Consumer packaged goods companies that successfully drive efficiencies can increase margins by 2 to 5 percent, according to a new IRI report.
“Given the current CPG environment, manufacturers understand the importance of a renewed focus on making more efficient investments, which can be easy to ignore in times of growth,” said Ray Florio, partner of Growth Consulting, Strategic Analytics, IRI. “In addition to being useful in challenging market downturns, ensuring your resources drive the strongest returns will better position companies to take advantage of the next inevitable upturn. IRI’s recent work with clients has demonstrated the value of this approach, with many of our clients successfully increasing their profitability while still meeting top-line growth objectives.”
The new IRI report recommends a comprehensive, three-phased approach to profitability growth:
Phase 1 — Measure True Profitability
It is essential to ensure that all parties are working from a single version of the truth by developing a fully allocated price-cost waterfall, which serves as a more granular version of a typical profit and loss statement. These waterfalls allocate direct and indirect costs to each product-customer combination and offer visibility into profitability drivers across the business.
Phase 2 — Identify Opportunities for Improvement
After laying the foundation, the next step is to identify variances, examining the rationale behind each of the swings and whether these additional costs are resulting in a corresponding financial or strategic benefit. While some variances will prove justified, it is essential to look at them critically with questions regarding cost, customer/product mix and price.
Phase 3 — Prioritize and Execute
Finally, consider how the identified opportunities compare in terms of value versus feasibility and translate the opportunities into concrete execution plans.
Although CPG manufacturers may face stumbling blocks across all three phases of work, IRI’s report outlines a series of guiding principles for overcoming common barriers to improving profitability. These recommendations include:
- Be Thoughtful Versus Thorough: Balance out the value of each waterfall element rather than trying to maintain a master list of drivers contributing to costs.
- Drive Cross-Functional Teaming: Assemble a broad team of cross-functional stakeholders and come to an agreement on the mechanisms and methods for allocating costs.
- Start Small: Prioritize opportunities by both value and feasibility to first exhaust the simpler quick wins and build trust prior to pursuing more challenging opportunities.
- Define the Why, Not the What: Focus on the underlying drivers of performance differences, leveraging additional inputs, such as price elasticity or assortment incrementality, which will bring solutions to light more clearly.
- Cycle Resources: There is great benefit from a cross-functional team dedicating a single day per week to driving profitability improvements, and cycling new members in and out can broaden exposure and identify new potential opportunities.
- Provide an Incentive: It is essential that the company’s leadership be heavily involved and reward those who deliver a significant or sustained boost to the bottom line.
“We designed our approach after seeing our clients face an endless cycle of overspending during a boom, then painfully trimming back far too much during a bust,” added Florio. “The results were periods of underwhelming profits followed immediately by share loss. Through our methodology, we’ve broken that vicious cycle, cutting out many of the deep troughs for both top- and bottom-line results.”