Background and challenges
A Fortune 500 food and beverage manufacturer, the leader in its category, had been dealing with a declining market and SKU proliferation, which was driving complexity throughout its supply chain, declining margins and decreased service levels.
The company engaged L.E.K. Consulting to complete a simplification assessment, including identifying major drivers of complexity, quantifying the impact of complexity on their operations, and developing a roadmap to reduce complexity, improve profitability, and enable growth. In addition, the client wanted a simplification playbook to that could be deployed in other categories.
Approach
We collaborated closely with a cross-functional team to design and implement a structured portfolio simplification process that was tailored to the client’s needs. The approach included a macro study of the end-to-end supply chain, the development of a SKU-level complexity model to quantify impact, and collaborative process to develop cost reduction initiatives and a simplification playbook for the business to replicate the project across its 20+ categories.
End-to-end supply chain
- Developed a view of the end-to-end supply chain, including the different flows through external manufacturing partners and the distribution network
- Evaluated supply chain and production planning processes to map data flows and decision rights
- Baselined production capacity, overall equipment effectiveness (OEE), distribution efficiency, and service level
Through the supply chain review, we identified several meaningful insights to inform the project. The network was no longer capacity constrained, which opened the possibility to simplifying several complex product flows that required 5+ manufacturing and distribution nodes. Minimum run quantity guidelines were no longer followed in several plants, which drove poor OEE and high costs. In addition, several opportunities were identified that were evaluated in parallel with the portfolio complexity review.
Portfolio complexity model
- Developed a three-leg framework to evaluate the portfolio – complexity, profitability, and value to the ‘trifecta’, which includes consumers, customers, and the company
- Several complexity methodologies were evaluated to determine the best fit for the business, considering the supply chain, manufacturing process, key performance indicators, and data availability
- A complexity composite metric that was developed that included a set of key operational and financial performance metrics, including production efficiency, distribution flow inefficiency, and raw material cost drivers
- Margin targets and hurdles were set in conjunction with the finance team and business unit leadership
- ‘Trifecta’ criteria were developed with commercial leadership to help measure the value being created beyond margin contribution. For SKUs that had high supply chain complexity or underperformed financially, the ‘trifecta’ criteria are applied to determine if this complexity is “good complexity”
Brands and SKUs were evaluated against complexity, profitability, and trifecta criteria to develop a set of SKU rationalization and supply chain opportunities. Analysis uncovered key trends – special formats, seasonal items, foodservice partnerships, and a new brand that had significantly underperformed launch expectations stood out.
A series of cross-functional workshops were held to test the model and define a set of SKU rationalization opportunities. For SKUs that were considered “good complexity”, the team ran LEAN-based root cause analysis to identify the drivers of underperformance and developed initiatives to improve financial and operational performance.
The simplification playbook
A playbook was developed to replicate the project in new categories across the business, including a project plan, roles and responsibilities, and a model how to guide.
Additionally, root cause analysis had uncovered process gaps where portfolio decisions were made without input from operations and finance. Process enhancement projects were developed and prioritized to reduce value leakage.
Results
Our team delivered a prioritized list of portfolio rationalization and supply chain simplification opportunities that unlocked a 14% increase in production capacity and generated $10M+ annual EBIT improvement.
The simplification playbook was deployed across the business and key business process gaps were addressed to sustain value.
The food and beverage manufacturer greatly enhanced its ability to identify, quantify and manage complexity to drive value through its business.
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