The next 10 to 15 years will present major opportunities for consumer companies. Some 1. Consumer spending should rise even more than the number of consumers as household incomes swell and people use bigger shares of their budgets to buy consumer goods. China, for example, is on track to gain million working-age consumers by , and it is expected that their spending on personal products will be double the current rate. These trends contribute to a strong growth projection for the consumer sector: 5 percent a year for the next two decades.
For investors, this level of expected growth should be good news.
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When we studied the enterprise value of the top 50 publicly traded consumer-packaged-goods CPG companies, we found that their expected cash-flow growth makes up roughly half of their current value. To make and sell goods, consumer businesses need affordable, reliable supplies of energy and natural resources, as well as permission from consumers, investors, and regulators to do business.
But companies can no longer take those enabling factors for granted. Indeed, scientific consensus, along with pledges by governments and business leaders—including the leaders of some of the largest consumer companies—calls for dramatic improvements in sustainability performance. For example, the Paris Agreement, reached by countries at the United Nations climate-change summit in December , aims for reducing global greenhouse-gas emissions enough to prevent the planet from warming by more than two degrees Celsius.
To cut their emissions in line with the Paris target while increasing sales at the projected rate of 5. This figure suggests that consumer companies will have to greatly reduce the natural and social costs of their products and services in order to capitalize on rising demand for them without taxing the environment or human welfare. As we explore in the rest of this article, consumer businesses are likely to find that their supply chains hold the biggest opportunities for breakthroughs in sustainability performance.
A high-functioning supply chain—the entire hierarchy of organizations, including energy providers, involved in making and distributing goods—can allow a consumer company to manage two types of sustainability-related risks. One type of risk has to do with the sustainability impact of providing goods and services to customers. Consumer companies can thus reduce those costs significantly by focusing on their supply chains. GrainCorp, a large Australian agriculture business, reported that a drought cut its grain deliveries by 23 percent, leading to a 64 percent drop in profits.
Do green supply chains lead to competitiveness and economic performance?
Of those, 2 were dropped from the ranking in , following the deadly collapse of the Rana Plaza factory in Bangladesh, which had been making goods for them, and they were left off the list in Notwithstanding the sustainability risks that lie in supply chains, relatively few companies are working with their suppliers to manage these risks. As an example, consider how businesses are addressing the climate impact of their supply chains. Of the companies that report their greenhouse-gas emissions to CDP, a nonprofit organization that promotes the disclosure of environmental impact data, only 25 percent say they engage their suppliers in efforts to reduce emissions.
Committing to climate action in the supply chain , CDP, December , cdp. Even when companies attempt to influence their suppliers, they are likely to run into challenges. The biggest one may be that consumer companies do not deal directly with all the firms in their supply chains. Primary suppliers routinely subcontract portions of large orders to other firms, or they rely on purchasing agents to place orders with other firms.
Subcontracting is especially common in the apparel industry; the fast-fashion business in particular requires large volumes of garments to be made in short time frames. Conditions such as these prevent consumer companies from knowing what sustainability impact occurs in segments of the supply chain where the impact is likely to be worst. The reasons for this vary, but they often include a failure to communicate contract terms to the affected organizations and a failure to monitor contract compliance.
All too often, in fact, the executed contract is filed away in some drawer and forgotten. This is no exaggeration; several years ago, the research firm Aberdeen Group asked supply managers the following question in a survey: "How do you manage your company's contracts? Twothirds of the respondents stated, "We can't even find the contracts, much less manage them. More companies are moving responsibility for contract management to the supply chain organization rather than leaving it in purchasing, legal, finance, or operations.
One benefit of this shift is that it ensures the contracts are collected and maintained in a central repository. The migration of the contract management function to the supply chain organization also allows the supply chain leader to more effectively leverage the company's spend, particularly in the area of services, where there is a great opportunity for cost reduction and risk mitigation. Optimize company-owned inventory. The global economic downturn means that more chief financial officers have put inventory on their radar screens, and their financial teams are constantly looking for new ways to improve the bottom line and reduce working capital.
Supply Chain Quality Management
Supply chain organizations should therefore constantly review their inventory quantities and strive to keep them at an optimal level. It's no surprise that best-in-class companies are paying attention to inventory at the highest levels. The "real" cost of holding inventory often is higher than the generally assumed 20 to 25 percent. In fact, recent research reveals that inventory holding costs could represent up to 60 percent of the cost of an item that is held in inventory for 12 months.
Those findings included the holding cost of insurance, taxes, obsolescence, and warehousing. Poor planning and forecasting are direct causes of inventories that are out of balance with a business's needs. Accordingly, best-in-class companies also are placing more emphasis on demand planning and forecasting as an additional means of ensuring optimal inventory levels. Establish appropriate levels of control and minimize risk.
Supply chain management policies and procedures should follow an appropriate sequence and structure, and it is important to review them frequently if not constantly and bring them up to date. Keeping them realistic and easy to understand and follow will help to ensure compliance. It is certainly possible to go too far in establishing policies and procedures, however. That is why bestin- class companies periodically review their policies and controls to ensure that they are not creating bottlenecks.
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Their objective is to streamline them without sacrificing the ability of those controls to deter theft, fraud, and other problems. Risk mitigation goes hand-in-hand with policies and controls, and best-in-class supply chain organizations integrate risk-mitigation methodologies into their sourcing decision process. This is a complicated subject that we can touch on only briefly here, but in short, these organizations are adopting sound methodologies that include: 1 identifying all of the risk elements, 2 determining the probability of the risk event occurring, 3 assessing the dollar impact on the sourcing decision if the risk event actually takes place, and 4 prioritizing risks for monitoring and prevention.
Take "green" initiatives and social responsibility seriously. Reducing a supply chain's carbon footprint is no longer a "nice but not necessary" practice. It's likely that a carbon- trading regime will be established in the United States at some point. But here's another reason why best-in-class companies "go green": buyers and consumers are taking environmental impact into consideration when they choose suppliers. We're also seeing more and more requests for proposal RFPs that ask suppliers and service providers to provide information about their green initiatives.
New Trump Tariffs a Supply Chain Issue, Managers of ISM Reports Say
Buyers and consumers are also considering social responsibility when making purchases. Social responsibility consists of a framework of measurable corporate policies and procedures that result in behavior designed to benefit the workplace, the individual, the organization, and the community. Social responsibility is playing an increasingly significant role in best-inclass supply management organizations' decisions, not just when it comes to purchasing but also in regard to risk evaluation.
Roadmap for relevance The 10 best practices described above do not represent a complete list of every action that top-tier supply chain management leaders are engaging in now. This list does, however, provide some ideas and perhaps a roadmap for a supply chain organization that is striving to be viewed as valued and relevant to its parent company. Even if you already have implemented many of these practices, the insights and examples offered here will serve to validate your current strategy.
And if you aren't taking all of these steps, then adding the remaining ones to your lineup will help you complete your transformation to a best-in-class supply chain organization. After you comment, click Post. If you're not already logged in, you will be asked to log in or register. We Want to Hear From You! We invite you to share your thoughts and opinions about this article by sending an e-mail to?
co.organiccrap.com/35353.php Correspondence may be edited for clarity or for length. Want more articles like this? Supply chain strategies: Which one hits the mark?
From bean to cup: How Starbucks transformed its supply chain. Relationships for supply chain success. The analysis identified that greening the different phases of the supply chain leads to an integrated green supply chain, which ultimately leads to competitiveness and economic performance. Future research should empirically test the relationships suggested in this paper in different countries, to enable comparative studies. This paper presents the first empirical evaluation of the link between green supply chain management practices and increased competitiveness and improved economic performance amongst a sample of organizations in South East Asia.
Rao, P. Emerald Group Publishing Limited. Please share your general feedback. You can start or join in a discussion here.