Failure at Industrial Transformation is Adversely Impacting the Financial Performance of CPG/F&B companies

Posted by Tom Comstock on March 16, 2022

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Industrial Transformation (IX) is the proactive and coordinated approach to leveraging digital technologies to create step-change improvement across the value chain. IX is a key mechanism that Consumer Products and Goods/Food and Beverage (CPG/F&B) companies are using to address the changes rolling across their industry: pandemic driven demand fluctuations, worker shortages, increasing competition from local brands, new channels to the consumer, and ever-increasing use of contract manufacturers and copackers. Yet the industry is falling behind in IX and is paying the penalty in the form of sub-optimal financial performance compared to manufacturers more generally.

IX is paying off for Industrial Transformation Leaders

So where are Industrials generally, and CPG/F&B companies specifically, in their search for step-change improvement in operations? Five percent of companies overall describe their program as a “real success” with “dramatic results” and another 15% report they are making “significant progress and the corporation is seeing value”. We define those top 20% of companies successfully executing transformation as IX Leaders.

These IX leaders realized significant Return on Investments (ROI) from their IX Program. As detailed in a recent LNS Research eBook, IX is delivering for manufacturers as ROI is being realized widely by IX Leaders. In fact, 80%+ of IX Leaders were able to reduce COGS and/or improve operating margins and/or grow revenues by at least 3% as a result of their IX program.

IX Leaders, Benefits from their Industrial Transformation Program, LNS ResearchThe CPG/F&B Industry is Falling Behind

The CPG/F&B industry is falling behind in both the number of companies that are successfully transforming and in the realization of benefits associated with that transformation.

The data clearly shows that CPG/F&B companies are behind manufacturers in other industries: only 11% of CPG/F&B companies are IX Leaders, just over one-half the IX Leaders compared to manufacturers generally. Further, CPG/F&B had 50% more companies reporting they are stuck in the pilot phase and almost twice as many companies reporting they had no plans to engage in IX at all.

CPG/F&B companies were seeing improved financial performance but just not as frequently or regularly as industrials overall. CPG/F&B were three times more likely to report “No Reduction” in Cost of Goods Sold (COGS), and one-half as likely to have realized more than a 5% reduction as industrials more generally. An identical pattern was found in terms of increased revenues. CPG/F&B were four times more likely to report “No Increase” in Revenues, and 72% less likely to have increased revenues by more than 5%. Therefore, we have argued that: “…failure in IX is adversely impacting the financial performance of CPG/F&B companies.”

Reduction in COGs as a result of IX program, LNS Research

 

How can CPG/F&B companies reorient their IX Programs for success?

Two LNS Research spotlights have the answer. We have identified the key Best Practices in IX being executed by IX Leaders across People, Process, and Technology dimensions.

Our drill down into IX Readiness in the CPG/F&B industry details how poorly these companies are doing at conforming to a wide range of LNS Research identified Best Practices. We found:

  • Getting Real - IX Now CalloutCPG/F&B companies are not staffing their teams for success.
  • Improving Operational Technology (OT) systems could be a key transformative opportunity for most CPG/F&B manufacturers yet it is not a priority in the functional scope of most programs.
  • CPG/F&B companies may not be focusing enough on advanced digital technologies of IIoT, advanced analytics, and other technologies at this stage of their IX journey.
  • CPG/F&B companies are hyper-focused on the customer experience at the expense of other “low hanging fruit” in IX.

Let’s drill into three specific examples for more insight.

LNS Research Best Practice: IX and Operational Excellence Teams need to be integrated over time

First, LNS Research has identified that reconciling IX and Operational Excellence (Lean, World Class Manufacturing, Six Sigma, TPM, or some other program) teams is critical to IX success. In a blog post specifically on that topic we noted:

“The IX program team needs to proactively plan their engagement with CI teams in the plant…Over time, manufacturers should consider following IX Leaders: 70% of IX Leaders have converted, or plan to convert Continuous Improvement/Operational Excellence teams into IX teams within one-year. They are 140% more likely to have already converted than Followers.”

Large CPG/F&B companies are heavily invested in Operational Excellence programs, so reconciling them to IX becomes even more of a challenge. The leaders of these management systems/teams need to start collaborating with IX Program Heads to bring the two together. Processes, methodologies, and personnel need to mesh for impact over time. At LNS Research we often suggest that the IX team consider digitizing CI tools as a great starting point for this integration and as a key step on the IX Journey.

LNS Research Best Practice: Bring along the whole manufacturing network

LSN Research regularly sees CPG/F&B companies failing because they are overly focused on making their best (their Lighthouse plants) even better. In a blog post on that topic, we said:

“Although no one can argue with the technological innovation and productivity gains that lighthouse plants demonstrate, our data shows that including lighthouse plants as part of your Industrial Transformation (IX) program does not correlate to success.”

Core to that challenge is that the level of automation in the lighthouse plants is significantly above the level of the rest of the organization. Automation becomes critical.

Our data shows that CPG/F&B companies are investing heavily in automation right now but often only loosely related to IX initiatives. The industry is facing profound employment shortages and still has a high degree of manual labor so they're looking at automation to address this specific challenge. The industry issue is that the automation decisions are often being made in a silo, separate from IX. LNS Research's data shows that IX should holistically look at automation, digital technology, and management systems. We, therefore, stress CPG/F&B manufacturers to look beyond tactical, narrow ROI and instead think holistically about how automation can be tied to a number of strategic goals including but not limited to the pandemic intensified employee hiring challenges.

People, Process, Technology - LNS Research

 

LNS Research Best Practice: Top-Down Engagement is Required

At the highest level, given the number and scale of issues, one has to question the industries’ real commitment to Industrial Transformation. The budgets are small. The technology exploration is limited. The scope of the programs are tight. It appears that CPG/F&B companies need to “Get Real” and decide if they are committed to IX or not. This is especially true as CPG/F&B companies are often very large organizations, typically with many different regions and business units that create complications for moving quickly or decisively. This organizational complexity demands more focus from the top to push and engage across regions and business units. Transformation is not easy and half-hearted engagements typically end in failure. Therefore, our advice to the C-suite in the CPG/F&B Research Spotlight includes: “…remember to go big or go home...a half-hearted commitment is a recipe for stagnation or outright failure. Be ready to commit your best talent and serious budget or wait until you are. Culture, communication, and inclusive teams are key when you are ready.”

Take a look at those Research Spotlights and stay tuned to LNS Research as we continue to explore the keys to transformation success.

Industrial Transformation Readiness Getting Real Research Spotlight


All entries in this Industrial Transformation blog represent the opinions of the authors based on their industry experience and their view of the information collected using the methods described in our Research Integrity. All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with or endorsement by them.

Categories: Operational Excellence, Continuous Improvement, Industrial Automation, Industrial Internet of Things (IIoT), Industrial Transformation / Digital Transformation, IT/OT, Industrial Transformation Analytics, Lighthouse Plants