Here’s how consumer-goods manufacturers can master complexity—and even turn it to their advantage.
With consumers’ product preferences diverging and retail formats proliferating, consumer-packaged-goods (CPG) companies have compelling reasons to constantly launch new SKUs. Fast-growing niche markets—such as health and wellness products, socially and environmentally responsible wares, and ethnic foods—represent enticing opportunities for CPG companies, as do new online and offline retail channels. Indeed, product innovation can help CPG companies win shelf space and capture growth, which is crucial at a time when many CPG categories are experiencing flat sales. But manufacturing more SKUs means having more complexity in the entire business system—and that’s not a trivial matter to CPG companies already under pressure to cut costs and to become ever more efficient. We estimate that complexity among food-and-beverage manufacturers, for example, is costing them as much as $50 billion in gross profit in the US market alone.
Many companies are painfully aware of the problem, and acknowledge the difficulty of keeping complexity under control. CPG executives from a range of companies—including Campbell Soup, Colgate-Palmolive, ConAgra Brands, and Hershey—have made public statements about their efforts to reduce complexity in their businesses. It’s a tricky undertaking, precisely because some level of complexity is necessary and advantageous. Traditional approaches to simplification—such as “cutting the tail,” or discontinuing the lowest-volume SKUs—are suboptimal, both because they tend to address only one aspect of the business system (a cut-the-tail program is all about assortment) and because they can produce unintended consequences. For example, by discontinuing a low-volume SKU, a manufacturer might inadvertently eliminate a product that plays a unique strategic role in the assortment. Or it might unknowingly drive up the per-unit cost of manufacturing other SKUs made on the same production line.
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