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Breaking the Tradeoffs Among Costs, Inventory, and Service

September 10, 2013 By Aaron Brown , Jeff Gell , Elfrun von Koeller , and Jeff Wray

Working in collaboration with the Grocery Manufacturers of America (GMA) and its membership, The Boston Consulting Group (BCG) conducted extensive benchmarking on topics related to effective supply-chain management. The resulting report, GMA Supply-Chain Benchmarking 2012: Unlocking the Hidden Value of Complexity Management and Collaboration, is based on a survey of 51 CPG manufacturers in the U.S., supplemented by interviews with 65 supply-chain executives. It also incorporates data that BCG gathered by polling 116 attendees at the February 2013 Supply Chain Conference, jointly hosted by the GMA and the FMI, including retailer views. Furthermore, it draws on BCG’s experience working with many of the leading CPG manufacturers and retailers in the U.S.

Since the Grocery Manufacturers Association’s (GMA’s) last supply-chain-logistics benchmarking survey in 2010, manufacturers of consumer packaged goods (CPG) have continued to face challenging economic headwinds. Many have responded by intensifying their focus on cutting costs and optimizing working capital, but this avenue to superior performance will at some point reach its natural end. And while some CPG manufacturers have successfully balanced lower costs with improved service, businesses on average have suffered slight drops in service levels.

Given these factors, it is time to go beyond traditional cost-cutting and find the answer to a different question: How can CPG manufacturers unlock additional value? This report, the eighth in the GMA’s benchmarking series focused on manufacturers’ outbound-supply-chain logistics, points the way forward.

There are still significant opportunities for nearly all companies to improve their supply-chain performance. Our analysis indicates that traditional assumptions regarding tradeoffs among costs, inventory, and service don’t always hold true. We found that higher inventory does not always equate to better service, and scale does not automatically lead to lower costs. (See “Questioning Conventional Wisdom.”) Instead, the winners manage the tradeoff between cost and service by focusing on less utilized, customer-centric levers such as complexity management and collaboration with trading partners.

Questioning Conventional Wisdom

Manufacturers should challenge conventional wisdom, particularly bearing in mind that the data we collected revealed several surprises:

  • There is no consistent observable relationship between cost and service levels. Some companies have managed to balance lower costs with higher levels of service, while others fare poorly at both.
  • There is no direct relationship between scale and costs for outbound logistics. This counterintuitive effect could be driven by a few factors. As organizations grow, the organizational and portfolio complexity typically increases, which can erode the gains from scale. Companies also often grow in ways that do not allow scale to be created in specific functions, such as by expanding into new categories, channels, or locations.
  • Higher inventory levels do not automatically drive higher service levels. In fact, no consistent correlation between inventory and case fill rate is apparent in the data. Just adding inventory to drive service levels is not a silver bullet. Improving service levels requires advanced planning and replenishment systems that allow companies to make sure that the right SKU is in the right location at the right time.

This three-part report builds on the GMA’s 20 years of supply-chain-benchmarking experience and related publications but differs from its predecessors in three key ways:

  • A Focus on Complexity Management and Collaboration. The three-part report provides deep assessments of two major drivers of supply chain value that have yet to be fully utilized by the industry: complexity management and collaboration with trading partners. It analyzes manufacturers’ approaches to these two drivers and identifies key ingredients of strategies that successfully exploit the drivers to unlock their hidden value.
  • A Special Feature on Direct Store Delivery (DSD). In addition to covering warehouse-based supply chains, this report includes a high-level look at DSD, a topic that we began to follow 15 years ago in a report jointly published by the GMA and The Boston Consulting Group (BCG). Survey results from 18 companies that use this go-to-market approach highlight what best-practice performance looks like. Detailed results of the DSD benchmarking survey are available through the GMA’s Direct Store Delivery Committee.
  • A Much Richer Source of Data. The analysis in this report is based on a survey of 51 U.S. CPG manufacturers (33 of them reporting only on warehouse-based supply chains, 13 only on DSD supply chains, and 5 on both), supplemented by interviews with 65 supply-chain executives at the companies. It also incorporates data that BCG gathered by polling 116 attendees at the February 2013 Supply Chain Conference—jointly hosted by the GMA and the Food Marketing Institute—including retailers’ views. Furthermore, it draws upon BCG’s experience working with many of the leading CPG manufacturers and retailers in the U.S. Detailed data can be found in the appendix at the end of the report.

Here, we outline the key findings of our study, primarily focusing on companies using warehouse-based supply chains.

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Breaking the Tradeoffs Among Costs, Inventory, and Service
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