Consumer Packaged Goods Industry (CPG)

Domain Competency Group

Agenda
 Introduction to Consumer packaged Goods Industry
 What is a Consumer Packaged Good (CPG)  Categories in CPG industry  What is a CPG Company?  Organization Structure of a CPG Company

 The Value Chain The Players

 Supplier  CPG Company

CPG Manufacturer Warehouse/Distribution Center

 Distributor  Retailer  Consumer

Introduction to Consumer Packaged Goods

Agenda .. Contd.
 Key Business Processes in CPG Company
 Planning  Buying & Sourcing  Manufacturing  Logistics and Distribution  Sales and Order Management  Marketing Management  Customer management

 Information Technology in CPG Industry

 Global Data Synchronization  RFID  Regulatory Compliance  Security

Introduction to Consumer Packaged Goods

Introduction To CPG
 What is a Consumer Packaged Good
 Consumables like food products, beverages, home & personal care, tobacco etc. which

have a short life span and get replaced frequently.

 Market Size
 Global market size of $ 1,500 Billion

Introduction to Consumer Packaged Goods

CPG Categories

Consumer Packaged Goods Industry

Food & Beverages

Makers of food products, beverages, dry coffees, teas and fruit smoothies Key Players: Nestle, Kraft Foods, Coca-Cola, Pepsi

Home Care
Makers of general household items, OTC drugs, nutritional supplements, pet foods Key Players: Procter & Gamble, Unilever, Reckitt Benckiser

Personal Care
Makers of personal hygiene, beauty care, baby care products Key Players: Unilever, Procter & Gamble

Introduction to Consumer Packaged Goods

Food & Beverage Category - CPG

 Dinner Solutions
 Fz Dinners/Entrees, Natural Cheese, Soup, Rfg Salad/Coleslaw, Fz Poultry, Fz Pizza, Vegetables, Dry Packed Dinners, Fz Seafood, Fz Plain

Vegetables

Beverages
 Carbonated Beverages, Milk, Beer/Ale/Alcoholic Cider, Bottled Juices, Rfg Juices/Drinks, Wine, Spirits/Liquor, Coffee, Bottled Water,

Creams/Creamers

Sweet & Dessert

 Chocolate Candy, Ice-cream/Sherbet, Cookies, Non-Chocolate candy, Snack bars/Granola bars, Fz Novelties, Canned/Bottled Fruit, Bakery

Snacks, Gelatin/Pudding Mixes, Fz Desserts/Toppings

Ingredients
 Fresh Eggs, Dough/Biscuit Dough, Baking Mixes, Salad Dressings, Spices/Seasonings, Baking Needs, Margarine/Spreads/Butter Blends,

Butter, Sugar, Mayonnaise

Breakfast Solutions
 Cold Cereals, Breakfast Meats, Yogurt, pastry/Doughnuts, Fz Breakfast Foods, Hot cereal, Toaster Pastries/tarts, English Muffins, pancake

Mixes,

Lunch Solutions
 Freash Bread/Rolls, Luncheon Meats, Processed Cheese, Frankfurters, Peanut Butter, canned Meat, Cream Cheese/Cream Cheese Spread,

Lunches-Rfg, Pickles/Relish- Rfg

 

Salty Snacks
 Crackers, Snack Nuts/Seeds/Corn Nuts, Popcorn/Popcorn Oil, Rice/Popcorn cakes

Baby Foods
 Baby Formula/Electrolytes, Baby Food, Baby Diapers

Introduction to Consumer Packaged Goods

Food & Beverage Products

Food Products

Beverages Carbonated Non-Carbonated Packaged Water Alcoholic Drinks

Dinner Solutions Sweet and Desserts Ingredients Breakfast Solutions Lunch Solutions Salty Snacks

Introduction to Consumer Packaged Goods

Home Care Products

 House Care
 Toilet Tissue, Laundry detergent, Household Cleaner, Paper Towels, Food & Trash

Bags, Facial Tissue, Dish Detergent, Light bulbs, cups & plates, Cleaning Tools/mops/brooms

 Pet Care
 Dog Food, Cat Food, Pet Supplies, Cat/Dog Litter

 General Merchandise
 Batteries/Kitchen Storage, Photography Studies, Socks, Blank Audio/Video Media,

Office Products, Lawn Fritzr, Childrens Art Supplies, Writing Instruments, Pantyhose/Nylons

Introduction to Consumer Packaged Goods

Home Care Products

House Care Surface Care Laundry Care Toilet care Air Fresheners Chlorine Bleach Dishwashing Products Polishes Insecticides

Pet Care Cat Food Dog Food

General Merchandise

Introduction to Consumer Packaged Goods

Home Care Products - Category Sizes

Toilet Care Polishes Chlorine Bleach Category Insecticides Air Freshners Dishwashing Products Surface Care Laundry Care Pet Care 0 10000 20000 30000 40000
2798 2946 3013 4779 5423 8829 12939 42543 45000

50000

Global Market Size (in $ Mn)

Introduction to Consumer Packaged Goods

Personal Care Products

 Personal Hygiene
 Soap, Toothpaste, Toothbrush/Dental accessories/Sanitary napkins, Shampoos,

Deodorants, Razors, Hand & Body Lotion, Hair Conditioners, Mouth Wash

 Beauty Care
 Skin Care, Hair Coloring, Facial Cosmetics, Fragrances, nail Cosmetics, Hair styling gel,

Lip & Eye Cosmetics, Hair Spray, Hair accessories, shaving lotions

 Baby Care
 Diapers, Baby Accessories, Moist Towelettes, Baby Needs

Introduction to Consumer Packaged Goods

Personal Care Products

Personal Hygiene Bath and Shower

Beauty Care Hair Care Fragrances

Baby Care Baby Care

Deodorants

Color Cosmetics Mens Grooming Skin Care Depilatories Sun Care

Introduction to Consumer Packaged Goods

Oral Hygiene

Personal Care Products -Category Sizes

Hair care Skin Care Color Cosmetics Fragrances Category Bath & Shower Oral Hygeine Men's Grooming Deodorants Sun Care Baby Care Depilatories 0 9,242 4,302 3,476 2,559 10,000 20,000 30,000 40,000 50,000 28,055 22,408 20,701 20,335 16,221 42,491 38,481

Global Market Size (in $ Mn)

Introduction to Consumer Packaged Goods

CPG Company
 The owner of a consumer packaged good trademark is a CPG company. They are also called as brand owners.
 A CPG Company is a Marketer of the CPG product

It creates brands by investing in advertising and communication of the product It decides the characteristics of a CPG product like pricing and promotions.
 A CPG Company may or may not manufacture and/or distribute the

product for final consumption.

A CPG company defines the manufacturing processes and product quality parameters which effect the composition of the product. It sets policies and guidelines for organization activities and controls & monitor the manufacturing plant Hence irrespective of it manufacturing a product CPG company keeps a very tight tab on production and distribution processes

Introduction to Consumer Packaged Goods

Key Activities Undertaken By A CPG Company

 Marketing and advertising The CPG product  Launching new products and innovating and developing on the existing products
 Close to 30000 new products in CPG were launched last year

 Key account management

 Specific focus on handling large accounts like Wal-Mart, K-Mart etc. A greater sense of

collaboration happens in terms of order management, forecasting and promotions management.

 Managing prices and promotions

 Taking pricing decisions suitable to local environment and managing trade/consumer

promotions

 Supply Chain Management

 Managing global supply chains to reduce the sourcing costs and better vendor

management

Introduction to Consumer Packaged Goods

CPG Industry - Organizational Structure

 Administrative Structure
 Executive, Assistant Manager, Regional Manager, General manager, VP,

President

 Functional Structure
 Sales, Marketing, Production, Dispatch, Key Account, Finance, Information

Systems, Human Resources, Purchase

 Geographical Structure
 APAC, Europe, North America, Africa

Introduction to Consumer Packaged Goods

Organizational Structure - Illustrative

President & CEO
Vice President Systems Vice President Human Resources Vice President Finance Vice President Region Vice President Marketing Vice President Logistics/Supply Chain Vice President Production

General Manager Systems

General Manager Human Resources

General Manager Marketing

General manager Logistics/Supply Chain

General Manager Finance

General Manager Unit

General Manager Production

Manager Systems Executive Systems Manager Finance Executive Finance

Manager Human Resources Executive Human Resources Manager Sales Executive Sales

Manager Marketing Executive Marketing

Manager Logistics/Supply Chain Executive Logistics/Supply Chain Manager Production Executive Production

Introduction to Consumer Packaged Goods

CPG INDUSTRY VALUE CHAIN THE PLAYERS

1 Supplier CPG Manufacturer

2(a)

2 CPG Company

2(b)

Warehouse/ Distribution Center

3 Distributor 4(a) Retail Distribution Center 4(b) 4 Retailer Retail Store

Direct Store Delivery Distribution Center Delivery

Consumer
Introduction to Consumer Packaged Goods

SUPPLIER  Supplier is a provider of goods or services to the CPG Company.

Suppliers can be classified on the basis of cost and how the goods or

services integrate with the end product

Supplier Classification

 Key performance metrics

Cost of Supply Reduced Lead Times Service Quality Promotions etc.

Introduction to Consumer Packaged Goods

Supplier Classification
Classification on the basis of how the goods or services enters the industrial production process and their relative costing
Goods that are identifiable parts of the finished product Click here for examples Long lasting goods which facilitate developing or managing the finished products Click here for examples Short lasting goods that facilitate developing or managing finished product Click here for examples Services like advisory/maintenance services which facilitate developing or managing finished product Click here for examples

Materials and Parts

Capital Items

Supplies

Business Services

Introduction to Consumer Packaged Goods

Materials and Parts

 Two types of materials and parts
 Raw Materials

Sugar, wheat, cotton

 Manufactured Material and Parts

Cartons, Packaging materials

Introduction to Consumer Packaged Goods

Capital Items
 Installations
 Factories, offices

 Equipment
 Handtools, forklifts and other tools and prtable factory equipment

Introduction to Consumer Packaged Goods

Supplies
 Operating Supplies
 Lubricants, coal, oil, writing paper, pens etc.

 Maintenance and repair items

 Paint, nails, brooms

Introduction to Consumer Packaged Goods

Business Services
 Maintenance and repair services
 Window cleaning, type-writer repair

 Business advisory services

 Advertising agency, market research agency, legal services, management consulting

services

Introduction to Consumer Packaged Goods

CPG Manufacturer
 A CPG Manufacturer is the owner of a unit producing a CPG product  CPG Manufacturers Can Be Of 2 types depending on the ownership of the manufacturing facility
 Company Owned Manufacturing

Here the CPG Company (Brand Owner) owns the plant

 Third Party/Franchisee Owned Manufacturing

The franchisee produces the product as per the norms of the CPG player quantity, quality, price Pays a franchisee fees to the CPG player which normally is directly proportional to the sales Very closely collaborates with the CPG Player E.g. SAPCO does bottling operations for The Coca-Cola Company

 Ownership patterns are governed by a variety of factors

 Maturity of product in the market  Investment requirements  Control of trade secrets

Introduction to Consumer Packaged Goods

Key Processes in CPG Manufacturing

Procurement

Manufacturing

Transportation Logistics

Introduction to Consumer Packaged Goods

Distributor
 Who is a distributor?
 A buying, warehousing and distributing organization that delivers merchandise to retail

stores in their own trucks.

 Distributor Operations
 Unloading goods from supplier  Palletizing and storing goods maintaining FIFO  Order Collection by Electronic media/phone/salesman  Organizing orders according to the beat plan  Loading vehicles with the relevant orders  Supplying goods to customer  Ordering goods from the supplier

Introduction to Consumer Packaged Goods

Distributor Operations
Collecting Order Loading route trucks Accepting goods from company as per previous order
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Delivery of goods

Route Truck 1

Sales and Delivery

Retail Stores

Goods From Company Warehouse

Distributor Warehouse

Route Truck 2

Sales and Delivery

Retail Stores

Introduction to Consumer Packaged Goods

Retailer
 A Retailer is a seller of products or services to the consumers for their personal use or house-hold use
 In a Retail Organization there are two types of entities

Retail Distributor Center Retail Store

 Retail Distribution Center

A centralized procurement and distribution facility which stocks and distributes various SKUs. Centralized distribution and procurement facilitates tighter inventory control and reduced procurement costs
 Retail Store

Point of actual purchase by consumer. Stores and merchandizes various product assortments which are bought by the consumer Retail Store Classification Some CPG product categories sell more via a particular types of stores than others Click here to see data

 Key Challenges Affecting CPG Company

 Reducing Transport and Order Fulfillment time  Ability to collaborate with major key retailers like Wal-Mart using EDI: Adherence to UCCNet/ RFID

Introduction to Consumer Packaged Goods

Classification of Retail Stores

 Classification based on the type/range/price of products
 Supermarkets

A supermarket, or grocery, is a store food and drinks and sometimes drugs, clothes and other household products that are consumed regularly. A supermarket offers a great variety of products.
 Drug Stores

Pharmacies and Drug stores engaged in retailing prescription or nonprescription drugs and medicines. These retail a range of prescription and over the counter (OTC) medicines, health and beauty items such as vitamin supplements, cosmetics and toiletries as well as offering photo processing services.
 Club Stores

These stores retail a general line of grocery products along with new merchandise items. The majority of goods supplied by this industry are purchased by wholesalers and retailers for resale. A smaller share of goods is purchased by consumers for private use.
 Mass Merchandisers

A self-service store displaying and selling different kinds of merchandise at lower overall profit margins than other retailers.
 Dollar Stores

A store selling inexpensive items for one dollar each. It usually sells everything from cleaning supplies to childrens toys. Most of these products are not branded and have a lower quality compared to products sold in other retail stores.
 Super centers

super center is a very large store that combines two formats: a complete grocery store and a complete mass merchandiser store. These formats are combined in the same building with common checkout lanes.

Introduction to Consumer Packaged Goods

Introduction to Consumer Packaged Goods

CONSUMER
 A Consumer is a person who consumes/ uses the product or service for his end use and not for re-selling
 CPG Products are

Fast Consumption products: implying regular purchase Low value products: implying low switching costs for consumer to competitors products
 Hence for the CPG company it is essential to have a strong and effective marketing

campaigns to influence the consumer buying and decision making process, so as to build preference
Consumer Decision Making Process

 Different consumers have differing needs to buy a product

 Needs could be based on tangible/aspiration requirement  Hence it is important for CPG company to segment consumers on the basis of their

needs and target specific consumer segments with their product offering which is reinforced by their marketing campaigns
 Consumer Segmentation

Introduction to Consumer Packaged Goods

CONSUMER: THE DECISION MAKING PROCESS

STAGE Problem Recognition INTERVENTION BY CPG PLAYER

Information Search

Media Mix: Print/Television/Radio

Evaluating Alternatives

Highlighting the value proposition value communicating the product Merchandizing and Displaying the Product Minimize gap between communication and product benefit/attribute

Purchase Behavior

Post-Purchase Behavior

Introduction to Consumer Packaged Goods

Consumer Segmentation
 The Need
 To distinguish one product from the other, selectively target a specific group of people to whom the

product is most appealing to. The group should be such that it makes economical sense to target it and the company has the expertise to make those features in the product which appeal to the group
Measurable Substantial Accessible Differentiable Actionable

 Classification of consumer can be



Geographic

Parameters: Region, population size, density, climate

Demographic:

Parameters: Age/Family Size/Income/Gender/Occupation/education/Social Class

Psychographic

Parameters: Lifestyle/Personality/Value

Behavioral:

Parameters: Occasions/Benefits/Usage Rate/Attitude toward product

Introduction to Consumer Packaged Goods

Key Business Processes of CPG Company

VALUE CHAIN PLAYERS

Supplier

CPG Company

Distributor

Retailer

Consumer

Planning

Buying and Sourcing

Manufacturing Management

KEY BUSINESS PROCESSES

Logistics and Distribution Management

Sales and Order Management

Marketing Management

Introduction to Consumer Packaged Goods

Functional Value Chain

Logistics and Distribution Managemen t Transportati on Management Warehouse Management Distribution management

Planning

Buying and Sourcing

Manufacturi ng Managemen t Production Scheduling Manufacturi ng Order Execution Production reporting and execution Inventory management Purchase Order Management

Sales and Order Management

Marketing Managemen t

Demand Forecasting Financial Planning Sales Planning Marketing Plan Production Plan Logistics & Procurement Plan

What to Buy? How Much to Buy? When to Buy? How To Buy? From Whom To Buy?

Trade Customer Services Trade order management Sales force support and automation

Market research Brand Management Advertising and Consumer Activations Trade Promotion Management

Introduction to Consumer Packaged Goods

Planning
 Objective
 To estimate and plan for resources correctly so as to satisfy the consumer demand in

the most cost effective manner

Meet sales expectations Avoid out-of-stock conditions Guard against overstock Keep inventory investment at acceptable level

RESOURCES
Manpower
Contract Labor Company Employees
Sales Finance Logistics Marketing Production

Supplier
Supplier of Goods
Machinery Raw Materials

Customers
Key Retailers Distributors

Banks
Long Term vs Short Term Loans Investment of Excess Cash

Supplier of Services
Transporter Advertising Agency Media

Introduction to Consumer Packaged Goods

Planning Process - Components

Demand Forecasting
Forecasting Yearly, Monthly, Weekly demand SKU-wise Doing a rolling estimates of demands quarterly/monthly/weekly Product Life Cycle and Seasonality Analysis Capital Expenditure Non-Capital Expenditure

Financial Plan

Sales Plan

Sales force staffing plan, Distribution plan, retail management plan, Budgets for trade schemes

Marketing Plan

Communication mix, advertising campaigns, consumer activations, packaging innovations, product launches Scheduling batch runs Labor Scheduling Maintenance Plan Sourcing of raw materials, production scheduling, logistics and transportation plan, Contract labor handling

Production Plan

Logistics &Procurement Plan

Introduction to Consumer Packaged Goods

Buying & Sourcing

Introduction to Consumer Packaged Goods

Buying and Sourcing

 Objective
 To source the materials and services used in product manufacturing in a cost effective

and organized manner

 Increase Procurement Efficiency

Material Cost Reduction Inventory Holding Cost Reduction

 Minimizing Raw Material Stock-Outs

Efficient Planning and Forecasting Vendor Collaboration Ability to Source Urgent Requirements

 Buying and sourcing is all of the processes involved in requesting, ordering, auditing, and paying for goods and services.

Introduction to Consumer Packaged Goods

Steps In Buying and Sourcing Process

1. Create Internal Requisition 2. Approval Process & Purchase Order Creation 3. Purchase Order Delivery to Suppliers 4. Bidding Process: Specifications from Suppliers 5. Supplier Selection & Confirmation 6. Advance Shipment Notice to CPG Manufacturer 7. Goods & Invoice receipt and matching against the Purchase Order 8. Payment Based On Terms Of Credit 9. Payment receipt confirmation by supplier Introduction to Consumer Packaged Goods

Increasing Sourcing Efficiency : Material Cost Reduction

 A 5% reduction in material cost increases net profit by 30%
Before Revenue $1000 M After $1000 M

COGS-Material Labor O/H

$600M $200M

$570M $200M

Gross Margin

$200M

$230M

Operating Expenses

$100M

$100M

N.I.B.T.

$100M

$130M

 Material Costs Reduction Can Happen Via The Following

 Bidding Process and Global Sourcing  Closer Vendor Collaboration

Introduction to Consumer Packaged Goods

Increasing Sourcing Efficiency: Reduction of Raw Material Inventory Holding Costs

 Raw Material Inventory Holding Cost
 Cost of investment in the goods which are used in the production process

Typically is the interest paid on the value of raw material goods held in the warehouse for production Interest typically is the rate of return the business earns
 Inventory Holding Cost = Value of Inventory * Rate of return earned by the business

E.g. (Illustrative)

Inventory value = $100M ROI of CPG Manufacturer = 12% Inventory holding cost = Inventory value*ROI = $100M*12% = $12 M

 Inventory holding cost can be reduced by

Negotiating to reduce material costs Reducing the stock levels by better collaboration with suppliers (reducing supplier lead times)

Introduction to Consumer Packaged Goods

Questions addressed by Buying and Sourcing Process

 A Buying and Sourcing Process Addresses the five key questions
 What to buy?  How much to buy?  When to buy?  From whom to buy?  How to buy?

Introduction to Consumer Packaged Goods

What To Buy?
Direct Materials Indirect Materials

Utilities Ingredients

Office Supplies Packaging Materials Spare Parts

Introduction to Consumer Packaged Goods

How Much To Buy?

Information Interaction Order Quantity Determination Methods

Supplier Information
Supply Lead Time Freight Costs

Number of Days Stock

Economic Order Quantity Demand Information

Production Sales Customers

Min/Max Quantity

Introduction to Consumer Packaged Goods

How Much To Buy Information Interaction

7. Lead Time, Quality, Quantity, Price, Payment EXTERNAL ENTITIES Terms 6. Production Schedule, Raw Material Requirement 2. Product wise Sales Data

INTERNAL ENTITIES

Supplier

Procurement

Distributor
1. Product wise Sales Data

Manufacturing
5. Inventory XYZ Goods Finished & Raw Materials

Company

Retailer
3. Changing Trends, Emergence of a product category

Warehousing & Logistics

4. Product demand estimates factored for promotions, New Launches

Consumer

Marketing

Introduction to Consumer Packaged Goods

How Much To Buy? - Number of Days Stock Method

 Determines the number of days stock the manufacturer will order over and above the normal safety stock  The number of days stock is basically determined by the suppliers lead time which could vary from month to month
Planned Production Requirement
10000 15000 20000 30000 30000 25000

Month
Jan Feb March April May June

Number of Months Stock Ratio

2 2.5 3 4 4 3

Planned B.O.M. Stock

20000 37500 60000 120000 120000 75000

Planned E.O.M. Stock

37500 60000 120000 120000 75000 90000

Planned Order E.O.M.

27500 37500 80000 30000 -15000 40000

B.O.M. = Beginning Of Month, E.O.M. = End Of Month

Introduction to Consumer Packaged Goods

How Much To Buy? - Economic Order Quantity

WHERE:

Economic Order Quantity

D = ANNUAL DEMAND, S = COST TO PLACE ONE ORDER I = % CARRYING COST/UNIT, C = COST OF ONE UNIT Introduction to Consumer Packaged Goods

How Much To Buy? - Min/Max Quantity Method

 Order quantity = maximum quantity of SKU in stock minimum quantity of SKU in stock  Maximum quantity depends on factors like
 Storage space availability: E.g. for ice-cream products one needs a cold storage which

will be very limited in the warehouse

 Financial resources available for investing in stock

 Minimum quantity depends on

 Safety stock to cover for demand fluctuations  Supplier lead times

Introduction to Consumer Packaged Goods

When To Buy?
Periodic Replenishment Reorder Point Purchase Forward Buy

Variable order quantity but fixed time interval ordering A convenient replenishment method in which the warehouse knows exactly when it will receive goods. With advance planning the warehouse can arrange and schedule transport logistics and manpower in advance thereby deriving cost benefits
Click to see graph

Fixed order quantity but variable time interval Ordering triggered when inventory falls below a specified norm called the reorder point Helps to minimize and plan inventory holding costs, especially for items which are costly and are not fast consumption items Ordering independent of time and quantity Bulk purchase especially when there are discounts offered The item may be used several months after the purchase but results in substantial material costs reduction

Click to see graph

Introduction to Consumer Packaged Goods

When To Order? - Periodic Replenishment

Inventory

Maximum Inventory

Fixed Replenishment period

Day 1

Day 2

Day 3

Day 4

Day 5

Day 6

Day 7

Day 8

Day 9

Day 10

Day 11 Day 12

Time Period
Introduction to Consumer Packaged Goods

When To Order? - Reorder Point

Fixed Order Size

Maximum Inventory Level

Inventory
Reorder Point

Safety Stock

Day 1

Day 2

Day 3

Day 4

Day 5

Day 6

Day 7

Day 8

Day 9

Day 10

Time Period
Introduction to Consumer Packaged Goods

From Whom To Buy?

Terms Of Sale Vendor Performance

Basic Cost

Material Quality

Discount

Lead Time

Credit Limit

Reliability

Number of Days Credit

Value Added Services

Introduction to Consumer Packaged Goods

How To Buy?

Introduction to Consumer Packaged Goods

Case Study - Procurement Process at A Chocolate Manufacturer (hypothetical case)

 Situation
 A plant, manufacturing milk chocolate  Ingredients: For 10 gm Milk Chocolate Bar production, Needed are the following

Sugar: 2gms Milk: 20ml Cocoa Beans: 2gms Wrapping Foil: 10cms Pack Cover: 1 Carton: 0.01 (1 carton for a pack of 100, 10gms milk chocolate)
 Production Run: 100,000, 10gm milk chocolate (1000 cartons) scheduled after 10 days  Raw Material Inventory

Sugar: 200 kg Milk: 100ltrs Cocoa Beans: 150kg Wrapping Foil: 1000mtrs Pack Covers: 5000 Cartons: 500 cartons

Introduction to Consumer Packaged Goods

Case Study (Contd.)

 Prescribed Raw Material Inventory (depending on supplier lead times)

Sugar: 100kg Milk: 120ltrs Cocoa Beans: 150kg Wrapping Foil: 800mtrs Pack Covers: 3000 Cartons: 600 cartons
 Lead Time (Time Taken By Supplier)

Sugar: 4 days Milk: 2 days Cocoa Beans: 6 days Wrapping Foil: 10 days Pack Covers: 9 days Cartons: 7 days

Introduction to Consumer Packaged Goods

Case Study (Contd.) - WHAT TO BUY?

Milk Chocolate

Cocoa

Sugar

Milk

Wrapping Foil

Pack Covers

Cartons

Introduction to Consumer Packaged Goods

Case Study (Contd.) - How Much To Buy?

 For Every Raw Material Calculate The amount consumed in the production run
 Sugar : For 1 chocolate need 2gms, for 100000 chocolates need 200 kg sugar  Milk: For 1 chocolate need 20ml, for 100000 chocolates need 2000ltrs Milk  Cocoa Beans: For 1 chocolate need 2gms, for 100000 chocolates need 200 kg cocoa  Wrapping Foil: For 1 chocolate need 10cms, for 100000 chocolates need 10000mtrs foil  Pack Covers: For 1 chocolate need 1 cover, for 100000 chocolates need 10000 covers  Cartons: For 100 chocolates need 1 carton, for 100000 chocolates need 1000 cartons

 For Every Raw Material Compute the Order Size By following

 Closing Inventory + Amount Consumed OP Inventory = Raw Material Ordered  Sugar: 100kg+200kg-200kg = 100kg Sugar To Be Ordered  Milk: 120ltrs+2000ltrs-100ltrs = 2020 ltrs Milk To Be Ordered  Cocoa Beans: 150kg+200kg-150kg = 200kg Cocoa Beans To Be Ordered  Wrapping Foil: 800mtrs+10000mtrs-1000mtrs = 9800mtrs Foil To Be Ordered  Pack Covers:3000+10000-5000 = 8000 Pack Covers To Be Ordered  Cartons:600+1000-500 = 1100 Cartons To Be Ordered

Introduction to Consumer Packaged Goods

Case Study (Contd.) - When To Buy?

 Raw Material Will Be Ordered So That The Supply Reaches Just In Time For Production So The Latest Ordered Can be Placed Is Equal To Production Scheduled Date Minus Lead Time

Order 10200mtrs Foil

Order 900 cartons

Order 300kg Sugar

PRODUCTION SCHEDULED

Day 1

Day 2

Day 3

Day 4

Day 5

Day 6

Day 7

Day 8

Day 9

Day 10

Day 11

Order 12000 pack covers

Order 200kg Cocoa Beans

Order 1980ltrs Milk

Introduction to Consumer Packaged Goods

Case Study (Contd.) - From Whom To Buy?

 Strategic Suppliers
 Suppliers of Wrapping Foil, Pack Covers, Cocoa and Cartons  Generally the requirement is specific to the company, e.g. Nestle Milk Chocolate

Wrapper Cannot Be Used By Any Other Manufacturer

 Commodity Suppliers
 Supplies of Sugar and Milk Can Be Sourced Via A Wider Variety Of Supplier As They

Are Easily Available

 Generally Go With The Lowest Price Suppliers

Introduction to Consumer Packaged Goods

Case Study (Contd.) - How To Buy?

 Commodities like Milk and Sugar
 E-marketplaces where one can place order and have the lowest bid

 Strategic Products packing cover and wrapping foil

 Collaboration with suppliers

Inventory Demand Forecasts Production Schedule Sales Data

 Suppliers could automatically deliver looking at inventory condition or on order which

could be placed via an EDI or Portal or By Phone/fax

Introduction to Consumer Packaged Goods

Manufacturing Management
 Objective
 To produce the product while minimizing production costs  Costs to be minimized can be of various types

Material wastage cost Plant downtimes Maintenance costs Power utilization costs (Power efficiency)

Introduction to Consumer Packaged Goods

Manufacturing
 Manufacturing is the process of converting raw materials into a finished good by means of a large scale industrial operation.  Schematic of a manufacturing process  Illustration of a manufacturing process  Performance Metrics In Manufacturing Process
 Reduce wastage  Increase Capacity Utilization of Production Line by reducing downtimes  Minimize product stock-outs

Introduction to Consumer Packaged Goods

Manufacturing Process A Schematic

Utilities - Energy Raw materials

Finished Goods Production Process Waste Products

Machinery Spares

Packaging materials

Introduction to Consumer Packaged Goods

Manufacturing Process At A Beverage Manufacturing Plant

Syrup preparation

Filling and carbonation

Conveying

Palletizing and warehousing Introduction to Consumer Packaged Goods

Quality Check

Performance Metrics In CPG Manufacturing

 Key Challenge In Manufacturing
 Multiple products/SKUs to be created on one production line  The sequence in which the products are produced determines the efficiency of the line

Use of production scheduling tools

 Performance Metrics
 Reduce Wastage/ Increasing Plant Yield

Plant Yield (in %) = (1- Waste Product/Finished Good)*100 To minimize the wastage of raw materials during the production process. The more number of times the product change-over happens on the production line the more raw material wastage happens and hence the plant yield drops. Hence the essence is to take as long batch runs as possible so as to avoid frequent changeovers. But longer batch runs could lead to holding higher inventories and hence higher carrying costs. Hence an optimum needs to be set.
 Increasing Capacity Utilization: Increasing Production Time

Reduce the Changeover Time or Break Down Time or Preventive Maintenance Time. Changeover time is directly controllable and can be reduced by proper sequencing of SKUs to be produced. Hence production scheduling is an important.
 Reduced Finished Goods Stock-outs

Production scheduling and batch run has to happen in a way which is in sync with the demand. Hence production scheduling has to be done so that finished goods stock-outs are minimized

Introduction to Consumer Packaged Goods

Manufacturing Management Key Components

Production planning and sequencing of different batch runs on the same production line to in a way which reduces changeover costs

Production Scheduling

Manufacturing Order Execution

Shop floor practices which are directly related to production processes

Reporting tools which determine plant efficiencies and yields

Production Reporting and Execution

Managing optimal inventory levels to take care of the demand/sales forecasts while reducing inventory holding costs

Inventory Management

Purchase Order Management

Requisitions for materials raw materials, manufactured materials, spares, equipment etc. Order management of the above categories Introduction to Consumer Packaged Goods

Distribution and Logistics management

 Processes involved in making the CPG product reach the retail store shelf  Key Components
 Transportation Management  Warehouse Management  Distribution management

Introduction to Consumer Packaged Goods

Transportation Management
 Transportation is the process of moving goods from one location to another. The mode of moving may be via trucks, railways, ships or by air.  Typically a third party (transporter) is hired by the CPG Company to move its goods from manufacturing plant to a distribution warehouse  Since CPG products are low value per volume items, the transportation costs as a percent of total revenues are higher. Hence transport costs are critical to determining cost efficiencies  Performance Metrics in Transportation
 Transport Cost Minimization

Fleet Utilization

Higher transport fleet utilization is critical to bringing down transport costs as a percent of revenues. To do so non-standard (less than truckload) orders need to be clubbed Order clubbing of multiple locations should be done in a manner so that the miles run by the transport vehicle is minimized. This calls for a proper route planning Since the transport truck has to come back to the plant, the critical challenge is utilize the truck on the way back by tying up with some other company which has goods to be hauled to the CPG warehouse location. If not done so the CPG player ends up paying for empty miles of the truck on the way back.

Reducing the number of miles run by route scheduling

Minimizing the Empty Miles

 Reducing damages in transit

Using racks to handle and stack fragile materials in the container

Introduction to Consumer Packaged Goods

Warehouse Management
 A Warehouse is a storage facility which stocks and supplies the products of the CPG company to retailers or distributors  Key Activities in a Warehouse  Performance Metrics in Warehousing and Distribution
 Minimizing Material Loss

Prevention of Pilferage and Damage Handling and stacking fragile products Specialized storage space e.g. Cold Storage Space For Ice-Creams Following FIFO (First In First Out) practice to dispatch older products first and then the fresher products
 Stock Availability and Inventory Replenishment Process

Accurately tracking inventory information Reducing Product Stock-Outs By stocking appropriate quantities
 Order Fulfillment

Accurately fulfilling the customer orders

 Minimizing Distribution Costs

Route Planning of Order Delivery to Increase Freight utilization and reducing the number of miles run for delivery

Introduction to Consumer Packaged Goods

Key Activities In A Warehouse

Goods Receipt From Manufacturing Plant

Unloading Goods From Truck

Stacking Goods In Warehouse

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Transporting Goods To Distributor or Retailer

Lifting and loading goods to delivery truck Introduction to Consumer Packaged Goods

Receiving Orders

Distribution Management
 Objective
 To ensure supply of all the SKUs to the retail store at the lowest cost

 Importance of Distribution in CPG industry

CPG Products are day to day usage products and get consumed very quickly, hence their replenishment is very frequent. Hence service efficiencies in distribution is critical to avoid stock outs. Presence of substitutes makes product stock-out at an outlet a major sales loss opportunity. The consumer may buy a competitive product leading to sales loss

 Distribution in CPG Industry

 A CPG company can follow two types of distribution models depending upon the type of

product
Warehouse Distribution Direct Store Delivery

Introduction to Consumer Packaged Goods

Distribution In CPG Industry

 Warehouse Distribution
 The CPG product is sent from the Company Warehouse to a Distribution Center (DC) of

a large retailer. The product is then sent from the retailers distribution center to the retail store.

 Schematic of Warehouse Distribution  A retailer may have multiple DCs which may be organized in one of the two ways:

DC containing all SKUs and supplying to a set of retail outlets who take stocks exclusively from it DC containing some SKUs and supplying to retail outlets who take some SKUs exclusively from the DC and other SKUs exclusively from some other DC

Introduction to Consumer Packaged Goods

Warehouse Distribution

Walmart DC

K-Mart DC

7 Eleven DC

Walmart Store1

Walmart Store2

K-Mart Store1

K-Mart Store2

7 Eleven Store1

7 Eleven Store2

DC: Distribution Center, A warehouse of a retailer which would stock products from different manufacturers like CPG, Apparel etc. and supply to stores of the chain Introduction to Consumer Packaged Goods

Distribution in CPG Industry Direct Store Deliveries

 Direct Store Deliveries
 Direct Store Delivery is a method of delivering product from CPG warehouse directly to

the retail store bypassing retailer warehouses. The shelf inventory in the retail store is usually managed by the CPG company/distributor with product check-in done both by the CPG company/distributor and the retailer

 Major CPG categories include

 Beverages, Snacks, Baked Goods, Greeting Cards etc.  DSD product characteristics

 The deliveries may be handled in two ways

 From company warehouse to retail store (2 tier DSD model)  From company warehouse to a distributor to a retail store (3 tier DSD model)

Introduction to Consumer Packaged Goods

DSD Product Characteristics

Type Perishability Description Shelf life too short to allow product to move through warehouse distribution network Vulnerable to physical damage products which may be significantly damaged if not given physical protection afforded by DSD High volume products at the extremes of density make it difficult to fully utilize truck space from the warehouse Laws regulating the handling and payment of certain items can require specialized treatment such as DSD can easily provide Complex sales patterns that require purchasing or merchandising skills not readily available in the retail organization (slow moving items that are necessary or high-impulse items that require store merchandising support) Examples Bread/ pastry

Fragility

Cookies/ snacks

Density Extremes

Potato chips/ paper towels OR soft drinks/ beer Beer/ alcoholic beverages

State/ Local Regulations

Unique Sales Patterns

Cookware/ hosiery OR soft drinks/ cookies/ snacks

Source: GMA Direct Store Delivery An ECR Best Practices Report 1995 and Infosys analysis

Introduction to Consumer Packaged Goods

Two Tier DSD Model

Brand Owner is same as the CPG company

Introduction to Consumer Packaged Goods

Three Tier DSD Model

Brand Owner is same as the CPG company DC shown above is the CPG companys Distribution Center Introduction to Consumer Packaged Goods

Warehouse Distribution vs DSD - How it adds up for retailers?

Warehouse Distribution Nature of Product Contribution to total retail sales Contribution to retailers invoices Contribution to retailers profitability Advantages To Retailer
Medium to long term product life 75% 25%

Direct Store Deliveries

Highly Perishable, Fragile 25% 75%

48%

52% Shorter lead times Savings in Cost of Warehousing, transportation and shelf replenishment as all those are taken care by the CPG player

Economies of scale: With centralized procurement can push for bulk discounts, better deals as well as lower overhead costs Lower safety stock levels needed leading to lower inventory

Introduction to Consumer Packaged Goods

Replenishment in DSD
 Depending upon how the replenishment of products happen at the retail store DSD can be classified into 2 categories
 Pre-Sell/ Order Taking Model: A form of DSD in which order placements take place a

day prior to product delivery. Orders are typically generated by distributor sales representatives or initiated by the customer and communicated to distributor by phone or fax or internet. Once processed the order is typically delivered to the sore over a few days (typically one) following order placements
Click here for overview of 2 tier DSD Pre-Sell Click here for overview of 3 tier DSD Pre-Sell

 Route-Sell/ Ready Stock Model: A form of DSD in which the sale and delivery of

product is accomplished by the same individual on the same day. The salesman has the product in the route truck and replenishes each store based on its immediate need
Click here for the overview of 2 Tier DSD Route-Sell Click here for the overview of 3 Tier DSD Route-Sell

Introduction to Consumer Packaged Goods

Overview of a 2-tier DSD Pre-Sell Replenishment Model

The following example depicts a simplistic view of a 2-tier, pre-sell DSD model.
Day 1 Activities
Store Shelf/ Display Route Rep CPG Warehouse

Day 2 Activities
Route Rep Transport goods Select product

Assortment Planning Consumer purchases product Merchandise Shelf/ Displays Process Returns Update promotions Inventory Transmit Invoice Create order

Route Assignment Order Picking Truck Loading Retail Stores

Information Flow

Deliver product Sales Force Automation CPG ERP Backdoor check-in Issue credit Delivery approval

Introduction to Consumer Packaged Goods

Overview of a 3-tier DSD Pre- Sell Replenishment Model

The following example depicts a simplistic view of a 3-tier, pre-sell DSD model.
CPG 1 ERP CPG 2 ERP

Day 1 Activities
Distributor Warehouse

CPG Warehouse Multiple CPG brands ship to common distributor

Prior Activities

Store Shelf/ Display

Distributor Rep

Distributor Rep

Day 2 Activities
Transport goods Select product

Information Flow

Assortment Planning Consumer purchases product Merchandise Shelf/ Displays Process Returns Update promotions Inventory Transmit Invoice Create order Sales Force Automation Distributor ERP

Route Assignment Consolidated store orders for different manufacturers Consolidated order picking Truck Loading Deliver product Backdoor check-in Issue credit Delivery approval Retail Stores

Information Flow

Introduction to Consumer Packaged Goods

Overview of a 2-tier DSD Route-Sell Replenishment Model

The following example depicts a simplistic view of a 2-tier, route-sell DSD model.
All Activities in Day 1
Store Shelf/ Display Route Rep Assortment Planning Process Returns Update promotions Inventory Consumer purchases product Create order for product Sales Force Automation Deliver product Backdoor check-in Merchandise Shelf/ Displays Transmit Inventory Pick product from truck Issue credit Delivery approval Route Assignment Product Picking Truck Loading CPG ERP

Prior to start of day

CPG Warehouse Route Rep Transport goods (rolling warehouse)

Information Flow Return to truck

Retail Stores

Introduction to Consumer Packaged Goods

Overview of a 3-tier DSD Route Sell Replenishment Model

The following example depicts a simplistic view of a 3-tier, route-sell DSD model.
CPG 1 ERP CPG 2 ERP

All Activities in Day 1

Store Shelf/ Display Distributor Rep

CPG Warehouse Multiple CPG brands ship to common distributor

Prior Activities

Information Flow

Distributor Warehouse

Distributor Rep Transport goods (rolling warehouse)

Assortment Planning Process Returns Update promotions Inventory Consumer purchases product Create order Return to truck for product Distributor ERP Route Assignment Consolidated Product Picking Truck Loading

Retail Stores

Prior to start of day

Deliver product Backdoor check-in Issue credit Pick product from truck

Information Flow
Sales Force Automation

Merchandise Shelf/ Displays Transmit Inventory

Delivery approval

Introduction to Consumer Packaged Goods

Sales & Order Management

 Objective
 To ensure proper capturing and execution of order placed by the customer

retailer/distributor
CPG industry has only 80% order fulfillment rate. Hence increasingly a problem of deductions in the bills is faced by CPG companies.
 To ensure availability of information to stakeholders in the sales process

Sales staff: Information to track and drive sales efficiencies and to take critical tactical decisions on the field to beat competition Customers: Information related to orders, promotions and finance

Introduction to Consumer Packaged Goods

 Creating end-to-end visibility

 All parties should have a view of daily operations

Synchronize operations of business units

Coordinate activities of departments to broker better rates with 3PL Model logistics plan based upon the upcoming promotions Data communication to retailers

Automate business processes

Setting alerts to catch irregularities Web apps to minimize backhauls Use of RFID tags on cases Investment in least cost fleets route planning

Deploy asset aware technologoes

Introduction to Consumer Packaged Goods

Sales and Order Management - Components

Order Status Sales Returns Promotion communications Accounts status: receivables vs. payables

Trade Customer Services

Trade Order Management

Order sequencing and Inventory allocation strategies Sales Order Invoicing Returns Management Claims Management Order approval process management Handling financial transaction

Sales Force Support & Automation

Granular Data Capturing Data Communication Business Analytics: MIS Reports

Introduction to Consumer Packaged Goods

Marketing Management
 Objective
 To create a consumer pull/preference/liking for the product with an objective of

distinguishing oneself from competition and to command a premium (value of brand) over the cost price thereby increasing the profit margins

 Marketing Management
 Steps In Marketing Management  Key Marketing Decisions

Price Product Promotions Place Positioning

 Importance of Product Life Cycle in making marketing decisions

Introduction to Consumer Packaged Goods

Steps In Marketing Management

Market Research & Consumer Intelligence
Understand consumer behavior and segment consumers on the basis of their need Understand relative strength of the product vis--vis competition Test marketing new product launches

Brand Development & Management

Defining Target Segment Defining Value Proposition of The Product Communication

Advertising and Consumer Activation

Communication Mix: TV/Radio/Print Media Content of Communication: Value Proposition Consumer promotions

Trade Promotion Management

Managing and designing promotions for retailers/distributors Managing promotion logistics and tracking the efficacy of the retailer/distributor promotion

Introduction to Consumer Packaged Goods

Marketing Decisions For CPG Player

CPG Industry Characteristics Consumer Behavior CPG Marketing Decisions
Effective Product positioning to create top of mind recall Product availability and merchandising at the right place Competitive products having similar attributes Consumer will look for value from range of products

Low value mass consumption Product

Propensity to try and experiment other products

Optimal Pricing Differentiate Product attributes from competition

Purchases of certain products are not planned

Impulse Driven purchase esp. in food items

Frequent and innovative consumer promotions

Introduction to Consumer Packaged Goods

CPG Marketing Decisions: Positioning the Product

 Defining value proposition  Defining the target segment  Defining communication mix and the message to convey the positioning

Introduction to Consumer Packaged Goods

CPG Marketing Decisions: Place of Sale

 Channel of sale grocery, departmental stores, own stores, Kiosk/Vending machines  How IT can be leveraged

Introduction to Consumer Packaged Goods

CPG Marketing Decisions: Optimal Pricing

 Price linked to the pack size related to consumer need  Price related to product quality  Price Elasticity e.g. salt (giffin goods)  Price= cost+ differential value (in terms of brand value/product)>sronger the brand

higher the premium

Introduction to Consumer Packaged Goods

CPG Marketing Decisions: Product Attributes

 Name, Quality, features, packaging, ancillary services, warranty

Introduction to Consumer Packaged Goods

CPG Marketing Decisions: Promotions

 Consumer promotions, trade schemes, packaging innovations

Introduction to Consumer Packaged Goods

Illustration of Marketing Decisions In The Cola Industry

 Industry Characteristics
 CPG Players: Coca-Cola, Pepsi, and small local players specific to district/town  Product Characteristics:

In Summers the product is consumed by the masses to quench their thirst Product is extremely affordable @ Rs. 5 An extremely impulse driven product, the purchase is not pre-planned Not a major taste difference between Coca-Cola and Pepsi, but locals taste significantly different Substitutes also exist in form of juices, lassi, chilled milk
 Consumer Behavior

Consumer is open to substitute coke with a pepsi and vice-versa if the product of his choice is not available or is not served chilled A consumer can substitute cola for a juice or chilled milk or a lassi to experiment If the consumption happens on premise consumer will go for a smaller volume pack, for at home consumption big packs are preferred During Under the Crown Schemes the consumers buy/increase the usage of one product in the hope of winning prices

Introduction to Consumer Packaged Goods

Illustration of Marketing Imperatives In The Cola Industry

 COCA-COLA vs PEPSI (Indian Context)
 Product Positioning

Coca-Cola Projected As A Family Drink Specifically Targeting Mature People Pepsi Projected As A Youthful & A Rebellious Drink, Specifically Targets Teenagers, Brand Associates with Cricket
 Place

Merchandising: No Difference, both companys provide and merchandise on racks, coolers and run display promotions for the retailers Presence in Image Accounts: Pepsi has a much bigger presence in hotels, tourist spots while Coca-Cola believes in presence in smaller accounts and opening new accounts and increasing the account base.
 Price

No major difference in cost to retailer and the selling price though at times there was a coke 600ml priced at Rs. 15 and Pepsi 500ml at Rs. 12.5; coke 2.25ltr at Rs. 43 and pepsi 2ltr at Rs. 40
 Product Attributes

Taste:

Sweetness: Pepsi is sweeter than Coca-Cola which is sweeter than Thums-Up Gas Content: ThumsUp has a higher CO2 content than Pepsi which has a higher content than coke Pepsi has cricketers pictures on its labels of plastic bottle Coke had 2ltr + 250ml free big PET pack vs Pepsis 2ltr PET pack

Packaging

 Consumer Promotions

Launch of Coca-Cola Mobile pack (500ml+100ml free) led to a loss of Pepsi Market Share Pepsi Tosss Ka Boss Promotion revolving around the ICC Cricket Tournament

Introduction to Consumer Packaged Goods

Impact of Product Life Cycle on Marketing Decisions

 Product Life Cycle (PLC)
 The phases through which every product goes through from its inception to its

discontinuity/phasing out
 The PLC phases are uniquely identifiable depending upon the sales of the product

PLC CHART
 Marketing Decisions based on PLC

Introduction to Consumer Packaged Goods

Product Life Cycle

Product Sales
Introduction Growth Maturity Decline

Time

Introduction to Consumer Packaged Goods

Marketing Decisions Based on Product Life Cycle

Marketing Variable Introduction Positioning: Target Market Product Place: Distribution Intensity Price Promotion High-Income Innovators One Basic Offering Limited or Extensive Penetration or Skimming Informative

Life Cycle Stage Growth Middle-Income Adopters Some Variety More Retailers Wide Range Persuasive Maturity Mass Market Greater Variety More Retailers Lower Prices Competitive Decline Low-Income and Laggards Less Variety Fewer Retailers Lower Prices Limited

Introduction to Consumer Packaged Goods

Information Technology in CPG

 Information technology is a strategic asset for a CPG company. The industrys adoption of IT has been markedly slower as compared to other sectors  Global Data Synchronization
 The principles of a sound data foundation as a key platform in the industrys efforts to

gain industrywide efficiencies date back to Efficient Consumer Response (ECR), which began more than a decade ago. Internet and communications technologies have improved significantly since these early efforts, and the key components such as registry services like UCCnet and catalogs/exchanges like Transora have at this point stabilized somewhat

 RFID/RPC
 Radio frequency identification (RFID) and its Electronic Product Code (EPC) have

received significant attention in the past year with the announcements from several major retailers worldwide requiring top suppliers to support this technology at the pallet and case level initially. As RFID/EPC goes from interesting research and foundational standards development to practical implementations, the industry will reach a major turning point. shipping case to the pallet.

 RFID/EPC tags can be applied at all levels of packaging from the consumer unit to the

Introduction to Consumer Packaged Goods