Tech-enabled SG&A transformation

How to leverage the upcoming S/4HANA migration as an opportunity for a holistic SG&A cost transformation.

ERP migration as an opportunity for SG&A cost transformation in CPG

Sidebar

As cost pressures in the consumer packaged goods (CPG) industry rise, CFOs and other executives are seeking to extract more efficiencies from central functions. CPG companies spend 21 percent of their revenue on average on selling, general, and administrative (SG&A) expenses. There is significant variance across industries, with IT firms spending 11 percent, healthcare companies spending 14 percent, and energy providers spending 4 percent on SG&A expenses. Not surprisingly, 76 percent of CPG executives rank cost management as a top priority over the next 12 months, with cost-reduction targets of 10 to 15 percent planned across SG&A functions (Exhibit 1). 1 Yet 46 percent of these executives said they lack confidence and feel unprepared to meet their cost-reduction targets.

Over the next 12 months, planned SG&A cost-reduction targets for consumer packaged goods and across other industries are generally 10 to 15 percent.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

These cost pressures are only expected to increase as consumers demand healthy products, personalization, and ultraconvenience—and as small brands continue to succeed, capturing most CPG growth.

The importance of enterprise resource planning (ERP) systems for realizing change in corporate functions is increasing. Many companies are moving away from monolithic ERP processes and solutions to enable the capabilities needed to win in the marketplace, such as unlocking real-time, centralized transaction processing and decision making through analytics and insights. ERP systems remain the backbone of CPG companies but are increasingly complemented by best-of-breed, hybrid systems architecture (Exhibit 2). These next-generation ERP systems and their satellite systems—such as procurement and HR solutions—touch most SG&A domains.

Next-generation enterprise resource planning systems, complemented by best-of-breed, hybrid systems architecture, will be the backbone of consumer packaged goods companies.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

But CPG companies may not see ERP systems as a path to savings at present because they currently face a daunting ERP-related expense: mandatory migration to the SAP S/4HANA platform, which must take place by 2027 (with standard support) for the many CPG companies that currently use SAP ECC as their ERP system. CPG companies are struggling to find a positive business case for this investment, which can easily reach nine figures, costing up to half a billion euros for large companies.

CPG companies wrestling with the need to cut costs while justifying a substantial technology investment may not have considered a key question: can CPG companies use this mandatory ERP transformation to realize higher and faster SG&A efficiencies enabled by the ERP core and surrounding systems? In fact, they can—if they use the migration as an opportunity to transform their operating model and generate new business value by redesigning overly complex or inconsistent business processes.

Generating value from the ERP investment

CPG companies can take a strategic, surgical approach to ERP transformation that targets only the business processes that, if optimized, can generate maximum value and cost savings for the company. Many CPG companies that have already migrated to S/4HANA have been disappointed by the results because the project exceeded their budgets and timelines and failed to generate expected savings. But CPG companies that approach S/4HANA migration as a platform for business transformation, rather than as a mere IT project, can avoid these pitfalls and reduce their SG&A costs by as much as 25 percent.

The potential efficiencies enabled by ERP systems can be directly linked to the value that CPG companies can realize from investing in the ERP system and its surrounding applications. The end goal of this investment is to optimize processes that, when redesigned, will generate the most value for the companies. Rather than simply moving all existing processes—both good and bad—onto the new S/4HANA platform, CPG companies can target specific value pools for process redesign, simplification, and standardization. This will allow them to maximize the utility of their ERP solution and their IT system overall.

For SAP-based systems, CPG companies can optimize processes by making them “fit to standard”—that is, conforming them to SAP standards. That way, the companies can avoid costly, overly intricate system customizations that are expensive to not only design but also maintain. CPG companies can harmonize and simplify their nondifferentiating processes in areas such as HR, finance, sales, and supply-chain management to align with their ERP solution’s standards.

New, ERP-enabled capabilities can unlock significant business value in a number of ways. Here are just a few examples:

  • Changes to transaction flows, screens, and wait times can simplify processes and operating models enough to reduce operating costs by 10 to 30 percent.
  • Real-time, embedded analytics shorten time-to-provisioning by 30 to 50 percent—enabling faster, better decision making.
  • An improved user experience—including access via any device, boosting end-user effectiveness—can cut inventory levels by 10 to 30 percent.

Uncovering value pools—a structured approach

CPG companies need to develop a clear line of sight from efficiency potential to value realization enabled by investments in the ERP system and surrounding applications. To do this, companies need to follow a structured approach, working their way through the processes to identify ways to unlock the value identified by traditional benchmark analysis, and find additional opportunities for digitization:

  • Determine the baseline for the core, end-to-end processes. To establish this baseline, CPG companies can map their resources to all key end-to-end business processes. This exercise will allow them to identify areas that are overresourced and need to be optimized. An ERP-enabled business transformation that drives changes to processes and the operating model is key to capturing value both within specific functions and along cross-functional end-to-end processes.
  • Assess the status quo. For subprocesses with the most assigned resources, CPG companies can identify pain points and uncover potential efficiencies with the assistance of various function experts. In this step, they should focus particularly on inconsistent processes across countries or entities and on manual transactional work.
  • Identify optimization levers. CPG companies can identify any value levers—such as automating manual tasks–related to process automation or simplification. Function-specific value levers help create future-proof functional organizations that use agile principles to deliver their tasks efficiently. Process-specific levers ensure the efficient execution of end-to-end processes across different functions (Exhibit 3). In one example, most finance subprocesses, if relatively standardized, can be automated with robotic process-automation technology and smart workflows that are adapted to the specific situation (Exhibit 4).
  • Size the potential impact and prioritize accordingly. CPG companies can quantify the impact of identified opportunities on personnel costs, headcount, and indirect spending by comparing industry spending benchmarks to company-specific data. They then can define the required “enablers”—such as organizational changes or effective change management—that will fully unlock the potential savings. Most digitization projects involve significant changes in processes, organization, and ways of working.
Of the SG&A functions, finance has the highest potential to unlock optimization opportunities by pulling various value levers.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com
Most finance subprocesses can be automated under the right circumstances.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

Best practices for planning an ERP-supported SG&A transformation

As CPG companies capitalize on the multiple business-transformation opportunities enabled by their ERP systems, there are five best practices they should keep in mind while setting up an ERP-backed business transformation to cut SG&A costs and redirect spending to sources of value (Exhibit 5).

There are five best practices organizations can undertake to ensure a successful SG&A transformation.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

1. Zero-based productivity

Having a zero-based mindset—in which an organization is willing to challenge its entire cost base—can trigger the next wave of productivity in the indirect-cost and people categories. A zero-based approach helps companies redirect resources into areas where they can have the greatest impact and drive growth. For example, zero-based budgeting allows CPG companies to go beyond cost-cutting and reimagine their budgets from the ground up, starting at zero and reallocating spending toward areas that drive the most value. Every euro that a CPG company spends is reexamined in this approach.

The foundation of repeatable zero-based processes in areas such as procurement can be integrated into a budget-creation software tool, automatically applying zero-based policies. Typically, capabilities for spend visualization, forecasting, and systems integration are included. Zero-based templates that cover the analyses, processes, efficiency levers, and organizational structure are required to fully unlock the potential. Zero-based processes are supported by standard procedures to build and negotiate budgets, including knowledge, guidance, and practices that equip organizations with the tools to negotiate at scale.

CPG companies that have adopted a zero-based mindset have identified up to 20 percent in indirect-spend savings in less than six months. With this attitude of reexamining the status quo and reimagining it from a blank slate, CPG companies can embrace change and develop radical new ways to do business—and gain value in the process.

2. Early, hypothesis-driven identification of major value pools

As described in the approach outlined above, CPG companies can develop hypotheses around their current process pain points, such as fragmented system landscapes with overly granular and frequent reporting and controlling processes, leading to significant workload through manual analyses and data reconciliation. Based on the pain points, CPG companies can then conduct targeted diligence efforts to uncover and prioritize the major value pools—opportunities to generate value through greater efficiency—within core SG&A processes. The potential value pools within finance processes, for example, can be substantial (Exhibit 6).

Uncovering value pools in SG&A processes such as finance processes can offer substantial benefits.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

This early view of the expected impact of an ERP transformation is critical to the ERP business case, as well as to developing a prioritized road map across core corporate functions and end-to-end processes. Leading CPG companies maintain a comprehensive library of typical ERP automation and process-simplification levers that can serve as a starting base for identifying SG&A efficiencies within all related end-to-end processes.

3. Synchronization of the CPG strategy, business processes, and IT perspective

Interlinking a CPG company’s overall business strategy, business processes, and IT and ERP teams helps the company synchronize its SG&A transformation with its ERP system implementation. CPG companies make the most of such an implementation when they translate their overall CPG strategy into optimized business processes that are enabled by ERP technology. In turn, optimizing business processes from end to end helps CPG companies use the full functionality of ERP solutions and reduce migration cost. Therefore, from the beginning of the implementation project, all relevant stakeholders—including the function that uses the solution, the IT group that enables the solution, and the leadership that sets the CPG strategy—should work closely together to determine which processes can be streamlined and simplified and how resources can be reallocated.

For example, financial planning and analysis processes, such as financial forecasting, can be simplified as much as possible, focusing on the CPG company’s most relevant strategic key performance indicators that enable effective managerial decision making. Consolidated ERP instances with automated data reconciliation increase speed nearly to real time and improve business-process quality, such as forecasting accuracy, due to an integrated and comprehensive database.

4. A cross-functional, value-driven digitization road map with a clear view of quick wins and long-term initiatives

CPG companies should develop a detailed digitization road map and governance structure for their business transformation that will be enabled by their ERP system. A distinct view of the technology elements needed to unlock value for the business translates into clearer, tighter business requirements for the technology implementation. CPGs should leverage the existing momentum and IT infrastructure of the S/4HANA project to also capture digitization opportunities not related to ERP and to avoid restructuring the same functions multiple times.

The road map should cover all technology elements, including the ERP system, its satellite systems, and the various toolchains. Individual initiatives should be prioritized based on several criteria, including ROI, interdependencies among initiatives, IT budget and capacity, and the respective function owners. Road map initiatives can typically be categorized into three types: ERP preparation (such as process standardization), ERP implementation (such as platform migration), and digitization opportunities not related to ERP.

The digitization road map should also include both quick wins within specific processes and longer-term potential wins that align strategic business decisions with the identified value drivers and the initiatives that will unlock that value. The road map should lay out a timeline for building the capabilities needed to realize the CPG company’s strategy and balancing the ERP implementation workload. Overall, the road map will have a clearer focus, better success metrics, and a tighter scope.

5. Capability building to ensure ongoing delivery of value and continuous improvement

As the implementation progresses beyond the planning stage, CPG companies can begin to build the capabilities needed to sustain change and ensure continuous improvement. Specifically, CPG companies need to build the capabilities to:

  • deliver the transformation (by hiring adequate IT resources and creating a transformation office, for example)
  • extract value from the new solutions (by creating an agile continuous-improvement model for SG&A processes, for instance)
  • translate knowledge of the new solutions to both IT and the functions that use them so that both groups can implement, fully utilize, and improve on them

A business process–excellence team is often incubated as part of a transformation office but, over time, becomes a separate dedicated function focused on continuous improvement.

Getting started

We recommend getting started with an independent diligence exercise that produces three deliverables: a business diagnostic, a technical assessment, and a transformation design.

  • The business diagnostic uses benchmark data and analyses of key ERP performance indicators to quantify the value at stake and assess the company’s readiness for the transformation, including any key risks.
  • The technical assessment defines the ERP strategy and a high-level target architecture based on ERP best practices. For S/4HANA migrations, it also establishes a deployment model, assesses the CPG company’s technical readiness using SAP’s S/4HANA readiness check, and estimates the implementation cost using S/4HANA reference cases.
  • The transformation design optimizes the program’s scope to be modular and simplified (rather than a “megaproject”) and includes a full potential business case for business transformation that goes beyond ERP implementation and considers the buy-in of key stakeholders. It should also establish a value-based, high-level transformation road map incorporating all stakeholders and partners.
Sidebar

Taking these initial steps will set CPG companies up for success in implementing ERP systems that transform SG&A processes and generate new value. The CPG companies can then embark on the structured approach we propose, in which the processes that stand to generate the most value when optimized are targeted and in which the ERP implementation timeline can be significantly shortened—sometimes by several years.

Related Articles