Last year, in collaboration with the World Economic Forum, we identified four durable shifts emerging from the unprecedented disruptions sweeping the world, with deep implications in manufacturing and supply chain.
Agility and customer centricity. Volatility in markets requires the ability to respond quickly. To meet the demand volatility in a cost-efficient way, companies are boosting network agility through stronger connectivity and supply-chain digitization.
Speed and productivity. Given the financial impact of these global disruptions on ordinary life, customers are focused more on value than ever. Delivering this value requires next-generation network productivity, which hinges on shifting to digital production systems.
Eco-efficiency. Consumers increasingly favor companies that commit to environmental responsibility, including sustainable sourcing of materials. Sustainability is now an operational advantage: increasingly, good ecological stewardship makes good business sense.
Supply-chain resilience. All the eggs cannot be in one basket, or even just a few. To survive critical disruptions, companies need the resilience of differentiated omnichannel solutions, which depend on customer connectivity through digitization and automation.
Digital and analytics (DnA) transformation isn’t merely a benchmark for achieving frontrunner status; indeed, it is nothing less than a matter of survival in a competitive industrial market. If companies want to survive—let alone thrive—digital transformation is no longer optional. It is vital. In this article, we outline the steps consumer-packaged-goods companies should follow for a successful DnA transformation.
The challenge of CPG transformations
Manufacturing companies from different industries can have very different DnA-transformation journeys. Among the most significant factors affecting the challenge of a company-wide DnA transformation is the degree to which the production network is fragmented. The greater the number of sites, the more fragmented the production schema will typically be. Moreover, CPG products often tend to have a low value density.
This combination of widely fragmented production networks consisting of many smaller sites, each producing relatively low-value-density products (think, for example, toilet paper, dishwasher detergent, or toasters), often makes it difficult to achieve great return on investment (ROI) from digital transformation at any given site.
To illustrate this, consider two imaginary global companies. The first manufactures high-margin specialty chemicals at only four massive sites, each of which accounts for a quarter of overall production. The second is a CPG household-cleaning-products firm operating 100 sites on four continents. Both companies have weathered similar disruptions and recognize the need to drive significant productivity to support growth. However, whereas the chemical company has achieved surprising growth, the CPG firm has seen comparatively low ROI when it comes to its DnA-transformation efforts.
Because the specialty-chemical company enjoys both the higher value density intrinsic to the high per-unit value of its relatively expensive products and a comparatively consolidated production network with only four sites, an improvement at any single site is likely to generate substantial ROI for the entire organization. A 10 percent productivity gain at one of these value-dense sites will likely resonate throughout the company. By contrast, the CPG firm has a wide network of small sites. As such, the same productivity gain of 10 percent at any one of its 100 sites producing household cleaning products will naturally yield only marginal company-wide ROI.
This example highlights the challenges faced by CPG manufacturers, whose wide, fragmented production networks make multisite DnA transformation necessary in order to generate meaningful ROI. Such multisite transformation is considerably more complex and demands highly effective planning and coordination on a network-wide level. Moreover, in this context, careful prioritization of potential use cases becomes particularly crucial. With hundreds of potential use cases, attaining the hoped-for ROI can depend on astute forecasts and informed assumptions. If a company misses the mark when prioritizing use cases and allocates substantial financial resources to the wrong ones, there could be little to no gain.
Frontrunners are emerging
CPG firms have been moving fast on the consumer side in areas such as marketing and sales and consumer engagement. But, for the most part, CPG has long lagged behind other industries in the DnA maturity of its operations. Now, there is great pressure on CPG companies to respond to these disruptions through changes associated with the four durable shifts, which together call for transformation in operations DnA.
The combination of productivity pressure and growth opportunity has triggered a significant acceleration in these areas among leading CPG firms, widening the gap between a few frontrunners and the rest. Considering that on the whole, productivity growth in manufacturing has slowed substantially in recent years, this acceleration is particularly notable. While growth opportunities can still be found by focusing on manufacturing excellence and traditional lean principles, it is becoming increasingly difficult to extract meaningful impact through these methods alone. A new approach is needed for these very different times.
Learning from CPG ‘lighthouses’
Some CPG companies are seeing impressive results and genuine ROI in their DnA transformations. This includes several in the Global Lighthouse Network, a World Economic Forum initiative in collaboration with McKinsey & Company, which recognizes manufacturing sites across the globe that are achieving truly transformative innovation at scale. The Global Lighthouse Network has grown steadily since its inception in 2018, and now comprises 90 lighthouse sites. A look at how CPG firms
have figured in this network is telling.
Early on, the scarcity of CPG lighthouses hinted at the unique challenges the industry has faced in pursuing transformative innovation at scale. However, the number of CPG applications recognized by the World Economic Forum has risen sharply this year. In fact, it has doubled since 2020, from six to twelve. Moreover, the CPG applications represent varied subsectors, ranging from food and beverage to household products. What are we seeing among these frontrunner CPG organizations?
Large CPG sites are seeing substantial ROI
Reviewing the experiences of CPG companies in the Global Lighthouse Network proves it is possible for at least a few single CPG sites to undergo the kind of transformation that produces notable ROI. These sites have marked substantial improvement across a range of KPIs, including productivity, sustainability, agility, speed to market, and customization (exhibit). Nevertheless, challenges remain even among these leaders. In light of the myriad factories that comprise the fragmented production networks characteristic of CPG, only a select few sites—typically large ones—have managed to yield notable ROI that resonates across their companies.
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Again, this is due to a simple but essential reality of CPG: compared with other industries, the production network is vast and often composed of small to medium-size sites, so transformation ROI from any one site tends to be low. Furthermore, from a product perspective, it can take hundreds or thousands of boxes of a CPG product like household cleaner to equal the value of a single heavy-machinery product, such as a wind turbine engine or specialized construction vehicle.
The downs and ups of fragmented production
A fragmented production network should not be misconstrued as a disadvantage. Indeed, CPG companies with broadly distributed production networks have generally built them intentionally in order to enjoy the advantages of proximity to consumers, a portfolio tailored to local consumer preferences, and intrinsic redundancy. However, the same distributed design that affords these advantages makes it difficult to implement broad-scale changes across the organization.
Clearly, some leading players in the CPG industry are getting it right. Again, consider that the number of CPG sites recognized by the World Economic Forum as frontrunner global lighthouses has nearly doubled since 2020. We believe the key to unlocking value for these companies—indeed, their next step change—lies in leveraging DnA to increase performance across the network.
The digital way forward
What can companies do, then, when their production network is fragmented, whether by necessity or by design? How can these CPG companies with large, low-value density networks transform? How can they realize the same sort of positive changes so crucial to maintaining strong performance in light of the four durable shifts taking place in the wake
of powerful disruptions?
Driving synergies across a broadly distributed production network is challenging, but new tools and technologies make it possible to do so more effectively than ever before. With the right approach that takes full advantage of the power of DnA, companies can unlock trapped value in ways that traditional lean manufacturing, for example, simply couldn’t access by itself. This can allow a further penetration of new working modes, even at small manufacturing sites.
Driving synergies across a broadly distributed production network is challenging, but new tools and technologies make it possible to do so more effectively than ever before.
This value unlock is within reach, but it takes commitment because the requirements for transforming wide networks are even tougher than for single-site transformations. Companies aiming to transform across fragmented networks should implement the following initiatives:
a more rigorous change management and project management office (PMO) approach
even stronger cross-site coordination
more robust Internet of Things (IoT) planning
a more explicit talent agenda
While it may seem obvious, it is important to keep a big-picture focus at the forefront, right from the beginning. This might mean sacrificing microlevel potentialities in favor of the macro—in other words, even if an exceptional initiative could highly benefit a single site, it shouldn’t take priority if it won’t be broadly applicable across the network in the scale-up stage.
Five steps to transform CPG production networks
We propose a five-step process for CPG firms that want to achieve network transformation by leveraging the power of DnA.
Develop the network strategy and road map. With a fragmented manufacturing network, it’s important to begin by scanning the organization to garner a clear understanding of the terrain. The operating questions should be, “Where and how can a prioritized portfolio of digital use cases bring real business value?” and “What enablers need to be put in place for success?” This first phase should produce the following results:
a top-notch DnA road map for the next two to three years
a clearly articulated business case for the program and designed enablers (such as the information technology/operating technology, or IT/OT, stack, and other resources)
a structured compilation of use cases with selected locations for piloting and rolling out
Companies that have already achieved a level of digital maturity can simultaneously launch the scaling of basic, no-regret use cases that have already been proven across different sites or, for example, the World Economic Forum’s Lighthouse Network. These might include digital performance management,
root-cause problem solving, or real-time overall equipment effectiveness (OEE) tracking.
Design the scale-up vehicle and engine. The next step is to design the scale-up vehicle and engine, making sure to keep the big picture—that is, the eventual network-wide implementation—at the forefront of the design. The scale-up vehicle includes top use cases for implementation at the pilot locations. Ideally, these would be the company’s largest, most mature sites.
The scale-up engine plan then determines scaling governance, including success control, staffing, change-management, and communication plans; technology stack and platforms; and the use of codified use cases for scaling. This phase produces a designed set of solutions, use cases, and a future-state data IT/OT stack ready to be implemented—all while readying the use cases for scaling across the network.
Build at pilot sites. With the scale-up vehicle and engine designed, it’s time to build. This includes implementing top use cases at the pilot sites, while building capabilities and enablers to facilitate rapid scale-up. This phase generates an agile working mode that can be replicated at other sites, together with a governance structure to support replicability.
More specifically, the plan usually encompasses implementation of top minimum-viable-product (MVP) use cases and the Industrial Internet of Things (IIoT) platform on the factory floor, as well as training for teams on design thinking, IoT, big data, advanced analytics, and digital transformations. Implementation follows a rapid scaling approach (including governance) at subsequent sites, with the scale-up plan refined further based on lessons learned from the pilot use cases.
Scale digital use cases fast across the network. In the fourth phase, the benefits of the broad-network view become apparent. As the company scales digital-manufacturing use cases across the production network, early choices to prioritize broad applicability and explicit ownership of important use case–driven initiatives start to pay off in the form of accelerated traction. Lessons learned from agile development in the pilot site(s) add fuel, minimizing friction as the new ways of working take hold.
Develop and deploy a DnA academy. Having deployed digital use cases across a broad, fragmented manufacturing network, the ongoing challenge is to build capabilities by upskilling. In keeping with the network-wide mentality, this can include the development and deployment of a DnA academy that upskills the entire organization—not just the change team or personnel at selected sites.
The four durable shifts continue to drive a great reset as we near the conclusion of the first quarter of the 21st century and look ahead to the second. Recent global disruptions have presented a yet-untapped growth opportunity for the CPG industry. As these disruptions apply cost pressures, companies are upping the competitive ante at
an accelerating rate.
Clearly, some companies are meeting the next S-curve of growth opportunities presented by the four durable shifts. For others, the time to react, anticipate, and grow is now. By understanding the unique challenges facing broadly distributed,
low-value-density, highly fragmented production schema, CPG organizations can implement strategies that achieve the kind of company-wide transformation needed to thrive.