Throughout the 1990s and early part of this century a variety of new store formats were introduced to the retail industry. In addition to the long-standing grocery, drug and mass merchant channels, rapid expansion of new club, dollar and specialty retail chains occurred. The new formats, seeking a differentiated merchandise mix to draw consumers to their stores, encouraged suppliers to create exclusive product and packaging options unique to the warehouse, club and dollar stores. Examples of unique product configurations include multi-packs (same item in bulk), variety packs (mix of flavors of same item) and club sizes (packaging of complementary, but different items). Extensive customization of services (versus just products) occurred as well. Responding to retailer needs, Consumer Packaged Goods (CPG) companies began to offer specialized pallet configurations, vendor managed inventory and dedicated in-store support.
In 2006, the Grocery Manufacturers Association (GMA) enlisted management consulting firm Booz Allen & Hamilton to perform a study entitled “Creating Value through Customization – Winning through Shelf-Centered Collaboration.” Participants in the study included retailers such as CVS Pharmacy, Meijer, Publix, Rite Aid and Target as well as CPG manufacturers such as Clorox, General Mills, Kraft, Kimberly Clark, Nestle and Sara Lee. The GMA study was not as widely read as I think it should have been as it offers excellent insights into what is an increasingly important issue in the supply chain – complexity caused by customization.
Image Source: Grocery Manufacturers Association – Creating Value through Customization – Winning through Shelf-Centered Collaboration
Consider the following findings from GMA:
- Over half the manufacturers surveyed supported unique sizes, customized display units or multi-packs. However, customization of services was even higher.
- Over half of surveyed suppliers supported services such as customized inventory management, pre-mixed pallets, specialized handling, collaborative planning, unique routes or special pallets.
- Over 1/3 of manufacturers stated that customized products represented more than 10% of sales. Forty percent of manufacturers stated that customized supply chain services are now provided for accounts representing more than half of their sales.
- Approximately 70% of manufacturers stated that customization of both products and services had risen substantially over the past 3 years. Furthermore, approximately 90% of manufacturers forecasted that customization would continue to increase in the next 2-3 years.
- Despite investment focus by both retailers and manufacturers, approximately half of all customized products and services fail to create value.
I think one of the key reasons that customized products and services fail to provide more value in the retail supply chain is due to the extensive complexity introduced. The GMA study stated that:
“One reason is that all this customization has created an enormous new source of additional complexity for both manufacturers and retailers, particularly as the varieties of customization continue to multiply. Many manufacturers now receive hundreds (some, even thousands) of requests for customization each year…”
“Customization makes the manufacturer’s task more complex in a variety of ways.”
“Image Source: Grocery Manufacturers Association – Creating Value through Customization – Winning through Shelf-Centered Collaboration
This concept of customization and the complexity it introduces to manufacturers is the subject of a research study, GXS recently commissioned with SCM World. The results of the study will be unveiled next week. In the meantime, I will being publishing several posts about the challenges manufacturers face with complexity.
One Response to “Customization of the Supply Chain – The CPG Perspective”
It seems that the greater the complexity on the sales side, the greater the strain should be on the manufacturer’s supply side. I know previous studies shows that manufacturers were greatly challenged in deploying, upgrading and managing supply-side B2B because resources were being allocated to the demand side. I wonder if increases in customization have led to increased stress on the supply side or have manufacturers invested more there to help support their demand side activities? In the former case, manufacturers should see strain and potential decreases in viability of their customizations. It would seem the latter scenario would reduce the amount of customization but what is attempted should be more successful.
Does your research address this question?