The digital future of manufacturing consumer packaged goods

There has been a lot of change in the last two years. This has led to a lot of disruption, which is still happening. To do well in the consumer packaged goods industry, you need to use digital tools and analytics.

Last year, we collaborated with the World Economic Forum to identify four durable shifts that are happening because of all the disruptions going on in the world. These shifts have big implications for manufacturing and supply chains.

One of these shifts is that companies are becoming more agile, which means they can respond quickly to changes in the market. This is done by having a stronger network connection and digitizing the supply chain.

• Speed and productivity. People are looking for good deals more than ever because of the disruptions happening in the world. To provide value, companies need to shift to using digital production systems. This will help improve network productivity.
• Eco-efficiency. More and more people are choosing to do business with companies that are environmentally responsible. This includes companies that use sustainable materials. Being environmentally responsible is now seen as an advantage because it makes good business sense.
• Supply-chain resilience. You can't put all your eggs in one basket. That's not a smart thing to do because if something bad happens, you'll lose everything. To make sure you don't lose everything, you need to have different solutions that work well together. This includes things like digitization and automation which help keep customers connected.

Digital and analytics (DnA) transformation is very important for companies if they want to stay competitive. The article says that there are specific steps that companies in the consumer-packaged-goods industry should follow for a successful DnA transformation.

The challenge of CPG transformations

Different types of manufacturing companies have different journeys when it comes to DNA transformation. The degree to which a company-wide DNA transformation is challenging is often based on how fragmented the production network is. The more sites there are, the more fragmented the production schema will typically be. Additionally, products that are Consumer Packaged Goods (CPG) often tend to have a low value density.

Digital transformation can be difficult to achieve when a company has many smaller sites that produce low-value products. This is because it is hard to make a lot of money back from the investment.

There are two types of companies: those that have a few large sites where they make high-margin products, and those that have many small sites where they make household cleaning products. The first company has done well in the face of disruptions, but the second company has not seen as good of results from their efforts to transform their business.

The specialty-chemical company enjoys both the higher value density intrinsic to the high per-unit value of its relatively expensive products and a comparatively consolidated production network with only four sites. This means that an improvement at any single site is likely to generate substantial ROI for the entire organization. A 10 percent productivity gain at one of these value-dense sites will likely resonate throughout the company. The CPG firm has a wide network of small sites. Because of this, if one site increases its productivity by 10 percent, it will only result in a marginal increase in company-wide ROI.

This example highlights the challenges faced by CPG manufacturers, whose wide, fragmented production networks make it necessary to carry out multisite DNA transformation in order to generate meaningful ROI. Such multisite transformation is considerably more complex and demands highly effective planning and coordination on a network-wide level. Making good decisions about which potential uses for a new technology will bring the best return on investment is very important. If a company guesses wrong about which uses are most important, it could end up wasting a lot of money without getting any benefit.

Frontrunners are emerging

CPG firms have been moving quickly to improve their marketing and sales strategies as well as how they engage with consumers. However, most CPG companies have not been as advanced as other industries when it comes to their operations. Now, there is a lot of pressure on CPG companies to catch up and respond to these disruptions through changes that are associated with four durable shifts. This calls for transformation in the way that operations are done.

The pressure to be productive, along with the opportunity for growth, has caused a significant increase in productivity among leading CPG firms. This growth is noticeable when you compare the leading firms to the rest of the companies in this industry. Manufacturing productivity has slowed down in recent years, but these firms are still managing to increase their productivity. Even though there are still opportunities for growth by focusing on manufacturing excellence and traditional lean principles, it is becoming more difficult to have an impact through these methods alone. A new approach is needed for these very different times.

Learning from CPG ‘lighthouses’

Some CPG companies are seeing impressive results and genuine ROI in their DnA transformations. This includes several in the Global Lighthouse Network, a World Economic Forum initiative in collaboration with McKinsey & Company, which recognizes manufacturing sites across the globe that are achieving truly transformative innovation at scale. The Global Lighthouse Network has grown steadily since its inception in 2018, and now comprises 90 lighthouse sites. A look at how CPG firms have figured prominently in this network is telling.

The number of CPG applications recognized by the World Economic Forum has risen sharply this year. This suggests that there are unique challenges the industry has faced in pursuing transformative innovation at scale. However, there are also a number of companies who are doing well in this area. The CPG applications represent varied subsectors, ranging from food and beverage to household products. What separates these frontrunner organizations from the rest?

Large CPG sites are seeing substantial ROI

Studying the experiences of companies in the Global Lighthouse Network has shown that it is possible for a few single CPG sites to undergo a transformation that produces a good return on investment. These sites have seen significant improvement across a range of key performance indicators, including productivity, sustainability, agility, speed to market, and customization (see exhibit).

Despite this, some challenges remain among these leaders. Because of the many factories that are part of the fragmented production networks found in CPG, only a few sites have yielded notable ROI that is felt across their companies.

This is because the production network for CPG products is vast and often composed of small to medium-size sites. This means that the transformation ROI from any one site is low. Furthermore, from a product perspective, it can take hundreds or thousands of boxes of a CPG product like household cleaner to equal the value of a single heavy-machinery product, such as a wind turbine engine or specialized construction vehicle.

The downs and ups of fragmented production

A fragmented production network should not be seen as a disadvantage. In fact, companies that have broadly distributed production networks have done so intentionally in order to enjoy the advantages of proximity to consumers, a portfolio tailored to local consumer preferences, and intrinsic redundancy. However, this same design makes it difficult to implement broad-scale changes across the organization.

Some of the leading players in the CPG industry are getting it right. For example, the number of CPG sites recognized by the World Economic Forum as frontrunner global lighthouses has nearly doubled since 2020. We believe that the key to unlocking value for these companies is using DnA to increase performance across the network.

The digital way forward

What can companies do when their production networks are not all in the same place? Companies with large, low-value density networks need to change. They need to realize the same positive changes that are crucial to maintaining strong performance in light of the four durable shifts.

It can be challenging to drive synergies across a widely distributed production network, but new tools and technologies make it possible to do so more effectively than ever before. With the right approach that takes full advantage of the power of DnA, companies can unlock trapped value in ways that traditional lean manufacturing, for example, couldn’t access by itself. This can allow a further penetration of new working modes, even at small manufacturing sites.

This transformation is possible, but it takes hard work because the requirements to transform a network are even tougher than for single-site transformations. Companies aiming to transform across fragmented networks should implement the following initiatives:

• A more rigorous change management and project management office (PMO) approach involves stricter controls and procedures.
• More effective coordination between different websites is required.
• Stronger planning for the Internet of Things (IoT).
• A more specific agenda of your talents.

It is important to have a big-picture focus when starting your project. This means that sometimes you may need to make sacrifices so that the project can be successful on a larger scale. For example, if an idea would only help one site, but it is not practical for the project on a larger scale, then it is not worth doing.

5 steps to transform production networks

We suggest a five-step process for CPG firms that want to use the power of DnA to achieve network transformation.

#1. Create the network strategy and road map. 

When the manufacturing network is fragmented, it is important to understand the organization first. You need to figure out where and how you can use digital technology to bring business value. You also need to put in place what is needed for success. This will help you get these results:

• A top-notch plan for the next two to three years.
• The business case for the program and the design of the enablers, such as the IT/OT stack and other resources, must be clearly articulated.
• A structured compilation of use cases can help with the selection of locations for piloting and rolling out new technology.

Companies that are more advanced with their digital strategies can simultaneously launch new, basic use cases that have already been successful on different websites or in other industries. This could include things like digital performance management, root-cause problem solving, or real-time overall equipment effectiveness (OEE) tracking.

#2. Design the scale-up vehicle and engine. 

The next step is to design the scale-up vehicle and engine. This will involve making sure that the design takes into account the eventual network-wide implementation. The scale-up vehicle should include the company's largest, most mature sites as pilot locations.

The scale-up engine plan then determines how the company will grow. This includes deciding what to do when things go well, who will work on the project, how to handle changes, and how to communicate with everyone involved. The plan also specifies the technology stack and platforms to be used. This phase produces a designed set of solutions, use cases, and a future-state data IT/OT stack ready to be implemented—all while readying the use cases for scaling across the network.

#3. Build at pilot sites. 

Now that the scale-up vehicle and engine have been designed, it is time to build them. This includes implementing top use cases at the pilot sites, while building capabilities and enablers to facilitate rapid scale-up. This phase generates an agile working mode that can be replicated at other sites, together with a governance structure to support replicability.

The plan usually includes implementing the top minimum-viable-product (MVP) cases on the factory floor, as well as training teams on how to use design thinking, IoT, big data, advanced analytics, and digital transformations. The plan is then implemented rapidly at subsequent sites, with the scale-up plan being refined further based on what was learned from the pilot cases.

#4. Scale digital use cases fast across the network. 

In the fourth phase, the company benefits from using a broad network. The company can scale digital-manufacturing use cases across their production network. This is thanks to making choices that prioritize broad applicability and taking control of important use case-driven initiatives. They learn from agile development in the pilot site(s), which minimizes friction as these new ways of working take hold.

#5. Develop and deploy a DnA academy. 

Deploying digital use cases across a large, fragmented manufacturing network is challenging. One way to overcome this challenge is to build capabilities by upskilling the entire organization. This can include developing and deploying a DnA academy that provides training to everyone in the organization, not just the change team or personnel at selected sites.

Conclusion

The four durable shifts continue to drive a great reset as we near the end of the first quarter of the 21st century and look ahead to the second. Recent global disruptions have created a growth opportunity for the CPG industry. As these disruptions apply cost pressures, companies are upping the competitive ante at an accelerating rate.

Some companies are preparing for the next growth opportunities. They are doing this by recognizing the four durable shifts. For other companies, it is time to react and grow now.

If CPG companies want to thrive, they need to understand the unique challenges that come with having a broadly distributed, low-value-density, and highly fragmented production schema. This understanding can help them create strategies that achieve company-wide transformation.

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