0 10000 20000 30000 40000 50000

Pet Care

Laundry Care

Surface Care

Dishwashing ProductsAir Freshners

Insecticides

Chlorine Bleach

Polishes

Toilet Care

Cate

gory

GlobalMarket Size (in $ Mn)


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Personal Care Products

Personal Hygiene

Soap, Toothpaste, Toothbrush/Dental accessories/Sanitary napkins, Shampoos,Deodorants, Razors, Hand & Body Lotion, Hair Conditioners, MouthWash

Beauty Care

Skin Care, Hair Coloring, Facial Cosmetics, Fragrances, nail Cosmetics, Hair styling gel,Lip & Eye Cosmetics, Hair Spray, Hair accessories, shaving lotions

Baby Care

Diapers, Baby Accessories, Moist Towelettes, Baby Needs


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Personal Care Products

PersonalHygiene

Beauty Care Baby Care

Baby Care

Fragrances

Color Cosmetics

Hair Care

Bath and Shower

Oral Hygiene

Deodorants

Mens Grooming

Skin Care

Depilatories

Sun Care


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Personal Care Products -Category Sizes

2,559

3,476

4,302

9,242

16,221

20,335

20,701

22,408

28,055

38,481

42,491

0 10,000 20,000 30,000 40,000 50,000

Depilatories

Baby Care

Sun Care

Deodorants

Men's Grooming

Oral Hygeine

Bath& Shower

Fragrances

Color Cosmetics

Skin Care

Hair care

Category

GlobalMarket Size (in $Mn)


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CPG Company

The owner of a consumer packaged good trademark is a CPG

company.Th

ey are also called as brand owners.A CPG Company is a Marketer of the CPG product

It creates brands by investing in advertising and communication of theproduct

It decides the characteristics of a CPG product like pricing and promotions.

A CPG Company may or may not manufacture and/or distribute the

product for final consumption. A CPG company defines the manufacturing processes and product quality

parameters which effect the composition of the product.

It sets policies and guidelines for organization activities and controls & monitorthe manufacturing plant

Hence irrespective of it manufacturing a product CPG company keeps a verytight tab on production and distribution processes


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Key Activities Undertaken By A CPG Company

Marketing and advertising The CPG product

Launching new products and innovating and developing on the existingproducts

Close to 30000 new products in CPG were launched last year

Key account management

Specific focus on handling large accounts like Wal-Mart, K-Mart etc. A greater sense ofcollaboration happens in terms of order management, forecasting and promotionsmanagement.

Managing prices and promotions

Taking pricing decisions suitable to local environment and managing trade/consumerpromotions

Supply Chain Management

Managing global supply chains to reduce the sourcing costs and better vendormanagement


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CPG Industry - Organizational Structure

Administrative Structure

Executive, Assistant Manager, Regional Manager, General manager, VP,President

Functional Structure

Sales, Marketing, Production, Dispatch, Key Account, Finance, InformationSystems, Human Resources, Purchase

Geographical Structure

APAC, Europe, North America, Africa


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Organizational Structure - Illustrative

Vice President

Region

Vice PresidentHuman Resources

Vice President

Finance

Vice PresidentMarketing

Vice President

Production

Vice PresidentLogistics/Supply Chain

Executive

Systems

Manager

Systems

Executive

Finance

Manager

Finance

Executive

Human Resources

Manager

Human Resources

Executive

Sales

Manager

Sales

Executive

Marketing

Manager

Marketing

General Manager

Unit

Executive

Production

Manager

Production

Executive

Logistics/Supply Chain

Manager


General Manager

Human Resources

General Manager

Marketing

General Manager

Finance

General Manager

Production

General Manager

Systems

Vice PresidentSystems

General manager


President & CEO


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CPG INDUSTRY VALUE CHAIN THE PLAYERS

Supplier

Warehouse/ Distribution

Center

Distributor

Retail Store

Consumer

CPG

Manufacturer

Retail Distribution Center

Retailer

3

1

4

5Direct Store Delivery

Distribution Center Delivery

2

2(b)

CPG Company

2(a)

4(a)

4(b)


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SUPPLIER

Supplier is a provider of goods or services to the CPG

Company.

Suppliers can be classified on the basis of cost and how the goods orservices integrate with the end product

Supplier Classification

Key performance metrics

Cost of Supply

Reduced Lead Times

Service QualityPromotions etc.


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Supplier Classification

Materials and Parts

Short lasting goods that facilitate developing ormanaging finished product

Clickh

ere for examples

Long lasting goods which facilitate developing ormanaging the finished products

Click here for examples

Goods that are identifiable parts of the finishedproduct


Capital Items

Supplies

Business Services

Services like advisory/maintenance services whichfacilitate developing or managing finished product


Classification on the basis ofhow the goods or services enters the industrial

production process and their relative costing


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Materials and Parts

Two types of materials and parts

Raw Materials

Sugar, wheat, cotton

Manufactured Material and Parts

Cartons, Packaging materials


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Capital Items

Installations

Factories, offices

Equipment

Handtools, forklifts and other tools and prtable factory equipment


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Supplies

Operating Supplies

Lubricants, coal, oil, writing paper, pens etc.

Maintenance and repair items

Paint, nails, brooms


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Business Services

Maintenance and repair services

Window cleaning, type-writer repair

Business advisory services

Advertising agency, market research agency, legal services, management consultingservices


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CPG Manufacturer

A CPG Manufacturer is the owner of a unit producing a CPG product

CPG Manufacturers Can Be Of2 types depending on the ownership of themanufacturing facility

Company Owned Manufacturing

Here the CPG Company (Brand Owner) owns the plant

Third Party/Franchisee Owned Manufacturing

The franchisee produces the product as per the norms of the CPG player quantity, quality, price

Pays a franchisee fees to the CPG player which normally is directly proportional to the sales

Very closely collaborates with the CPG Player

E.g. SAPCO does bottling operations for The Coca-Cola Company

Ownership patterns are governed by a variety of factors

Maturity of product in the market

Investment requirements

Control of trade secrets


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Key Processes in CPG Manufacturing

Manufacturing

Transportation Logistics

Procurement


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Distributor

Who is a distributor?

A buying, warehousing and distributing organization that delivers merchandise to retailstores in their own trucks.

Distributor Operations

Unloading goods from supplier

Palletizing and storing goods maintaining FIFO

Order Collection by Electronic media/phone/salesman

Organizing orders according to the beat plan

Loading vehicles with the relevant orders

Supplying goods to customer

Ordering goods from the supplier


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Distributor Operations

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Goods FromCompanyWarehouse

DistributorWarehouse

Route Truck 1

Route Truck 2

Sales and Delivery

Sales and Delivery

Retail Stores

Retail Stores

Loading routetrucks

Collecting OrderDelivery of

goods

Accepting goods fromcompany as per previous

order


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Retailer

A Retailer is a seller of products or services to the consumers for their personal useorhouse-hold use

In a Retail Organization there are two types of entities

Retail Distributor Center

Retail Store

Retail Distribution Center

A centralized procurement and distribution facility which stocks and distributes various SKUs.

Centralized distribution and procurement facilitates tighter inventory control and reduced procurement costs

Retail Store

Point of actual purchase by consumer. Stores and merchandizes various product assortments which are boughtby the consumer

Retail Store Classification

Some CPG product categories sell more via a particular types of stores than others Click here to see data

Key C

h

allengesA

ffecting CPG CompanyReducing Transport and Order Fulfillment time

Ability to collaborate with major key retailers like Wal-Mart using EDI: Adherence to UCCNet/ RFID


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Classification of Retail Stores

Classification based on the type/range/price of products

Supermarkets A supermarket, or grocery, is a store food and drinks and sometimes drugs, clothes and otherhousehold products

that are consumed regularly. A supermarket offers a great variety of products.

Drug Stores

Pharmacies and Drug stores engaged in retailing prescription or nonprescription drugs and medicines. Theseretail a range of prescription and over the counter (OTC) medicines, health and beauty items such as vitaminsupplements, cosmetics and toiletries as well as offering photo processing services.

Club Stores

These stores retail a general line of grocery products along with new merchandise items. The majority of goodssupplied by this industry are purchased by wholesalers and retailers for resale. A smaller share of goods ispurchased by consumers for private use.

Mass Merchandisers

A self-service store displaying and selling different kinds of merchandise at lower overall profit margins than otherretailers.

Dollar Stores

A store selling inexpensive items for one dollar each. It usually sells everything from cleaning supplies to childrenstoys. Most of these products are not branded and have a lower quality compared to products sold in other retailstores.

Super centers

super center is a very large store that combines two formats: a complete grocery store and a complete massmerchandiser store. These formats are combined in the same building with common checkout lanes.


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CONSUMER

A Consumer is a person who consumes/ uses the product or service forhisend use and not for re-selling

CPG Products are

Fast Consumption products: implying regular purchase

Low value products: implying low switching costs for consumer to competitors products

Hence for the CPG company it is essential to have a strong and effective marketingcampaigns to influence the consumer buying and decision making process, so as to

build preference Consumer Decision Making Process

Different consumers have differing needs to buy a product

Needs could be based on tangible/aspiration requirement

Hence it is important for CPG company to segment consumers on the basis of theirneeds and target specific consumer segments with their product offering which isreinforced by their marketing campaigns

Consumer Segmentation


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CONSUMER: THE DECISION MAKING PROCESS

Problem Recognition

Information Search

EvaluatingAlternatives

Post-Purchase Behavior

STAGE INTERVENTION BY CPG PLAYER

Minimize gap between communication

and product benefit/attribute

Media Mix: Print/Television/Radio

Highlighting the value proposition value

communicating the product

Purchase BehaviorMerchandizing and Displaying the

Product


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Consumer Segmentation

The Need

To distinguish one product from the other, selectively target a specific group of people to whom theproduct is most appealing to. The group should be such that it makes economical sense to target itand the company has the expertise to make those features in the product which appeal to the group

Measurable

Substantial

Accessible

Differentiable

Actionable

Classification of consumer can be

Geographic

Parameters: Region, population size, density, climate

Demographic:

Parameters: Age/Family Size/Income/Gender/Occupation/education/Social Class

Psych

ographic

Parameters: Lifestyle/Personality/Value

Behavioral:

Parameters: Occasions/Benefits/Usage Rate/Attitude toward product


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Key Business Processes of CPG Company

Planning

Buying and Sourcing

Manufacturing Management

Logistics and Distribution Management

Sales and Order Management

Marketing Management

Supplier CPG Company Retailer Consumer DistributorVALUE CHAINPLAYERS

KEY BUSINESS

PROCESSES


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Functional Value Chain

PlanningBuying andSourcing

Manufacturing

Management

Logisticsand

DistributionManagemen

t

Sales andOrder

Management

MarketingManagemen

t

DemandForecasting

FinancialPlanning

SalesPlanning

MarketingPlan

ProductionPlan

Logistics &ProcurementPlan

What toBuy?

How Muchto Buy?

When toBuy?

How ToBuy?

FromWhom ToBuy?

ProductionScheduling

Manufacturing OrderExecution

Productionreportingandexecution

Inventorymanagement

PurchaseOrderManagement

Transportation

Management

WarehouseManagement

Distributionmanagement

TradeCustomer

Services

Trade ordermanagement

Sales forcesupport andautomation

Marketresearch

BrandManagement

AdvertisingandConsumerActivations

TradePromotionManagement


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Planning

Objective

To estimate and plan forresources correctly so as to satisfy the consumer demand inthe most cost effective manner

Meet sales expectations

Avoid out-of-stock conditions

Guard against overstock

Keep inventory investment at acceptable level

ManpowerContract LaborCompany Employees

SalesFinanceLogisticsMarketingProduction

SupplierSupplier of Goods

Machinery

Raw MaterialsSupplier of ServicesTransporterAdvertising AgencyMedia

CustomersKey RetailersDistributors

BanksLong Term vs ShortTerm Loans

Investment of ExcessCash

RESOURCES


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Planning Process - Components

Demand Forecasting

Financial Plan

Sales Plan

Marketing Plan

Production Plan

Logistics &Procurement Plan

Forecasting Yearly, Monthly, Weekly demand SKU-wiseDoing a rolling estimates of demands quarterly/monthly/weekly

Product Life Cycle and Seasonality Analysis

Capital ExpenditureNon-Capital Expenditure

Sales force staffing plan, Distribution plan, retail management

plan, Budgets for trade schemes

Communication mix, advertising campaigns, consumeractivations, packaging innovations, product launches

Scheduling batch runs

Labor SchedulingMaintenance Plan

Sourcing of raw materials, production scheduling, logistics andtransportation plan, Contract laborhandling


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Buying & Sourcing


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Buying and Sourcing

Objective

To source the materials and services used in product manufacturing in a cost effectiveand organized manner

Increase Procurement Efficiency

Material Cost Reduction

Inventory Holding Cost Reduction

Minimizing Raw Material Stock-Outs Efficient Planning and Forecasting

Vendor Collaboration

Ability to Source Urgent Requirements

Buying and sourcing is all of the processes involved in requesting, ordering,auditing, and paying for goods and services.


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Steps In Buying and Sourcing Process

1. Create Internal Requisition

2. Approval Process & Purchase Order Creation

3. Purchase Order Delivery to Suppliers

4. Bidding Process: Specifications from Suppliers

5. Supplier Selection & Confirmation

6. Advance Shipment Notice to CPG Manufacturer

7. Goods & Invoice receipt and matc

hing against t

he Purc

hase Order

8. Payment Based On Terms Of Credit

9. Payment receipt confirmation by supplier


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Increasing Sourcing Efficiency : Material Cost Reduction

Before After

Revenue $1000 M $1000 M

COGS-Material $600M $570M

Labor O/H $200M $200M

Gross Margin $200M $230M

Operating Expenses $100M $100M

N.I.B.T. $100M $130M

A 5% reduction in material cost increases net profit by 30%

Material Costs Reduction Can Happen Via The Following

Bidding Process and Global Sourcing

Closer Vendor Collaboration


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Increasing Sourcing Efficiency: Reduction of Raw Material Inventory

Holding Costs

Raw Material Inventory Holding Cost

Cost of investment in the goods which are used in the production process Typically is the interest paid on the value of raw material goods held in the warehouse for

production

Interest typically is the rate of return the business earns

Inventory Holding Cost = Value of Inventory * Rate of return earned by the business

E.g. (Illustrative)

Inventory value = $100M

ROI of CPG Manufacturer = 12%

Inventory holding cost = Inventory value*ROI = $100M*12% = $12 M

Inventory holding cost can be reduced by

Negotiating to reduce material costs

Reducing the stock levels by better collaboration with suppliers (reducing supplier lead times)


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Questions addressed by Buying and Sourcing Process

A Buying and Sourcing Process Addresses the five key questions

What to buy?

How much to buy?

When to buy?

From whom to buy?

How to buy?


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What To Buy?

Direct Materials

Ingredients

Packaging Materials

Indirect Materials

Office Supplies

Utilities

Spare Parts


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How MuchTo Buy?

Information Interaction

OrderQuantity Determination

Methods

Number of Days Stock

Economic Order Quantity

Supplier Information

Supply Lead TimeFreight Costs

Demand InformationProductionSalesCustomers

Min/Max Quantity


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How MuchTo Buy Information Interaction

XYZ

Company

Supplier

Retailer

Distributor

Consumer

Procurement

Manufacturing

Warehousing &

Logistics

Marketing

EXTERNAL ENTITIES INTERNAL ENTITIES

7. Lead Time,Quality, Quantity,

Price, PaymentTerms

2. Product wise

Sales Data

1. Product wiseSales Data

3. Changing Trends,Emergence of aproduct category

6. ProductionSchedule, Raw

MaterialRequirement

4. Product demandestimates factored for

promotions, NewLaunches

5. InventoryFinished Goods& Raw Materials


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How MuchTo Buy? - Number ofDays Stock Method

Determines the number of days stock the manufacturer will order over andabove the normal safety stock

The number of days stock is basically determined by the suppliers lead timewhich could vary from month to month

Month

Planned

Production

Requirement

Number of

Months Stock

Ratio

Planned

B.O.M.

Stock

Planned

E.O.M.

Stock

Planned

Order

E.O.M.

Jan 10000 2 20000 37500 27500

Feb 15000 2.5 37500 60000 37500

March 20000 3 60000 120000 80000

April 30000 4 120000 120000 30000

May 30000 4 120000 75000 -15000

June 25000 3 75000 90000 40000

B.O.M. = Beginning Of Month, E.O.M. = End Of Month


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How MuchTo Buy? - Economic OrderQuantity

WHERE:

D = ANNUALDEMAND, S = COSTTO PLACE ONE ORDER

I = % CARRYING COST/UNIT, C = COST OF ONE UNIT

Economic Order

Quantity=


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How MuchTo Buy? - Min/Max Quantity Method

Order quantity =

maximum quantity of SKU in stock

minimum quantity of SKU in stock

Maximum quantity depends on factors like

Storage space availability: E.g. for ice-cream products one needs a cold storage whichwill be very limited in the warehouse

Financial resources available for investing in stock

Minimum quantity depends on

Safety stock to cover for demand fluctuations

Supplier lead times


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When To Buy?

Periodic Replenishment Reorder Point Purchase Forward Buy

Variable order quantity butfixed time interval ordering

A convenientreplenishment method in

which the warehouseknows exactly when it will

receive goods.

With advance planning thewarehouse can arrangeand schedule transport

logistics and manpower in

advance thereby derivingcost benefits

Click to see graph

Fixed order quantity butvariable time interval

Ordering triggered wheninventory falls below a

specified norm called thereorder point

Helps to minimize and planinventory holding costs,

especially for items whichare costly and are not fast

consumption items

Click to see graph

Ordering independent oftime and quantity

Bulk purchase especiallywhen there are discounts

offered

The item may be usedseveral months after thepurchase but results in

substantial material costsreduction


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When To Order? - Periodic Replenishment

Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 Day 9 Day 10

Inve

ntory

Fixed Replenishment period

Time Period

Day 11 Day 12

M

aximumInventory


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When To Order? - Reorder Point


Inventor

y

ReorderPoint

Fixed

OrderSize

Safety

Stock

M

aximumInventoryLevel

Time Period


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From Whom To Buy?

Terms Of Sale Vendor Performance

Basic Cost

Discount

Credit Limit

Number of Days Credit

Material Quality

Lead Time

Reliability

Value Added Services


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How To Buy?


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Case Study - Procurement Process atA Chocolate Manufacturer

(hypothetical case)

Situation

A plant, manufacturing milk chocolate

Ingredients: For 10 gm Milk Chocolate Bar production, Needed are the following

Sugar: 2gms

Milk: 20ml

Cocoa Beans: 2gms

Wrapping Foil: 10cms

Pack Cover: 1

Carton: 0.01 (1 carton for a pack of 100, 10gms milk chocolate)

Production Run: 100,000, 10gm milk chocolate (1000 cartons) scheduled after 10 days

Raw Material Inventory

Sugar: 200 kg

Milk: 100ltrs

Cocoa Beans: 150kg Wrapping Foil: 1000mtrs

Pack Covers: 5000

Cartons: 500 cartons


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Case Study (Contd.)

Prescribed Raw Material Inventory (depending on supplier lead times)

Sugar: 100kg

Milk: 1 20ltrs

Cocoa Beans: 150kg

Wrapping Foil: 800mtrs

Pack Covers: 3000

Cartons: 600 cartons

Lead Time (Time Taken By Supplier)

Sugar: 4 days

Milk: 2 days

Cocoa Beans: 6 days

Wrapping Foil: 10 days

Pack Covers: 9 days Cartons: 7 days


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Case Study (Contd.) - WHATTO BUY?

Cocoa Sugar Milk Pack

Covers

Cartons

Milk

Chocolate

Wrapping

Foil


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Case Study (Contd.) - How MuchTo Buy?

For Every Raw Material Calculate The amount consumed in the production run

Sugar : For 1 chocolate need 2gms, for 100000 chocolates need 200 kg sugar

Milk: For 1 chocolate need 20ml, for 100000 chocolates need 2000ltrs Milk

Cocoa Beans: For 1 chocolate need 2gms, for 100000 chocolates need 200 kg cocoa

Wrapping Foil: For 1 chocolate need 10cms, for 100000 chocolates need 10000mtrs foil

Pack Covers: For 1 chocolate need 1 cover, for 100000 chocolates need 10000 covers

Cartons: For 100 chocolates need 1 carton, for 100000 chocolates need 1000 cartons

For Every Raw Material Compute the Order Size By following

Closing Inventory + Amount Consumed OP Inventory = Raw Material Ordered

Sugar: 100kg+200kg-200kg = 100kg Sugar To Be Ordered

Milk: 120ltrs+2000ltrs-100ltrs = 2020 ltrs Milk To Be Ordered

Cocoa Beans: 150kg+200kg-150kg =

200kg Cocoa Beans To Be Ordered

Wrapping Foil: 800mtrs+10000mtrs-1000mtrs = 9800mtrs Foil To Be Ordered

Pack Covers:3000+10000-5000 = 8000 Pack Covers To Be Ordered

Cartons:600+1000-500 = 1100 Cartons To Be Ordered


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Case Study (Contd.) - When To Buy?

Raw Material Will Be Ordered So That The Supply Reaches Just In Time ForProduction So The Latest Ordered Can be Placed Is Equal To Production

Scheduled Date Minus Lead Time


Order300kgSugar

Order

1980ltrs Milk

Order200kgCocoaBeans

Order10200mtrs Foil

Order 12000

pack covers

Order900cartons

Day 11

PRODUCTION

SCHEDULED


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Case Study (Contd.) - From Whom To Buy?

Strategic Suppliers

Suppliers ofWrapping Foil, Pack Covers, Cocoa and CartonsGenerally the requirement is specific to the company, e.g. Nestle Milk ChocolateWrapper Cannot Be Used By Any Other Manufacturer

Commodity Suppliers

Supplies of Sugar and Milk Can Be Sourced Via A Wider Variety Of Supplier As They

Are Easily AvailableGenerally Go With The Lowest Price Suppliers


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Case Study (Contd.) - How To Buy?

Commodities like Milk and Sugar

E-marketplaces where one can place order and have the lowest bid

Strategic Products packing cover and wrapping foil

Collaboration with suppliers

Inventory

Demand Forecasts

Production Schedule

Sales Data

Suppliers could automatically deliver looking at inventory condition or on order whichcould be placed via an EDI or Portal or By Phone/fax


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Manufacturing Management

Objective

To produce the product while minimizing production costsCosts to be minimized can be of various types

Material wastage cost

Plant downtimes

Maintenance costs

Power utilization costs (Power efficiency)


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Manufacturing

Manufacturing is the process of converting raw materials into a finishedgood by means of a large scale industrial operation.

Schematic of a manufacturing process

Illustration of a manufacturing process

Performance Metrics In Manufacturing Process

Reduce wastageIncrease Capacity Utilization of Production Line by reducing downtimes

Minimize product stock-outs


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Manufacturing Process A Schematic

Raw materials

Packagingmaterials

Utilities - Energy

Production Process

FinishedGoods

WasteProducts

Machinery Spares


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Syrup preparation Filling and carbonation Conveying

Quality CheckPalletizing and warehousing

Manufacturing ProcessAt A Beverage Manufacturing Plant


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Performance Metrics In CPG Manufacturing

Key Challenge In Manufacturing

Multiple products/SKUs to be created on one production line

The sequence in which the products are produced determines the efficiency of the line

Use of production scheduling tools

Performance Metrics

ReduceWastage/ Increasing Plant Yield

Plant Yield (in %) = (1- Waste Product/Finished Good)*100

To minimize the wastage of raw materials during the production process. The more number of times the productchange-overhappens on the production line the more raw material wastage happens and hence the plant yielddrops. Hence the essence is to take as long batch runs as possible so as to avoid frequent changeovers. Butlonger batch runs could lead to holding higher inventories and hence higher carrying costs. Hence an optimumneeds to be set.

Increasing Capacity Utilization: Increasing Production Time

Reduce the Changeover Time or Break Down Time or Preventive Maintenance Time. Changeover time is directlycontrollable and can be reduced by proper sequencing of SKUs to be produced. Hence production scheduling isan important.

Reduced Finished Goods Stock-outs

Production scheduling and batch run has to happen in a way which is in sync with the demand. Hence productionscheduling has to be done so that finished goods stock-outs are minimized


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Manufacturing Management Key Components

Inventory Management

Production Reporting andExecution

Production Scheduling

Shop floor practices which are directly related to productionprocesses

Reporting tools which determine plant efficiencies and yields

Production planning and sequencing of different batch runs on

th

e same production line to in a way which

reduces ch

angeovercosts

Manufacturing OrderExecution

Managing optimal inventory levels to take care of thedemand/sales forecasts while reducing inventory holding costs

Purchase OrderManagement

Requisitions for materials raw materials, manufacturedmaterials, spares, equipment etc.Order management of the above categories


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Distribution and Logistics management

Processes involved in making the CPG product reach the retail store shelf

Key Components

Transportation Management

Warehouse Management

Distribution management


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Transportation Management

Transportation is the process of moving goods from one location to another. Themode of moving may be via trucks, railways, ships or by air.

Typically a third party (transporter) is hired by the CPG Company to move its goodsfrom manufacturing plant to a distribution warehouse

Since CPG products are low value per volume items, the transportation costs as apercent of total revenues are higher. Hence transport costs are critical to determiningcost efficiencies

Performance Metrics in Transportation

Transport Cost Minimization

Fleet Utilization

Higher transport fleet utilization is critical to bringing down transport costs as a percent of revenues. To do so non-standard (lessthan truckload) orders need to be clubbed

Reducing the number of miles run by route scheduling

Order clubbing of multiple locations should be done in a manner so that the miles run by the transport vehicle is minimized. This callsfor a proper route planning

Minimizing the Empty Miles

Since the transport truck has to come back to the plant, the critical challenge is utilize the truck on the way back by tying up withsome other company whichhas goods to be hauled to the CPG warehouse location. If not done so the CPG player ends up payingfor empty miles of the truck on the way back.

Reducing damages in transit

Using racks to handle and stack fragile materials in the container


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Warehouse Management

AWarehouse is a storage facility which stocks and supplies the products of the CPGcompany to retailers or distributors

Key Activities in a Warehouse

Performance Metrics in Warehousing and Distribution

Minimizing Material Loss

Prevention of Pilferage and Damage

Handling and stacking fragile products

Specialized storage space e.g. Cold Storage Space For Ice-Creams

Following FIFO (First In First Out) practice to dispatch older products first and then the fresher products

Stock Availability and Inventory Replenishment Process

Accurately tracking inventory information

Reducing Product Stock-Outs By stocking appropriate quantities

Order Fulfillment

Accurately fulfilling the customer orders

Minimizing Distribution Costs

Route Planning of Order Delivery to Increase Freight utilization and reducing the number of miles run for delivery

K A ti iti I A W h


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Key Activities In AWarehouse

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Goods Receipt FromManufacturing Plant

Unloading Goods From Truck Stacking Goods InWarehouse

Receiving OrdersLifting and loading goods todelivery truck

Transporting Goods ToDistributor or Retailer

Di t ib ti M t


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Distribution Management

Objective

To ensure supply of all the SKUs to t

he retail store at t

he lowest cost

Importance ofDistribution in CPG industry

CPG Products are day to day usage products and get consumed very quickly, hence theirreplenishment is very frequent. Hence service efficiencies in distribution is critical to avoid stockouts.

Presence of substitutes makes product stock-out at an outlet a major sales loss opportunity. The

consumer may buy a competitive product leading to sales loss

Distribution in CPG Industry

A CPG company can follow two types of distribution models depending upon the type ofproduct

Warehouse Distribution

Direct Store Delivery

Di t ib ti I CPG I d t


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Distribution In CPG Industry


The CPG product is sent from t

he Company

Wareh

ouse to a Distribution Center (DC) ofa large retailer. The product is then sent from the retailers distribution center to the retailstore.

Schematic of Warehouse Distribution

A retailer may have multiple DCs which may be organized in one of the two ways:

DC containing all SKUs and supplying to a set of retail outlets who take stocks exclusively from it

DC containing some SKUs and supplying to retail outlets who take some SKUs exclusively fromthe DC and other SKUs exclusively from some other DC

W h Di t ib ti


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Walmart DC

Walmart Store1 Walmart Store2

K-Mart DC

K-Mart Store1 K-Mart Store2

7 Eleven DC

7 Eleven Store1 7 Eleven Store2

DC: Distribution Center, A warehouse of a retailer which would stock products from different manufacturerslike CPG, Apparel etc. and supply to stores of the chain


Di t ib ti i CPG I d t Di t St D li i


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Distribution in CPG Industry Direct Store Deliveries

Direct Store Deliveries

Direct Store Delivery is a method of delivering product from CPG ware

house directly tothe retail store bypassing retailer warehouses. The shelf inventory in the retail store is

usually managed by the CPG company/distributor with product check-in done both bythe CPG company/distributor and the retailer

Major CPG categories include

Beverages, Snacks, Baked Goods, Greeting Cards etc.

DSD product characteristics

The deliveries may be handled in two ways

From company warehouse to retail store (2 tier DSD model)

From company warehouse to a distributor to a retail store (3 tier DSD model)

DSD P d t Ch t i ti


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TypeType DescriptionDescription ExamplesExamples

Perishability Shelf life too short to allow product to movethrough warehouse distribution network

Bread/ pastry

Fragility Vulnerable to physical damage products whichmay be significantly damaged if not given physicalprotection afforded by DSD

Cookies/ snacks

DensityExtremes High volume products at the extremes of densitymake it difficult to fully utilize truck space from thewarehouse

Potato chips/ papertowels OR soft drinks/beer

State/ LocalRegulations

Laws regulating the handling and payment ofcertain items can require specialized treatmentsuch as DSD can easily provide

Beer/ alcoholicbeverages

Unique SalesPatterns Complex sales patterns that require purchasing ormerchandising skills not readily available in theretail organization (slow moving items that arenecessary orhigh-impulse items that require storemerchandising support)

Cookware/ hosieryOR soft drinks/cookies/ snacks

DSD Product Characteristics

Source: GMA DirectStore Delivery An ECR Best Practices Report 1995 and Infosys analysis

Two Tier DSD Model


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Two TierDSDModel

Brand Owner is same as the CPG company

Three Tier DSD Model


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Three TierDSDModel

Brand Owner is same as the CPG company

DC shown above is the CPG companys Distribution Center

Warehouse Distribution vs DSD How it adds up for retailers?


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Warehouse Distribution vs DSD - How it adds up for retailers?

Warehouse Distribution Direct Store Deliveries

Nature of Product Medium to long term product life High

ly Perishable, Fragile

Contribution to total retailsales

75% 25%

Contribution to retailersinvoices

25% 75%

Contribution to retailersprofitability

48%5

2%

Advantages To Retailer Economies of scale: Withcentralized procurement can pushfor bulk discounts, better deals aswell as lower overhead costs

Lower safety stock levels needed

leading to lower inventory

Shorter lead times

Savings in Cost ofWarehousing,transportation and shelfreplenishment as all those aretaken care by the CPG player

Replenishment in DSD


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Replenishment in DSD

Depending upon how the replenishment of products happen at the retail storeDSD can be classified into 2 categories

Pre-Sell/ OrderTaking Model:A form of DSD in which order placements take place aday prior to product delivery. Orders are typically generated by distributor salesrepresentatives or initiated by the customer and communicated to distributor by phone orfax or internet. Once processed the order is typically delivered to the sore over a fewdays (typically one) following order placements

Click here for overview of2 tier DSD Pre-Sell

Click here for overview of3 tier DSD Pre-Sell

Route-Sell/ Ready Stock Model:A form of DSD in which the sale and delivery ofproduct is accomplished by the same individual on the same day. The salesman has theproduct in the route truck and replenishes each store based on its immediate need

Click here for the overview of2 Tier DSD Route-Sell

Click here for the overview of3 Tier DSD Route-Sell

Overview of a 2 tier DSD Pre Sell Replenishment Model


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Overview of a 2-tierDSD Pre-Sell Replenishment Model

The following example depicts a simplistic view of a 2-tier,pre-sell DSDmodel.

Information

Flow

Retail Stores

Deliver product

Backdoor check-in

Issue credit

Delivery approval

CPGWarehouse

RouteAssignment

Order Picking

Truck Loading

CPG

ERP

Route Rep

Transport goods

Select product

Store Shelf/

Display

Sales Force

Automation

Assortment Planning

Merchandise Shelf/Displays

Process Returns

Update promotions

Inventory

Transmit Invoice

Create order

Consumer

purchases

product

Route Rep

Day 1 Activities Day 2Activities

Overview of a 3 tier DSD Pre Sell Replenishment Model


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Overview of a 3-tierDSD Pre- Sell Replenishment Model

The following example depicts a simplistic view of a 3-tier,pre-sell DSDmodel.

Retail Stores

Deliver product

Backdoor check-in

Issue credit

Delivery approval

Distributor

Warehouse

Route Assignment

Consolidated storeorders for different

manufacturers

Consolidatedorder picking

Truck Loading

CPG2ERP

Transport goods

Select product

Store Shelf/

Display

Sales Force

Automation

Assortment Planning


Process Returns

Update promotions

InventoryTransmit Invoice

Create order

Consumer

purchases

product

Distributor Rep

Day 1 Activities

Day 2ActivitiesDistributor Rep

Multiple CPGbrands ship to

common

distributor

Distributor

ERP

CPG1

ERP

Information

Flow

Information

Flow

PriorActivities

CPG Warehouse

Overview of a 2-tier DSD Route-Sell Replenishment Model


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Overview of a 2-tierDSD Route-Sell Replenishment Model

The following example depicts a simplistic view of a 2-tier,route-sellDSD model.

Information

Flow

Deliver product

Backdoor check-in

Issue credit

Delivery approval

CPGWarehouse

RouteAssignment

Product Picking

Truck Loading

CPG

ERP

Store Shelf/

Display

Sales Force

Automation

AssortmentPlanning

Process Returns

Update

promotions

Inventory

Create order

Return to truckfor product

Consumer

purchases

product

Route Rep

All Activities in Day 1


Transmit Inventory

Retail

Stores

Route Rep

Transport goods(rolling warehouse)

Pick product from truck

Prior to startofday

Overview of a 3-tier DSD Route Sell Replenishment Model


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Overview of a 3-tierDSD Route Sell Replenishment Model

The following example depicts a simplistic view of a 3-tier,route-sellDSD model.

Deliver product

Backdoor check-in

Issue credit

Delivery approval

Distributor

Warehouse

CPG2ERP

Sales Force

Automation

Distributor Rep

Multiple CPGbrands ship to

common

distributor

Distributor

ERP

CPG1

ERP

Information

Flow

PriorActivities

Store Shelf/

Display

AssortmentPlanning

Process ReturnsUpdatepromotions

Inventory

Create order

Return to truckfor product

Consumer

purchases

product

All Activities in Day 1


Transmit Inventory

Route Assignment

ConsolidatedProduct Picking

Truck Loading

Retail

Stores

Distributor Rep

Transport goods(rolling warehouse)

Pick product from truck

Information

Flow

Prior to startofday

CPG Warehouse

Sales & Order Management


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Sales & OrderManagement

Objective

To ensure proper capturing and execution of order placed by the customer retailer/distributor

CPG industry has only 80% order fulfillment rate. Hence increasingly a problem of deductions inthe bills is faced by CPG companies.

To ensure availability of information to stakeholders in the sales process

Sales staff: Information to track and drive sales efficiencies and to take critical tactical decisionson the field to beat competition

Customers: Information related to orders, promotions and finance


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Creating end-to-end visibility

All parties should have a view of daily operations

Synchronize operations of business units

Coordinate activities of departments to broker better rates with3PL

Model logistics plan based upon the upcoming promotions

Data communication to retailers

Automate business processes

Setting alerts to catch irregularities

Web apps to minimize backhauls

Deploy asset aware technologoes

Use of RFID tags on cases

Investment in least cost fleets route planning

Sales and Order Management - Components


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Sales and OrderManagement - Components

Sales Force Support &Automation

Trade Customer Services

Granular Data Capturing

Data CommunicationBusiness Analytics: MIS Reports

Order Status

Sales ReturnsPromotion communications

Accounts status: receivables vs. payables

Trade OrderManagement

Order sequencing and Inventory allocation strategiesSales Order Invoicing

Returns ManagementClaims Management

Order approval process managementHandling financial transaction



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Objective

To create a consumer pull/preference/liking for the product with an objective ofdistinguishing oneself from competition and to command a premium (value of brand)over the cost price thereby increasing the profit margins


Steps In Marketing Management

Key Marketing Decisions

Price

Product

Promotions

Place

Positioning

Importance of Product Life Cycle in making marketing decisions



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Trade PromotionManagement

Advertising and ConsumerActivation

Market Research &Consumer Intelligence

Defining Target SegmentDefining Value Proposition of The ProductCommunication

Communication Mix: TV/Radio/Print MediaContent of Communication: Value PropositionConsumer promotions

Understand consumer behavior and segment consumers on thebasis of their need

Understand relative strength of the product vis--vis competitionTest marketing new product launches

Brand Development &Management

Managing and designing promotions for retailers/distributorsManaging promotion logistics and tracking the efficacy of theretailer/distributor promotion

Marketing Decisions For CPG Player


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Marketing Decisions For CPG Player

CPG Industry

Characteristics

Low value massconsumption Product

Competitive productshaving similar attributes

Purchases of certainproducts are not planned

Consumer

Behavior

Propensity to try andexperiment other products

Effective Productpositioning to create top

of mind recall

Product availability and

merchandising at the rightplace

Consumer will look forvalue from range of

products

Frequent and innovativeconsumerpromotions

Differentiate Product

attributes from competition

Optimal Pricing

Impulse Driven purchaseesp. in food items

CPG Marketing

Decisions

CPG Marketing Decisions: Positioning the Product


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CPG Marketing Decisions: Positioning the Product

Defining value proposition

Defining the target segment

Defining communication mix and the message to convey the positioning


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CPG Marketing Decisions: Optimal Pricing


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CPG Marketing Decisions: Optimal Pricing

Price linked to the pack size related to consumer need

Price related to product quality

Price Elasticity e.g. salt (giffin goods)

Price= cost+ differential value (in terms of brand value/product)>sronger the brandhigher the premium

CPG Marketing Decisions: Product Attributes


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C G a et g ec s o s oduct tt butes

Name,Quality, features, packaging, ancillary services, warranty

CPG Marketing Decisions: Promotions


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g

Consumer promotions, trade schemes, packaging innovations

Illustration ofMarketing Decisions In The Cola Industry


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g y

Industry Characteristics

CPG Players: Coca-Cola, Pepsi, and small local players specific to district/town

Product Characteristics:

In Summers the product is consumed by the masses to quench their thirst

Product is extremely affordable @ Rs. 5

An extremely impulse driven product, the purchase is not pre-planned

Not a major taste difference between Coca-Cola and Pepsi, but locals taste significantly different

Substitutes also exist in form of juices, lassi, chilled milk

Consumer Behavior

Consumer is open to substitute coke with a pepsi and vice-versa if the product ofhis choice is notavailable or is not served chilled

A consumer can substitute cola for a juice or chilled milk or a lassi to experiment

If the consumption happens on premise consumer will go for a smaller volume pack, for at homeconsumption big packs are preferred

During Under the Crown Schemes the consumers buy/increase the usage of one product in thehope of winning prices

Illustration ofMarketing Imperatives In The Cola Industry


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g p y

COCA-COLA vs PEPSI (Indian Context)

Product Positioning

Coca-Cola Projected As A Family Drink Specifically Targeting Mature People Pepsi Projected As A Youthful & A Rebellious Drink, Specifically Targets Teenagers, Brand Associates with

Cricket

Place

Merchandising: No Difference, both companys provide and merchandise on racks, coolers and run displaypromotions for the retailers

Presence in Image Accounts: Pepsi has a much bigger presence in hotels, tourist spots while Coca-Colabelieves in presence in smaller accounts and opening new accounts and increasing the account base.

Price No major difference in cost to retailer and the selling price though at times there was a coke 600ml priced at Rs.

15 and Pepsi 500ml at Rs. 12.5; coke 2.25ltr at Rs. 43 and pepsi 2ltr at Rs. 40

Product Attributes

Taste: Sweetness: Pepsi is sweeter than Coca-Cola which is sweeter than Thums-Up

Gas Content: ThumsUp has a higher CO2 content than Pepsi whichhas a higher content than coke

Packaging Pepsi has cricketers pictures on its labels of plastic bottle

Coke had 2ltr + 250ml free big PET pack vs Pepsis 2ltr PET pack

Consumer Promotions

Launch of Coca-Cola Mobile pack (500ml+100ml free) led to a loss of Pepsi Market Share

Pepsi Tosss Ka Boss Promotion revolving around the ICC Cricket Tournament

Impact of Product Life Cycle on Marketing Decisions


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p y g

Product Life Cycle (PLC)

The phases through which every product goes through from its inception to itsdiscontinuity/phasing out

The PLC phases are uniquely identifiable depending upon the sales of the product

PLC CHART

Marketing Decisions based on PLC


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Marketing Decisions Based on Product Life Cycle


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g y

Life Cycle StageMarketing

Variable

DeclineMaturityGrowthIntroduction

Positioning:Target Market

Product

Place: DistributionIntensity

Price

Promotion

High-IncomeInnovators

Middle-IncomeAdopters

Mass Market Low-Incomeand Laggards

One Basic

Offering

Some Variety Greater

Variety

Less Variety

Limited orExtensive

MoreRetailers

MoreRetailers

FewerRetailers

Penetration orSkimming

Wide Range Lower Prices Lower Prices

Informative Persuasive Competitive Limited

Information Technology in CPG


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Information technology is a strategic asset for a CPG company. Theindustrys adoption of IThas been markedly slower as compared to othersectors

Global Data Synchronization

The principles of a sound data foundation as a key platform in the industrys efforts togain industrywide efficiencies date back to Efficient Consumer Response (ECR), whichbegan more than a decade ago. Internet and communications technologies haveimproved significantly since these early efforts, and the key components such as registryservices like UCCnet and catalogs/exchanges like Transora have at this point stabilized

somewhat

RFID/RPC

Radio frequency identification (RFID) and its Electronic Product Code (EPC) havereceived significant attention in the past year with the announcements from severalmajor retailers worldwide requiring top suppliers to support this technology at the palletand case level initially. As RFID/EPC goes from interesting research and foundational

standards development to practical implementations, th

e industry will reach

a majorturning point.

RFID/EPC tags can be applied at all levels of packaging from the consumer unit to theshipping case to the pallet.

Fourth Cut Cpg

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