An end-to-end transformation of planning – McKinsey
The consumer-goods industry has been fending off an array of challenges, such as shifts in consumer expectations and purchasing habits, low GDP growth in some large economies, and a global pandemic that created seismic upheaval. In 2020, the most resilient players were the ones that had already begun rethinking their planning practices.
Those successes are cause for optimism, but existing planning capabilities won’t be sufficient for organizations to keep pace over the next decade. The accumulation of challenges will only make things more difficult for managers of global supply chains and the companies that rely on them. In the current context, supply chains will be called to contribute much more to performance—and that will require a complete reimagining of planning operations, capabilities, company performance, and processes.
The answer: an end-to-end transformation of planning. Technologies such as analytics and machine learning will play a major role, but to be effective they must be supported by new processes, talent, and governance. Companies should start their journey by focusing on five discrete priorities that could generate significant value. The benefits will be well worth the effort.
Pinpointing growth and margin opportunities
A high-performing planning function can provide consumer companies with the ability to capture value across both the top and bottom lines.
Top line: Growth and revenue
In recent years, e-commerce has accounted for 65 percent of growth in the consumer industry. The COVID-19 crisis reshaped the e-commerce landscape by forcing customers to change the way they buy. This trend led to the creation of a number of new “microchannels,” several of which look set to endure beyond the pandemic (Exhibit 1). For instance, the adoption of apps such as DoorDash and Instacart and models such as “buy online, pick up in store” has spiked.
Despite the rapid growth of e-commerce, traditional channels still represent the largest share of sales in the consumer market. Consumer companies have made significant investments in technology, but service levels haven’t improved. They face a number of persistent challenges in this space: increasing customization, greater complexity in the product portfolio, stockouts and missed revenues, and excess inventory. These issues all contribute to a negative customer experience.
Recent events have also placed resilience under the magnifying glass. Over the past 20 years, value chains have become more global, prompting leading companies to develop business-continuity plans. In the second quarter of 2020, we surveyed 60 senior supply-chain executives from across industries and geographies and discovered that a staggering 93 percent of respondents want to increase resilience in their supply chains. The COVID-19 pandemic highlighted the need for more transparent supply chains across industries such as retail, pharmaceuticals, and consumer packaged goods. The few players that had the skills, capabilities, and technology to precisely track SKUs across the supply chain have not only weathered the crisis but have also gained an edge on less-advanced competitors.
Bottom line: Margin and cost
Companies are scrambling to hold down costs and protect margins across several fronts. First, they are facing higher production and logistics costs thanks to the proliferation of SKU portfolios; rising demand for sustainable, organic products and locally sourced fresh goods; and the robust growth of smaller brands, which have expanded three to four times faster than large brands. As a result, costs have risen from lower purchase volumes, manufacturing time has increased from longer changeovers, and less-predictable demand has caused more waste and markdowns.
In addition, the increasingly scattered product portfolio is making end-to-end planning even more critical for organizations seeking to maximize growth and profitability across all planning horizons.
Organizations cannot make optimal decisions without cutting-edge algorithms that can process vast amounts of live data and give planners the insights to react quickly to any change in demand. Finally, most consumer organizations have undertaken ambitious IT transformations that have improved data consistency and accessibility but that have failed to significantly increase planning accuracy or agility. Indeed, many are struggling to generate insights that could deliver superior business value or reduce manual planning efforts.
Establishing a ‘North Star’ for end-to-end planning
Many companies have been making investments in their planning tools and capabilities. Some have made progress in one or even a few areas, but only recently have companies started to tackle planning with the end-to-end perspective needed to significantly elevate performance and address the complex suite of issues. The best-in-class end-to-end planning of the future is built on the following principles:
Cross-functional integration. Companies must manage different planning activities (for example, demand, net requirements, production, and scheduling) in a comprehensive, coordinated way to produce the best decisions for the entire value chain.
Short planning cycles. Traditional monthly planning cycles accelerate to weekly cycles or even continuous-planning processes to enable the agility required in consumer industries.
Advanced-analytics enablement. Advanced analytics helps improve planning quality by, for example, enabling better demand forecasts, production planning, scheduling, and workforce planning.
A high degree of automation. Systems and algorithms support the automation of standard tasks and trigger interventions based on “basic” deviations, allowing planners to focus on exception management and decision making. Tools for automated root-cause identification and the fast, efficient evaluation of alternative actions support planners in their core tasks.
Full supply-chain visibility. Real-time data and performance transparency along the entire supply chain (for example, with inventories and orders) help organizations identify risks and exceptions early on and develop potential countermeasures. In addition, automated scenario-planning capabilities help companies understand the financial implications of potential actions and provide the basis for fact-based, profit-maximizing decisions.
This future state represents a “North Star” for consumer companies. While the end-to-end transformation is aspirational, the required technologies already exist, and companies are making progress across these elements.
Charting a path to value
To unleash maximum value from planning operations, many companies will need to embark on a comprehensive transformation. This effort encompasses several main priorities and embeds the right mix of technology, processes, capabilities, and operating-model changes required to make the journey successful (Exhibit 2).
Focus on business metrics instead of supply-chain key performance indicators: Integrated business planning
Integrated business planning (IBP) builds on real-time financial scenarios that increase the quality of planning decisions as well as the agility of the planning process. Key enablers of efficient IBP are supply-chain and financial planning, system capabilities for real-time scenario creation and evaluation, and machine learning supported by exception identification. IBP is increasingly important for all consumer players, but it is crucial for omnichannel businesses that rely on cross-channel decision making (for example, prioritization decisions in case of bottlenecks). By enabling a coordinated category and product range strategy, companies can make complex trade-offs among pricing, promotions, and availability, a task that is extremely hard to achieve with classic planning systems and capabilities.
An international packaged-food company that was already holding less than 30 days of inventory with service levels above 95 percent embraced this challenge. The company started by cleaning its data to improve availability and transparency and introduced new cross-functional processes to enable data-driven decision making. Through these efforts, it decreased finished-goods inventory by 20 percentage points, improved forecast accuracy by six percentage points, and achieved a threefold increase in response time.
Know what your customer will ask for: Creating a better demand signal
Machine-learning forecasting algorithms use internal and external data sources, as well as their ability to “learn” from historic demand patterns, to continually improve forecast accuracy and minimize manual planning. Leaders harness the capabilities of advanced analytics forecasting tools to strengthen their fact base and close the gap between demand forecasts and commercial targets. Machine-learning algorithms can also simulate the expected impact of sales activities (such as promotions) on demand and help optimize activity management. These tools contribute to an improved customer experience by increasing the availability of the newest offerings. A beverage company built the capabilities to simulate the impact of commercial activities on demand and integrate machine-learning forecasting into its demand-planning processes. The result: an improvement of 13 percentage points in forecast accuracy.
Immediate hands-off order confirmation: No-touch order management
The growth of omnichannel business elevates the importance of automated order-management processes, which give planners the ability to immediately confirm orders—for example, available to promise across planning levels—for optimal stocking based on customer requirements and product availability. Yet side-order management must handle an increased volume of smaller orders. Automation is required to ensure efficient, rapid order processing and allow planners to focus on critical exceptions. As planning becomes more automated and moves toward a touchless operation, it frees up employees to gain new skills so they can focus on more value-adding tasks.
For example, a large consumer-goods distributor developed a stand-alone digital use case to pinpoint inventory position along its supply chain and accurately confirm expected delivery dates and transportation lead times. As a result, client satisfaction rose 30 percentage points.
Break artificial silos between different functions: Automated end-to-end planning
Integrated and highly automated planning processes and systems seamlessly optimize the planning process from demand to production scheduling to deployment. These tools give companies the ability to react in real time to changes in demand or supply exceptions and determine ideal trade-offs among functions. To achieve the greatest impact from advanced demand-sensing solutions, leading consumer-goods players establish automated, end-to-end planning systems to support supply- and inventory-planning agility. That capability allows companies to react to changes in short-term forecasts, manage costs and inventories more effectively, and improve service levels. One leading food company invested in advanced planning capabilities and reduced its inventory by 30 percent while raising customer service levels by three percentage points.
Fix problems before they occur: End-to-end visibility and control
Key elements of a resilient, responsive supply chain include real-time visibility and the early identification and rapid resolution of exceptions (ideally before they have an impact on customers or finances). Service and inventory control towers can help to create transparency, enable fast reactions, and continually address root causes. This visibility is essential to get the right product to the right place at the right time and through the right channel to fulfill customer demand and maximize growth. The COVID-19 pandemic clearly demonstrated the need for transparency across the supply chain, including customers and suppliers. Companies with real-time visibility have been able to react to the disruption much more quickly, make fact-based decisions, and minimize the negative impact on their supply chains—or even gain a competitive advantage.
One home and personal-care company improved customer-service levels by 25 percent through a rapid turnaround of its supply-chain performance. It achieved greater supply-chain visibility by implementing a governance structure (a control tower) that enabled faster response times when identifying exceptions in the supply chain.
Companies with real-time visibility have been able to react to the disruption much more quickly, make fact-based decisions, and minimize the negative impact on their supply chains—or even gain a competitive advantage.
Key success factors in advanced planning transformations
In our experience, a planning transformation is particularly complex. Successful companies must simultaneously manage a large stakeholder base and technological enablement while implementing new ways of working throughout the organization. Executive leadership is a vital component; without the engagement of the top team, any transformation is destined to fail. Business leaders should focus on five actions to accelerate their planning transformation:
- Engage stakeholders beyond the supply chain and the organization. Since the supply chain touches so many different parts of the organization, a successful transformation requires engagement from the CEO and COO. Their presence will lend credence to the transformation and ensure decisions are made in a cross-functional way. A transformation also presents companies with the opportunity to use external data (for example, from retailers, contract manufacturing organizations, copackers, trade partners, and proprietary databases) to generate value for itself and its ecosystem—such as through better visibility on capacity or supply. One company that had a digitally mature procurement function developed an algorithm to predict supply safety, thus improving supply-chain efficiency.
- Develop a plan starting with high-value areas. End-to-end planning transformations run the risk of remaining too conceptual—and therefore difficult to implement. To make efforts more tangible, organizations should select one of the top five use cases and identify its relevance at the granularities of product family, geography, and customer segment (called cells). This exercise enables the development of a portfolio of applications that can be deployed over 12 to 24 months, focusing first on high-impact cells and those with sufficient data. In addition to starting small, organizations should be sure to scale up. One solution is to start with a cell that holds significant business value. Once a sizable flagship has been established and is generating results, the case for scaling can be much easier to make.
- Select the right ecosystem of tech partners. Several tech partners offer advanced integrated solutions, and many start-ups have developed specialized supply-chain offerings—for example, for a specific planning process or industry. While some organizations have specific planning challenges that require customized solutions, executives should start by considering more than one major tech partner. A wider set of candidates can help companies concentrate first on the expected business outcome and then on the technology required to address it.
Reinvent the organization to ensure end-to-end optimization and more agile decision making at interfaces. While advanced planning transformations focus mostly on digital and technology enablement, organizations achieve the greatest planning improvements and efficiency gains through an organization and process redesign. This approach ensures end-to-end decision making in a fit-for-purpose way depending on geography, product segment, channel, and customer type. Indeed, advanced algorithms can solve the most complex issues and identify an optimal solution for the company as a whole. However, this solution can include implications that aren’t beneficial to some individual functions, so organizational setup has to ensure that the resulting actions are executed by all functions to achieve the best outcome.
Organizational changes can take different forms. Radical changes include the creation of a central product organization representing all functions to make optimized trade-offs for a given brand and geography. A less-radical approach is to develop an official network of colleagues in charge of a product or brand while maintaining functional structure. A good way to start is to establish a cross-functional board and ensure it makes decisions based on the recommendations of advanced algorithms. Still, additional elements are required for planning to unlock optimized trade-offs, such as implementing properly aligned incentives for objectives and target functions (for example, by product and channel). In starting such a journey, it is critical to involve key stakeholders in addition to operations, such as sales, marketing, and finance.
- Engage in a massive reskilling program with HR. Planning teams typically still handle a lot of work manually, including consolidating, checking, and reviewing data. As the transformation proceeds, the role of a planning team must evolve to focus more on strategic decision making, trade-offs, and stakeholder engagement. Given the size of the team and the scarcity of those resources in the job market, companies must invest in upskilling as a critical pillar of the planning transformation. In our experience, successful efforts harness techniques such as learning by doing. For example, each individual planner should contribute to the solution design—from business-case creation to delivery—and understand the potential of algorithms to support planning.
How to get started
Companies that want to explore the potential of advanced planning should start by identifying and aligning on a core list of strategic business priorities across their operations and set clear improvement targets for each one. They should then understand how true end-to-end planning across the five priority areas discussed can achieve each of those targets and set a path for the transformation. Finally, they need to devise a clear deployment plan that embeds key success factors across organizational structures, skills, processes, and technologies to make sure that all typical pitfalls are addressed from the start.
Planning activities have traditionally been a supply-chain topic. However, digital and advanced analytics are now unlocking the ability to make complex trade-offs among functions such as sales, production, and the supply chain that will become more critical in the coming years. This dynamic challenges the way companies think about their planning operations and organization. Given the value at stake and the threat posed by digital natives, an advanced planning transformation should be at the top of the agenda for consumer-goods CEOs, and it should focus on five main priorities: integrated business planning, creating a better demand signal, no-touch order management, automated end-to-end planning, and end-to-end visibility and control.
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