How can consumer firms build a smarter operating model?
The ability of a firm’s operating model to manage consumer experiences will determine its success in gaining a competitive advantage.
To truly address the needs of the digital consumer and remain relevant, consumer companies need to ensure that all major functional areas (including R&D, manufacturing, supply chain and HR) are aligned around a common operating model. A digital operating model will enable efficiency, allowing firms to gain and retain a competitive advantage over their rivals.
For some companies, an overhaul of their supply chain and processes will be required to deliver innovative services and experiences; for others, smart supply chains and smart factories will allow them to react more flexibly to demand for personalized products. Some businesses will want the visibility of their entire supply chain that smart processes offer, so that they can reassure consumers, regulators and activists that their product is ethically sourced and manufactured.
Digital operating model is one of four themes that we believe will be central to the digitization of the consumer industries over the next decade. The other themes we examine are consumer data flow and value capture, experience economy, and omni-channel retail.
Smart supply chains
In the digital world, supply chains need to become more agile to thrive in an environment characterized by shorter lead times, higher frequency and uncertainty of demand. Companies will also need to be able to have granular visibility across the supply chain.
The technological advances that created the Internet of Things will give companies and their partners the ability to monitor supply chains in real time. This will allow firms to respond better to changes in consumer demand, enable suppliers and distributors to greatly improve logistics efficiency and empower retailers to manage their inventories more effectively.
The Coca-Cola Company
The Coca-Cola Company has introduced Freestyle fountain machines, which use RFID to monitor and track dispenser operations and place orders for supplies. These fountains also have the ability to provide real-time analytics about product consumption and preferences. For the consumers, these machines are appealing and have contributed to increasing traffic in restaurants that use them.¹
Added visibility across the supply chain through the use of control towers could increase operating profits for consumer companies by approximately $400 billion over a 10-year period through 2025. Sharing warehousing infrastructure and related logistics services² could generate $70 billion in operating profits. Additional $50 billion cumulative operating profits could be generated through reduction in procurement costs.
For retailers, automation in warehousing could reduce fulfillment costs by about 40%.³ We expect this to generate approximately $200 billion in operating profit, assuming a 20% adoption rate by 2025. Using digital platforms to share warehouse capacity could reduce logistics costs in the range of 12%.⁴ We expect aggregate cost savings of approximately $250 billion, assuming a 20% adoption rate by 2025. The aggregate operating profit impact for retailers is approximately $450 billion from 2016 to 2025.
As sales and marketing have traditionally been important functions for consumer companies, their talent recruitment and development structures have tended to focus on hiring those with skills relevant to these functions. As every aspect of a company’s operations, from vendors to factories to distribution networks, becomes digital, the skills that companies will need in their workforce will change dramatically. There are widespread concerns that education systems are not producing people who have the skill set that consumer businesses are looking for: data and technology skills coupled with an understanding of how the business works.
While companies are reliant on government policy to revitalize education systems and create a new generation of workers with those sought-after digital skills, there are steps they can take to improve their talent base. Placing more emphasis on the development of digital skills in the firm’s long-term strategy will help. Businesses can partner with government and educational institutions to design courses that will produce graduates with the skills that are most relevant in the digital era. Investing in skill development of existing employees – especially those whose jobs are threatened by automation – is equally important.
We estimate an increase in operating profits for consumer companies of approximately $150 billion over the next 10 years. Currently 50%⁵ of major companies use social networks for recruitment and we expect the share to grow to 90% by 2025. Investing in digital upskilling of the workforce could improve productivity by 20% in 2025.
P&G and Google
P&G and Google started an employee exchange program with the aim of fostering innovation and enabling cross-pollination of digital talent. P&G used the program to scale up digital skills among its employees and step up its Internet marketing initiatives. With this program, P&G gained expertise in digital and search marketing, helping it to sell its products more effectively online.⁶
Like smart supply chains, the smart factories concept builds on the technology behind the Internet of Things. The smart factory will have cyber-physical machines that combine electronic and mechanical systems to form a modular, adaptable production line. In an era when consumers are seeking increasing personalization, the flexibility of a smart production line will facilitate the production of highly customized goods. It will also be easy to reformulate, produce prototypes and get new products to market faster.
Smart factories are already up and running, particularly in Germany.⁷ Siemens has set up a smart factory in Amberg that can produce 250,000 electronic components an hour. In 1990, the production line was only 25% automated; now it is 75% automated. The defect rate has dropped to just 11.5 per million, and output has increased 8.5 times while employee numbers have been steady.⁸
As Figure 1 illustrates, interest in smart factories is growing. Companies weighing up whether to invest in smart factories face some big calls, particularly as the investment in the automation and connectivity technologies required to create a smart factory will be substantial. Smart factories could lead to challenges for regulators and governments too. If increased automation in smart factories leads to job losses, governments and businesses must ensure that these workers are retrained with the skills that will help them find new and productive jobs.
Smart factories offer scope for operational efficiencies, such as energy cost savings and maintenance cost savings, but they also enable companies to realize benefits by making possible new offerings to consumers, such as hyper-personalized products and services. Smart factories could add approximately $70 billion in operating profits over the next 10 years, assuming that 5% of the overall production will be under the ambit of smart factories by 2025.
1. The Coca-Cola Company, “Everything you need to know about Coca-Cola Freestyle”
2. Walters D., Global Logistics
3.Technology Advice, “How Kiva systems is changing the future of warehouse work”, December 9, 2013.
4. Walters D., Global Logistics
5. HR Magazine, “50% reduction on recruitment costs”
6. Direct Marketing news, “Google, P&G swapping employees”, November 2008
8. Siemens, “Digital Factory Defects”
The consumer industries are one of six sectors (along with automotive, electricity, healthcare, logistics and media) that have been the focus of the World Economic Forum’s Digital Transformation of Industries (DTI) 2016 project. An overview of the DTI program can be found here.
Our in-depth findings about the digital transformation of the consumer industries are available in a white paper, which can be downloaded here.
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