As growth becomes more challenged, particularly for branded products, we are seeing a renewed emphasis on cost savings in the Food and Fast Moving Consumer Goods (FMCG) industries.
Unfortunately, after years of reliably finding new ideas to deliver the 3-5 percent savings that management has come to expect, the "low hanging fruit" has largely been picked off the trees.
Now that most of the costs have been wrung out of the supply chain, it’s clear that CPG companies need a new way of thinking.
I spent 31 years in R&D at Procter & Gamble and today lead ideation sessions on margin management (among other topics) for large and mid-sized consumer goods companies. What I’ve learned is that supply chain cost savings alone cannot be the answer. As practiced today, it is a game of vanishing returns.
The better approach is to take a holistic view of margin management. Here are the five steps to a winning approach, and surprisingly, supply chain cost savings isn’t even one:
Make margin management an enterprise-wide, multifunctional effort. It should be led by the sector P&L owner and tracked quantitatively with transparent, relevant measures. Progress should be reviewed at each sector leadership team meeting, and benchmarked against specific goals/timing built into the functional leaders' compensation package. This is in contrast with a "cost savings" approach where the technical functions (R&D and Product Supply) have the responsibility to deliver lower product costs.
Balance top-line revenue growth with bottom line growth in operating income. A coordinated effort must be in place to grow volume and reduce costs. The "dial" should not be turned to an extreme where all the savings are used in marketing and temporary price reductions to grow volume while eroding margin; nor can all the savings be taken to the bottom line to increase profit while share declines.
Make innovation a core component of margin management. The way to maintain this share/profit balance is by linking tools to grow the top-line (e.g. pricing, product mix, new product line extensions/adjacencies) that can support higher pricing and margins together with cost savings. That requires coordinated multifunctional input and commitment to the sector project portfolio. It also requires careful attention to the allocation of scarce technical resources between innovation and productivity.
Make margin management part of the culture. Not only must the responsibility for this program be adopted as a core, sector-wide strategy with execution a priority for all functions, but other paradigms must be challenged. For example, a core principle of many cost savings projects is that the consumer must not be able to tell that the product has been changed in a meaningful way. In the past, very sensitive consumer tools (e.g. paired comparison blind use tests) have been employed to qualify the lower cost version of the product for market. It’s important to rethink these tests, as real world consumers don’t evaluate products blind, but in the context of the brand, the price, the claims and past experiences.
Infuse external thinking and fresh perspectives. With any difficult problem, it helps to get outside perspectives – someone from different functions, companies, and even industries to bring breakthrough ideas. In today’s free-agent workforce, where many very experienced experts work on their own or through companies like YourEncore, accessing external thinking has never been easier. innFusion℠, a turnkey solution from YourEncore, brings highly-experienced Experts to clients, offering an effective external perspective and productive solutions to critical business challenges.
Completing an effective and lasting cost-saving strategy begins with the mindset. Taking a holistic view at the cost-saving strategy is the best way to begin taking steps towards a winning approach. Click here to read more about how different strategies like activity based costing can improve R&D productivity.
About Marc Dahlgren, Ph.D. – Dr. Dahlgren spent 31 years in R&D at Procter & Gamble and is now a leading YourEncore expert in technical problem solving, product development, and margin management. Equal parts technologist and facilitator, Marc is the process owner for innFusionSM, a facilitated problem-solving methodology that helps companies tackle difficult technical challenges quickly.