7 minute read 1 Jun 2016
Shipping containers in a warehouse.

How to unlock growth with an effective operating model

By

US Americas

Multidisciplinary professional services organization

7 minute read 1 Jun 2016

From food to apparel, global consumer products industries are realizing the benefits of holistic operating models. 

Existing operating models for global consumer products companies are no longer effective for today’s market environment. We know that in order to sustain profitable growth, companies need to meet changing consumer demands and reconfigure their operating models. Companies must take a holistic approach that takes into account both business and regulatory issues.

But how?

We’ve looked at various industries and seen that many are taking these steps toward transformation.

Nine questions to a better operating model

  • Operating models activate business strategy. Design requirements flow from an organization’s business models. Understanding each business model segment and its unique performance needs will guide how investments are made across the business (for example, capability requirements and what is shared versus distinctive).

  • Reconfiguring the operating model cannot be taken lightly. It is often triggered by acquisitions and divestments. It is a major business transformation, requiring change across every aspect of the company, such as:

    • Relocation of key employees and revamp of their roles
    • Changes to existing infrastructure investments
    • Overcoming regulatory and tax hurdles
  • Tax opportunities and costs could result with operating model footprint changes on a cross-border basis. A company may need to close multiple plants in a high-cost location serving local customers and would then relocate the capacities to an emerging economy serving regional and local customers. The company’s tax and finance professionals will need to be included in the team that evaluates such options so that the decision can be made holistically.

  • There is always a tension between the need to realize the benefits of scale and the ability to capture growth opportunities at the local level. Companies need to make decisions about centralizing or decentralizing high-value activities and locating management functions operationally where it makes the most sense.

  • EMEA or Asia-Pacific markets may be too broad geographical clusters. Companies should consider clustering markets based on the following factors:

    • Stage of development
    • Channel structures
    • National tastes and preferences
  • The benefits of scale must be balanced with local operations to retain agility. Some larger consumer products companies have created procurement organizations with a combination of global and regional characteristics. The key question to answer is how much should be left with the local operations. This approach allows for setting effective strategies, innovating and deploying sustainable procurement practices at a local level.

  • The central procurement model is increasingly implemented as a stand-alone company serving the group companies. This provides chief procurement officers with greater control.

  • Companies are looking for greater clarity about their regulatory and compliance obligations. They need to understand the following and adjust the operating model accordingly. This includes:

    • How to navigate the various tax regimes
    • How tax regimes trickle down to different regulatory or legal requirements
  • The rise of omni-channel, social media, changing consumption patterns and the shift of economic gravity to emerging markets demand a change in commercial strategies to ensure profitable growth.

    There are six key shifts that companies need to consider:

    • Moving from supply-led innovation to demand-led innovation
    • Bringing together fragmented brand portfolios into a single, centrally managed portfolio
    • Adopting and fully integrating all channels, including e-commerce, into the supply chain
    • Replacing supply-led pricing approaches with customer-led, above-market pricing decisions
    • Establishing clear account segmentation strategies and treatment
    • Adopting a core brand management strategy rather than traditional brand product management

Three steps toward transformation

Given the level of complexity, operating model change can seem daunting, although the benefits are often significant. To make it more manageable, organizations can approach the transformation in three stages:

l260 unlocking value with the operating model graphic 01 v1 cropped 3840x

Source: EY

Industry perspectives

Apparel — speed and agility come to the fore
  • The trend toward centralization

Today, apparel companies have a trend toward greater centralization, with the main hub often located in Asia. Centralized procurement models tend to deliver the most operational benefits, enabling the creation of economies of scale. Regionally focused principal companies adapt quickly to changing consumer demands and provide rapid time to market.

  • Aggregating inventory to minimize markdowns

Apparel companies should also seek greater flexibility through their distribution centers. By aggregating as much inventory as possible, they can react quickly to changing demand, reallocating goods among wholesale, retail and e-commerce sales.

  • Optimizing relationships with licensees

In recent years, stronger relationships have emerged between apparel companies and licensees. Licensees must develop the brand and align their own operations with the operating model of the apparel company.

Beverages — leveraging global scale
  • Untapped potential

There are strong, global-scale dynamics at play within beverages. Products are frequently global and may only differ subtly across markets. Only a few beverage companies have, however, implemented true regional or global supply chain management. There is significant untapped potential to pool resources across countries to improve product availability, working capital and asset utilization.

  • Effective procurement operating models

The most effective procurement operating models typically consist of: a centralized core, with regional and local variants for specific categories also mega categories, like packaging or bottles. This provides maximum control while also enabling a degree of local variance. By optimizing procurement, beverage companies have cut input costs by 3% to 12%.

  • Exploring the buy-sell model

CP companies are exploring buy-sell models, where the central procurement company becomes the only supplier to the group. This ensures optimal forecasting and capacity planning across the supply and demand networks. For some, toll manufacturing is the next step. The manufacturing entity charges a “brewing fee” to the supply chain company but never owns the product.

  • Co-location with other functions

Co-location of procurement with other functions enables a more integrated approach. Procurement teams could play a bigger role in areas such as product and packaging.

Food — a new approach to market clustering
  • Tailoring the supply chain to the needs of the consumer

Food companies must constantly adjust their operating models to “unlock” value from their global business operations. Many food companies have arguably become too centralized in recent years. They recognize that they need a more regionally driven model. In this case, proximity to the consumer is key because tastes vary widely from market to market.

  • Clustering markets by stage of development

Companies should consider clustering markets according to their stage of development.

Markets such as Japan, Australia and South Korea can be grouped together due to similar dynamics in terms of the maturity of modern trade. Another cluster could comprise Myanmar, Vietnam and Laos, where traditional trade still dominates.

This clustering approach enables companies to stay close and relevant to the market, while still realizing some scale benefits by bringing similar markets together within the same regional structure.

  • Taking constraints into consideration

The constraints of markets should be factored into the design of these clusters. For example, various economies in Asia-Pacific have restrictions on the cross-border movement of products, and may apply significant duties or not provide the required licenses. While this may restrict the size of clusters, it can also introduce further opportunities in choosing locations where fiscal regimes and talent differentials exists.

Summary

By looking closely at business drivers, and at how scaling both locally and globally can impact operations and regulatory environment, companies are transforming their operating models into more agile and collaborative systems.

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By

US Americas

Multidisciplinary professional services organization