Large consumer companies are constantly facing challenges from changing consumer preferences and behaviors, rising competition, and the never-ending need for their end-to-end supply chains to become more nimble and flexible—all while keeping tight control over costs and maximizing growth potential. Inorganic growth from acquiring smaller, faster-growing companies has thus become a necessity for many large consumer-packaged-goods (CPG) players. But in many cases, those moves have only compounded these challenges.
The COVID-19 pandemic has sharpened the need to adapt operations as consumers reshape their consumption patterns, with lingering uncertainty about how long the crisis may last and whether its effects will endure.
The paths companies have followed in response have diverged, driven mainly by the emergence of bottlenecks throughout the supply chain. Those that have navigated the crisis better and withstood the initial economic shock generally were quick to adapt their operating models. But 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.
To survive and ultimately thrive, most consumer companies will want to rethink their supply-chain operating models to become more resilient, responsive, and agile. There is no single “right” answer for all companies—and the degree of change required will vary widely. Some organizations may need to redesign their operating model from the ground up, while others may require only smaller adjustments. But as a baseline, virtually all consumer companies will need to identify their strengths, their most critical supply-chain objectives, and their opportunities along the entire value chain—and then build the right operating model to achieve their long-term strategic goals.
Growing challenges on all fronts
Before the pandemic began, macro trends were already reshaping the consumer landscape and altering customer expectations. Today, consumers prioritize not just products but an engaging omnichannel shopping experience. They want convenience (think online shopping capabilities), personalization (customization and tailoring), economy (overnight free shipping), and social responsibility (such as more sustainable packaging). And in a period of economic uncertainty, they are increasingly price sensitive.
At the same time, new market entrants pose a competitive threat to established players, with innovative business models, aggressive pricing, and highly engaging brands. Omnichannel and direct-to-consumer models are growing, creating new demands for operations teams. Changes to comply with physical-distancing requirements may persist and further stimulate channel shifts toward e-commerce.
Advances in technology and innovation present both opportunities and challenges. Analytics and artificial intelligence (AI), for example, have become a powerful means to unlock value, with amplifying effects across the physical and digital worlds. But without the right operating model in place, they may simply accelerate—and exacerbate—existing problems, such as uncoordinated processes, capability gaps, or technology mismatches.
CPG companies will likely need new approaches to overcome these challenges and become more competitive. From 2015 to 2018, M&A accounted for 40 percent of the industry’s growth, increasing players’ top lines but leaving many struggling to improve productivity, optimize supply-chain costs, and reduce complexity. In some cases, the acquisition’s costs were high enough to undercut the thesis that supported it in the first place. And even when M&A is reasonably well-integrated, one of its frequent legacies is an aggregation of supply chains that are hard to manage and make efficiencies and synergies hard to capture.
As a result, supply chains are under pressure to become far more resilient and agile under an operating model that is:
- faster and more flexible, to provide dramatically shorter lead times from order to delivery
- granular and segmented, to meet differentiated requirements for demand fulfillment in different categories and geographic markets, even while accommodating promotions and other factors that increase volatility
- enabled by new technology and talent to fulfill rising customer expectations, such as for instant customization
- integrated seamlessly to ensure consistent customer experience across channels (through advanced planning, distributed-order management, and excellence in physical flows)
- cost- and resource-efficient, to boost growth and support investment
Designing a new operating model
Going forward, we believe that most organizations will continually adjust their operating models, incorporating new practices that help them better capture internal synergies and respond to external events. Put simply, a fit-for-purpose operating model is designed for change, setting clear priorities based on the company’s overall aspirations and the unique pain points it anticipates encountering throughout its supply chain. Baking flexibility into the business model will mean balancing several dimensions at once:
- Responsiveness. Fast decision making in reaction to market changes at either the business-unit or enterprise level. Prioritize when: in rapid growth mode; times of market uncertainty.
- Scalability. Strengthening ability to integrate acquisitions and expand omnichannel capabilities. Prioritize when: legacy business is stable and the company seeks sustainable growth.
- Efficiency. Adapting to changing business needs while maintaining or improving profitability. Prioritize when: markets are maturing; customers are trending toward lower-margin products.
- Standardization. Ensuring that best practices are shared throughout the business, and driving regulatory compliance even in newer and smaller business units. Prioritize when: risk reductions are critical to maintain or improve quality and reliability across the business.
Three operating-model archetypes
There isn’t a single “correct” supply-chain operating model for every organization. Different industry dynamics and elements of execution will invariably lead to different answers, with varying levels of centralization. Nevertheless, three common operating-model archetypes are emerging among consumer businesses (Exhibit 1).
Centralized operating model
A centralized operating model is based on an integrated control of planning, procurement, manufacturing, and logistics, across both existing business units and new acquisitions. A single executive has end-to-end ownership over the supply chain, along with full accountability. As smaller brands are acquired, they are integrated into the main company’s existing operating model and organizational structure. If companies use centers of excellence to share best practices, these centers still report to the head of operations to ensure focused accountability. This approach is most applicable when all business units have similar products or customers, offering a high degree of end-to-end control and significant scale efficiencies. Although it can limit responsiveness to new trends, the structure allows organizations to respond to disruptions in a coordinated fashion.
For example, a global foods manufacturer launched an operating-model redesign as part of a company-wide transformation. In the redesign, all manufacturing and supply-chain responsibilities were centralized into a global shared-services model. The result was hundreds of millions in cost savings, despite a mature business.
Decentralized operating model
Under a decentralized operating model, an organization creates distinct supply-chain networks for each business unit or geography. Within each business unit, operational leaders have the latitude to run their own supply chain as they see fit, with full autonomy over decision making. (In some cases, a central coordination committee can set organization-wide policies in areas such as quality standards and enterprise-resource-planning systems.)
Companies typically use a distributed operating model if they sell very different products to different end markets or customer bases, or if they have little need to coordinate activities across business units. Some companies operate multiple at-scale supply chains, segmenting them along geographic or product lines. Once they reach sufficient scale, they can be integrated into the larger organization.
The key advantage of a decentralized operating model over a centralized one is that it is faster, more agile, and more responsive to changes in consumer preferences and behaviors at a brand or business-unit level. Individual business units can respond to market shifts or disruptions more rapidly. But that flexibility can come at the expense of standardization and, sometimes, efficiency. In addition, companies with a decentralized operating model are generally slower to pivot at the enterprise level in response to changing conditions affecting the entire enterprise.
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. Global heads of manufacturing, logistics, and planning ensure overall strategies are rolled out and best practices are shared across regions.
Hybrid operating model
A hybrid operating model is one in which select aspects of the operating model are centrally controlled (typically strategic tasks, such as network planning), while others are handled by individual business units (typically localized aspects, such as regional logistics).
Organizations typically choose a hybrid operating model when they have highly dissimilar manufacturing technologies or regionalized portfolios or customer bases. Because companies can choose which aspects are centralized and which are delegated, they can balance key dimensions for their needs: business units could make their own decisions about manufacturing, increasing their agility, while still capitalizing on economies of scale through centralized procurement.
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.
Achieving a successful operating-model redesign
The right operating model powers a company’s ability to meet strategic outcomes by enabling leaders to make the right decisions. An operating-model redesign therefore 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.
The most effective operating models consider company-specific nuances when making design choices, bearing two important requirements in mind.
Set long-term business aspirations
First, rather than focusing on the next round of cost optimization or the next acquisition, leadership teams identify a longer-term objective, such as growth into new categories or expansion of market share. These objectives will set the boundaries for the future operating model and capabilities it needs to deliver.
Digital factors into these decisions as well. For example, a company that wants to continue operating as a set of separate organizations has to determine how to harmonize disparate technology stacks. And virtually all organizations will likely need to invest in advanced analytics and AI, maintaining or improving performance with technologies such as autonomous planning or robotic process automation.
Evaluate trade-offs against design principles
Leaders start by determining the most critical design principles for their supply chains and plan their operating models accordingly. For example, given rising price sensitivities, a consumer company might decide that “cost leadership” should be its strategic goal. That implies a series of operating-model decisions with varying impact on potential synergies, inputs, overhead, and operating performance (Exhibit 2).
Likewise, maximizing responsiveness with a highly decentralized operating model encourages business units to be entrepreneurial and to adapt to changing market needs. But this flexibility risks reducing internal support for large enterprise-level moves—such as making major capital-expense investments—and can create challenges in coordinating a crisis response.
Not every company needs a complete redesign of its operating model. 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.