TOWARD 2020

TOWARD 2020How the F&B industry can close the strategy-to-performance gap and

innovate for the future.

This report is brought to you by the teams at Inside FMCG and management consultancy

TIME TO LEADTHE PACKAustralia’s F&B sector is lagging behind other industries when it comes to innovation and creativity. But this need not be the case.

Australia has a bit of a reputation for lagging behind in the food retail world, with too many companies sitting on their hands

awaiting the arrival of Amazon and Wholefoods, or heading to Europe to find the latest trend or technology to bring back to Australia.

And whenever we do hear about innovation in the FMCG category, it is inevitably about a shiny new product on the supermarket shelf. Because it is not sexy, no-one really talks about the work behind the scenes in the supply chain that enabled that product to reach the shelf safely and efficiently, or the work in the store that helps cut back running costs.

Australia last year slipped several notches on the annual Global Innovation Index, released in June by Cornell University, the UN World Intellectual Property Organisation and graduate business school Insead. The nation fell four places to 23rd spot on the index, which bases its rankings on an analysis of “inputs” into the innovation sector and “outputs” from the startup industry. Inputs include “institutions, human capital and research, infrastructure, market sophistication and business sophistication” while outputs are measured on knowledge and technology, and creative metrics.

Prime Minister Malcolm Turnbull has said he wants to position Australia as the “innovation nation”, and in sectors like mining and financial services, incubators, accelerator programs and start-up hubs are common language.

Perhaps the F&B industry should look to mining for inspiration. Australia is not only a mining centre but also an equipment and technology service centre, where the combined industries are known as METS. These businesses have a turnover of $90 billion, they export goods and services worth $15 billion, and

represent 21.7 per cent of the national job market.

Test bedLike mining, FMCG is a global marketplace, and Australian companies are challenged with higher input costs such as wages, fuel and imported raw materials compared to their global competitors. There is also the scale of the country versus the population. But rather than view this as a handicap, perhaps we need to adjust our view – maybe our special attributes as a nation make Australia possibly the best test bed for innovation globally.

With its own peculiar challenges such as a duopoly of major retailers plus 7.6 million square kilometres shared by only 24 million people, if a product can work, a technology can succeed and collaboration can occur in Australia, most likely it could be replicated globally.

We need to be drawing inspiration from other sectors for innovative ideas that can be applied to the F&B sector, across products and supply chains. To do this we need to jump the international market place, stop lagging and get out ahead. With the right headwinds, focus and collaboration, Australia could be seen by the world as the place to look for innovation and a test bed for technology and products alike.

Management consultancy Pollen was founded on a belief that value chains can be transformed through collaboration and technology, and has a vision of creating with its clients a step change in the F&B sector, moving it from a follower to an innovator.

PAUL EASTWOOD, CEO, Pollen Consulting Group

PAUL EASTWOOD

TOWARD 2020

Play in our

sandbox...Australia has enormous potential to become a test bed for global innovation, but it all rests on the shoulders of the FMCG industry.

A ustralia should become the “sandbox for innovation” to disrupt the world as we know

it. That is the philosophy of assistant Minister for Industry, Innovation and Science Craig Laundy, as outlined on the ABC show Q&A.

“I would argue that we are the perfect test bed for the world’s technology,” he told viewers, saying overseas companies could come to Australia to “play and innovate”. It is a nice sentiment, but where are we now and how can we get there?

Australia’s FMCG industry trends often mimic similar European markets of a decade ago, our consumers sharing similar tastes, culture and behaviours. Currently, private-label share in Australia is lower than in many European countries, but retailers are striving to grow this segment, and not for the first time.

Aldi’s expansion in two states is no doubt expediting the adoption of private-label strategies across major retailers, which is driven in turn by major retailers hiring experience through European-trained retail executives. Pressure to compete with discount supermarkets and private label has driven national brands to invest significantly into promotions, putting significant pressure on the industry.

An opportunityPerhaps the most significant similarity, although more recent, is the onslaught of

OLIVER NORTH

online retail. While Australian retailers are playing with how their online service will look to the consumer, it is at an early stage of innovation. Amazon’s disruptive arrival in Australia seems set to accelerate a move to online shopping. Interestingly, this offer an opportunity for Australia, as there is no lone digital adoption strategy. Clearly, global markets are going in similar directions, but there are many different paths and some emerging markets are reinventing adoption stages previously experienced by established markets.

A study by Deloitte, 2016 Global Powers of Retailing, shows that fewer than 20 per cent of the world’s top 250 retailers work on Australian soil. Will this relative lack of saturation continue? I suspect not. Retailers already with a presence will look to expand while new entrants will look to capitalise on a stable economy, substantial government spend and a robust consumer appetite for local and international household goods. Globalisation will force significant challenges for all in what will be perhaps the most disrupted and competitive of all market sectors.

If the Australian industry really is following trends seen in other markets, is it capitalising on a time of increasing innovation, or is it following a well-trodden path of bullish pressure down the supply chain and siloed identification of opportunities in innovation and efficiency?

Can we do something different? Does

the timing mean we can more quickly and efficiently adopt technology than our European counterparts? Can we accelerate and position ourselves as a world leader in FMCG?

The lingering question, though, is: are our supermarkets ready and willing to embrace change?

Reduced to a remnantIt is no surprise that manufacturing in Australia has been steadily declining over the past 30 years. It now accounts for around 7 per cent of total output and employment, half of what it was in 1990. It could be said that manufacturing has been reduced to a remnant. The remaining industries have either found special niches that need either little labour or a lot of energy, or they rely on customers who need proximity or immediacy such as FMCG.

Meantime, Australia’s food-industry contribution to national manufacturing has grown by 30 per cent over the past seven years, according to a new Australian Food and Grocery Council

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(AFCG) report. The council’s CEO, Tanya Barden, reiterates the contribution the sector makes to the economy “at a time when other manufacturing is moving offshore and being buffeted by internal and external economic pressures”. So if the sector is going nowhere, how can we set ourselves up for success?

While it may be true there are parallels between FMCG in Europe in 2008 and Australia today, the same cannot be said about the health, diversity and application of the technology sector. And while the emergence of Aldi and Amazon in Oceania may be a nuisance to some, there seems to relevancy in the old adage “necessity is the mother of invention”.

As the Australian FMCG industry is in the grips of forced change, should we be focusing on seeking a new direction rather than blindly following a well-trodden path?

Potential disruption What technologies and products will emerge in the next 10 years within FMCG is anyone’s guess, but changes will not happen overnight. However, it is important for leaders to ensure they keep on top of any changes within the industry, challenge traditional business models and encourage innovation. Failure to do so will gift an opening to innovative global companies to potentially disrupt the category entirely.

It is a time to empower individuals and promote innovation. Old answers may become dated and redundant as new ideas take hold. Empower the entire workforce, including millennials, to submit ideas, and spread innovative thinking throughout the business.

Think big, start small and act fast. Open your mind to technology and connectivity to reduce cost and increase efficiency across your network.

Build strong working relationships

across the value chain. This is not so much about open-book relationships but rather the honest identification of synergies where financial benefits can be shared by all. Generally, the adoption of cost-reduction programs is fairly mature within businesses, but do we have the ability to take a holistic view, see our business as a process within the entire value chain and understand the drivers that can deliver value to a wider collaborative group?

Art of distributionIt is time to nail the art and science of distribution. Some global retailers, like Alibaba, have moved to 24-hour anywhere delivery. Innovation in distribution models is becoming common, enabled by technology.

UberEats is a great example, as a service enabling food to be ordered anywhere within a city linked to a distributed network of independent drivers. What is to stop Uber from developing retail partners?

Interestingly, as this magazine goes to press, Coles has announced a collaboration with job-outsource company Airtasker. A 12-month trial in New South Wales will allow eligible customers to post a shopping list and budget on the outsourcing platform and receive groceries to their door on the same day.

The potential for Australia to be the test bed for global innovation is enormous – we just need an FMCG industry ready and willing to change traditional modes of thinking.

As the Australian FMCG industry is in the grips of forced change, should we be focusing on seeking a new direction rather than blindly following a well-trodden path?

OLIVER NORTH, Consultant, Pollen Consulting Group

Applying the Amazon model to a brick-and-mortar retail industry would lower overheads by easing stock levels,

freeing up cash, cutting manual labour and reducing product travel.

Undoubtedly, the two biggest changes on the Australian FMCG landscape are the

arrival of e-commerce giant Amazon and customer behaviours, each one fuelling the other. And while the incumbent retailers keep sitting on their hands, other new entrants will be breeding more “Amazonians” as they go.

Consumers will always be in the driver’s seat, leading the way with their ever-changing preferences, priorities and purchasing habits, leaving it for the retailers to make the right decisions to keep pace, continually chasing their tail.

To get ahead of the Amazonians, the whole FMCG value chain needs to adopt and adjust to new ways of meeting customer needs. The sector globally is often so focused on the end customer it forgets about the engine room, the supply chain. Amazon certainly did not, which is why it is winning, but could it be blindsided by Australia or other nations shifting the paradigm again?

It is entirely possible – the Australian sector is well positioned to think differently and leapfrog the competition, putting itself at the cutting edge.

Following the packWoolworths CEO Brad Banducci said earlier last year the supermarket company had gone from being reactive to being more collaborative and forward-looking with suppliers. But this is only really following the international pack, with

PAUL EASTWOOD

Beating the Amazonians

companies like M&S in the UK far further down this road with its “Plan A”. But this is no match for the aerospace sector or companies like Toyota, which actively invest in developing their suppliers’ capability and skills.

Collaboration is more than just saving costs. It is the key to improving the quality and value proposition for consumers, as well as moving ahead of consumer trends. Taking the time to identify these opportunities, let alone the complexities in navigating both businesses to implement changes, means they often take a back seat.

It is not surprising to see the success of meal kit services within a short timeframe. Delivered to your doorstep, meal kits are mostly preferred by on-the-go consumers with poor time availability. What is shocking is that retailers are not leading this through a collaboration with suppliers – it is new entrants starting with nothing other than an idea and some start-up funding.

Technology and innovation through collaboration is the key to delivering on consumer demands, which incidentally usually also leads to cost improvements. However, setting up sophisticated benefit-sharing models on day one or aiming for wholesale collaboration across the industry does not work. The right way forward is to develop principles, and to have a grown-up conversation on aligned objectives. It is a long-term investment and involves thinking differently about

how businesses can work together to meet customer needs.

Biggest blockPerhaps the biggest block is the fragmented supply base, where retail buying teams are dealing with hundreds if not thousands of suppliers. Consolidation would not only reduce costs through economies of scale, but also pave the way for true collaboration rather than a superficial maintenance of relationships.

Focusing on closer alignment allows for quicker new product development, adopting the approach of the lean startup where products are tested based on minimum viability with a win big/fail fast mentality. This bucks the rules and regulations around delists, and having to re-range to quickly adapt and develop to customer needs. With such a system in place, Australia has the chance to become a global FMCG test bed.

Only where collaboration and a true understanding of the full value chain are in play can we really start to streamline and create an efficient value chain.

British supermarket giant Tesco has had its offer to buy wholesaler Booker for £3.7 billion approved, and claims it will create the UK’s “leading food business”. The deal has spooked the grocery sector, but investors liked the idea with shares in

TOWARD 2020

both businesses trading higher after the announcement.

Tesco claims it will give its suppliers more customers to sell to, while giving independent retailers more choice. It also thinks it can cut down on food waste by making the supply chain from farm to retailer more efficient, and this point probably has significantly more value than it realises.

Thinking pointsUsing technology as an accelerator, the cost savings through a merged distribution model and other synergies could rival Amazon and provide some thinking points for the Australian market.

A key challenge in Australia is distribution costs. Retailers’ supply chains are designed for volume rather than speed. Direct-to-store is common in the fresh model because the retailers’ networks are designed for pallet volumes and lower in-store replenishment cycles. But this means time on the shelf and minimum order quantities are driving in-store waste.

Whether it be a collaboration, joint venture or acquisition, the partner with access to a lean supply chain designed for smaller, more frequent delivers will be leading in the categories that cater to customer demand, such as “fresh”.

A deal like Tesco’s would significantly increase density in deliveries by including supermarkets, convenience retailers, wholesalers, restaurants, caterers and potentially the end customer all on the

same vehicle, solving one of the key supply-side problems.

Bullwhip effectVelocity is defined as speed and direction of motion. Translated into the supply chain world, it means the right amount of the right products in the right place at the right time.

Most businesses use third-party logistics and warehouses, while others push their own logistics systems, creating complex and fragmented networks with multiple points of inventory. Each one holds a little more than the next in the chain to ensure supply. The bullwhip effect kicks in with stock hold multiplied to cover variability in demand down the supply chain. In simple terms, our supply chains are fat and growing fatter based on the wrong information being provided.

Technology could enable a smoother supply chain with demand sensing and shared information. However, there could be an exciting alternative in a paradigm change that would allow retailers to win the battle of the Amazonians. This would be delivered through the retailers vertically integrating not to the manufacturers and the farms, but through owning the physical supply chain from the end of the manufacturing line forward.

Instead of product flowing directly from production lines to warehouses owned by the retailers, who could then distribute to either their stores or other customers for the manufacturer, the manufacturer would agree a stock-hold position and

location as close to the final customer as possible.

In theory, this is moving to vendor-managed inventory on a grand scale in the distribution centres, applying the Amazon model to a brick-and-mortar retail industry. It potentially will have a significant impact on third-party logistics and the future of storage companies. However, it would remove a huge amount of stock, freeing up cash, removing manual labour in the warehouse, reducing the distribution legs product would travel and lowering such overheads as planning and customer service. And all of this before we think about automation and technology accelerators.

Australia’s FMCG sector has the opportunity to put together this new paradigm, creating the physical network, underpinned by collaboration, innovation and technology that would make its model the envy of the world. People like Amazon come to learn and test new ideas.

There could be an exciting alternative in a paradigm change that would allow retailers to win the battle of the Amazonians.

PAUL EASTWOOD, CEO, Pollen Consulting Group

TOWARD 2020

More than a buzzword“Industry 4.0” is set to make a fundamental change in how businesses work, so it will pay to become an early adopter.

DANNY VAN D’HUYNSLAGER

O nly 10 short years have elapsed since we used our mobile phones simply as phones,

while now our smartphones essentially hold the sum of all human knowledge in our pocket. In the way these devices have revolutionised our personal lives, so too “Industry 4.0” is set to fundamentally change how businesses work.

Sure it’s a buzzword, but Industry 4.0 is essentially the next phase in the digitisation of the entire value chain. It is driven by a rise in data availability, processing power and connectivity thanks to the internet of things (IoT). It builds on new forms of interaction, connecting the physical and virtual worlds.

Will it change how businesses work in Australia? Absolutely. If not, Australia cannot hope to compete on a global scale.

Is it easy or straightforward? Absolutely not – and not doing it right will be costly. Finding the right way of engaging with Industry 4.0 will be challenging in an environment where we are all dealing with an ever-increasing flow of information, not to mention having to run our daily business and

satisfy our customers.

Steep adoption curveThere is no question online shopping will pick up, with Amazon being a key driving force. Pundits predict there will be a steep adoption curve, just as there has been in other markets, and you had better be ready for some extreme customer expectations. A slick online interface will no longer be enough to convert a sophisticated online shopper.

You may have already heard of blockchain technology. For the FMCG industry this will be the big Industry 4.0 game changer, with far-reaching consequences. Major industry players such as Mars, Reckitt Benckiser and Unilever already have advanced plans to sell directly to consumers, cutting out the middleman, thanks to the security and transparency of blockchain.

For the retail sector, the approach to Industry 4.0 will have to be centred around an omni-channel customer experience, providing smart and virtual shopping experiences – like the possibilities of scanning nutritional information through smart glasses.

The focus will be on making shopping a seamless experience. Retailers and foodservice businesses need to gear up their systems to deliver on that mass customisation expectation.

Many companies have jumped on the doorstep-delivery convenience bandwagon, focusing on that “last mile”, an important link as that will ultimately satisfy (or not) the convenience shopper. But what about the thousands of miles in the supply chain that hold the potential for innovation and better business?

Untapped potentialA product can travel thousands of kilometres from farm to table, and there is so much untapped potential for technology to find a better way for unnecessarily long and complex value chains. For a start, technology can improve supply-chain transparency, leading to better traceability, less waste and improved food security.

A number of so-called Industry 4.0 technologies are already in use around the world, for example, DHL is using smart glasses with augmented reality to improve warehousing efficiency,

delivery and performance. The potential lies in the early adoption of these technologies and combining them with IoT technology.

There are high expectations blockchain technology will deliver end-to-end transparency in the global food system, and be the answer to information sharing that really exploits value-chain opportunities. Food safety, sustainable waste and the use of smart resources are all global business drivers that will improve significantly from value-chain transparency, so you can be certain the food industry will be affected.

Australia has all the ingredients to benefit from the impacts of technology on the value chain:

• Being part of the global food system as a big exporter

• Smart resources management, mitigating energy price surges and landfill restrictions

• A long distribution and supply chain, benefiting from smart products and services to focus on speed rather than capital-intensive volume

• Smart factories, maximising return on capital expenditure as well as mitigating skills gaps and distance from supply lines

• Less complex standards and legislation compared to other regions, enabling Australia to get ahead of the adoption curve.

Best of both worldsCompanies need not solve problems in isolation any more. No single organisation has all the knowledge because it is distributed across many stakeholders in the networked business world. When it comes to technology, it is impossible to know every single best way forward.

Most startups have the agility to come up with great innovative ideas and attract some of the brightest young minds, but lack the funds, business acumen and infrastructure to take it all the way. Larger companies are tapping in to that network with innovation hubs and investments in incubator spaces.

Most Australian businesses are small to medium sized, which makes them nimble and quick to market. But they lack deep pockets. Combining the best of both worlds, building value-chain collaborative co-creation networks of startups, SMEs and bigger technology players, should be the prevailing model for Australia.

At Pollen, we focus on working together with both the supply and demand sides, finding cross-company benefits with full transparency and sharing the financial outcomes.

A matter of trustIt is not an easy process, and one common denominator constantly inhibits collaboration: trust. The fear of losing that perceived competitive advantage, a culture that shuns sharing, and uncertainty of who owns future innovative intellectual property all make collaboration a challenge.

But, like all challenges, the rewards can outweigh any difficulties. Pollen has proved it can work by implementing a collaborative approach with a major retailer across its food-supply chain. Pollen has a core belief that the best way to tackle the big opportunities is through sharing knowledge, experiences and working collaboratively toward a shared transparent goal.

How to make it happen?Firstly, think big. Look at where you

fit in the entire value chain, from farm to table; identify your key partners

and opportunities, be it waste, food safety, energy or simply supply-chain transparency. Then, with your partners, set collaborative objectives in line with your own business objectives, short- and long-term.

Start smallIdentify all stakeholders and build alliances, be it governmental, consumer associations, universities and/or non-profit organisations.

Start small. Analyse the technologies available to identify small learning opportunities. These can include smart packaging, augmented reality or machines connected through sensors, using big data to improve velocity across the value chain. Build skills and learning experiences within your organisation. Early successes will engender confidence.

Become an early adopter. Try and test, adopt the principle of fail fast/fail forward, and build the future networked competencies of your organisation into your value chain to create collaborative trust. Share the benefits across the entire value chain, potentially through new business and equity models. Share information securely, potentially through blockchain technologies.

Finally, do not overlook the organisational skills needed to make these changes. Technology by itself will not deliver the results you seek. This will come from a combination of human creativity and technology supported by leadership and a collaborative business culture.

DANNY VAN D’HUYNSLAGER, Director, Pollen Consulting Group.

TOWARD 2020

Collaboration can be king Australian retailers need to adopt best practices to reshape their approach to working with suppliers, forming dynamic partnerships that lead to success for all concerned. JOCELYN SPURRIER

In today’s fast-paced and demanding retail climate, cost reduction is king while genuine collaboration is the

proverbial stepmother. Failed attempts at collaboration have dissuaded suppliers and publicly damaged retailer reputations.

A case in point was Coles’ Active Retail Collaboration scheme, which came under fire. Ultimately it cost the supermarket chain pecuniary penalties of $10 million plus costs after “unconscionable conduct” directed at more than 200 suppliers.

We are programmed to find a reason to not like our neighbours. In fact, research shows we go out of our way not to talk to them. Perhaps the same approach permeates our value chains: it is often easier and less hassle if we just meet once a year and agree a price; we can exchange disappointment in emails and irate phone calls that are often treated with a pinch of salt.

It is time to change the mentality on collaboration in Australia, and it might be a way to get the jump on the globe as other nationals also fail at collaboration in the sector.

Yet other industries around the globe with a few dominant end suppliers have been effectively collaborating for decades. Just look at how Toyota works with suppliers, or what collaboration means in the aerospace sector. Such approaches should inspire Australian retailers to adopt best practices to reshape their approach to supplier collaboration.

All encompassingIn the UK, Marks & Spencer’s “Plan A” collaboration activity delivered $160

million of net benefit in 2014/15. The plan is all encompassing for the retailer, aligning to supply-chain engagement and collaboration. Its food suppliers have implemented three levels of sustainability benchmarking aimed at improving human resources as well as environmental and performance efficiencies. The 30 per cent of product by volume coming from factories that reached silver level in 2015 is expected to rise to 100 per cent by 2020.

Under the plan, a supplier exchange network, conferences and workshops combine to develop and communicate best practices, and a £50 million (AU$87 million) fund provides capital for suppliers to introduce new working methods.

In total, Marks & Spencer food suppliers have cut waste by more than 250,000 tonnes and saved 8.5 million cubic metres of water. A third of sites have improved energy efficiency by at least 20 per cent on their baseline while 46 per cent have positivity scores of 65 per cent or more in employee feedback surveys.

One of the most important elements in collaboration is a consistent framework. Over-complicated models can lead to lack of engagement and participation. By starting with just four pillars – to define, support, capture and reward – retailers can develop sustainable collaboration programs that are easily managed and improve as they mature.

Critical elementsThere are two critical elements in the define phase: the program description and choice of supplier. Definition is fundamental to the program’s success.

During this stage, a clear vision is set and objectives identified that will drive such improvements as cost optimisation, sustainability, joint supply-chain initiatives, delivery in full and on time, and industry-leading quality or freshness. Each objective needs to include a range of performance levels with data to track progress.

Deciding when and which suppliers should be included in a collaboration program is an exercise that varies from industry to industry. For instance, critical suppliers can be identified by tools that provide an aggregate score for each based on such criteria such as lead time, historical performance and supply risk. Within FMCG, this data could also include volume, cost and relationship.

To ensure the relationship is a partnership and not a dictatorship, transparency is paramount. Data needs to be gathered to provide a clear starting point for collaboration. Market feedback analysis can provide insight into topics such as overall performance, cost competitiveness, product quality, delivery performance, ease of doing business, customer support, responsiveness and flexibility. This information will serve as a baseline from which to launch collaboration.

Knowledge sharingLarge retailers often have resources to which suppliers may not have access. These can be in the form of personnel, toolkits, ideology and economies of scale. Knowledge can also be shared through factory and distribution centre tours for suppliers.

Toyota works closely with all suppliers in its value chain to help them improve their business processes and profitability. The motor company even built a training centre for suppliers. It considers collaboration a 10-year process rather than a two-minute fix. “Base management decisions on long-term philosophy, even at the expense of short-term financial goals,” says Toyota.

Once you have started collaborating on initiatives, capturing your progress is an essential part of the journey. This process should be uniform and reviewed on a predefined cadence. This will ensure initiatives are progressing, and it is also an important gatekeeper to guarantee all parties are aligned to the ongoing tasks and desired outcomes. Market feedback analysis should be used annually to track progress.

Collaboration should be celebrated. Recognition should not be solely tied to

Such approaches should inspire Australian retailers to adopt best practices to reshape their approach to supplier collaboration.

cost reduction. Recognise suppliers for innovation, performance, quality and strategic partnerships. Collaboration can gain further traction through rewarding suppliers with larger volumes, scope and joint initiatives.

As your collaboration program gains traction, and suppliers see the value in the relationship, the program will grow organically. Dynamic partnerships will make the path to increasing your bottom line more enjoyable for all stakeholders.

JOCELYN SPURRIER, Consultant, Pollen Consulting Group

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A matter of just in timeFMCG has much it can learn from the efficiencies and cost savings of vendor-managed inventories.

MONITA BROUGHTON

Acollaboration between vendor and customer to achieve both working and financial benefits

also brings the opportunity to move toward a highly beneficial vendor-managed inventory model.

In traditional inventory models, vendor and customers manage their individual inventory levels with a focus on forecast accuracy and sales history, trying to maintain stock levels based on this data. This can result in high inventory levels, particularly where shelf life is a concern, forcing them to keep low-runner products for that “what if” order, tying up precious cashflow in potentially unsellable and/or obsolete product. There is no visibility across material availability/shortages and inventory levels, so it’s every man for himself.

Vendor-managed inventory across the supply chain is often seen in industries like automotive where just-in-time manufacturing goes hand in hand with the “pull”-model replenishment systems that come with vendor-managed inventory. In this system, replenishment rates are established on understanding true customer consumption and optimal stock levels, combining this with knowledge of seasonal variances and sales history.

Short lead times become crucial in just-in-time environments, where flexibility is crucial and model mix is not forecast far into the future. This need for short lead times is mirrored in the food industry where heightened demand for fresh and to-go products means it is now time for FMCG to move into the just-in-time environment. More than ever, the need to shorten the time between paying and being paid (buying produce and delivering product) is key to fresh-product success.

In a vendor-managed inventory system, the supplier is ultimately responsible for tracking and replenishing customer inventory, but for this model to succeed the risk of shortages needs to be a shared liability.

There is no “us and them” mentality. No-one blames upstream processes or supply for shortages that affect their own bottom line. We are all critical links in the chain.

Frequent communication and transparency of data is key, with an emphasis on an “all for one and one for all” approach, with each link understanding its role. Supply chains need to be regarded as an ecosystem, with each player holding a crucial role in sustaining the balance. The consequence of one link failing is that the entire ecosystem fails.

Vendor-managed inventory models are more transparent, using fewer locations and truck movements to sustain optimal stock levels for longer-life products. Shipping can be planned on previous week, day, shift or even hourly consumption rather than batch-order placement, with milk-run delivery or bus-stop-style logistics, instead of the large dock-to-dock delivery mentality.

In fresh-produce systems this becomes crucial to enable reduced lead times and gain extra shelf life. The benefits for all involved are lower inventory levels and flexible ebb and flow to meet complex seasonal consumer demands.

Launching such a collaborative system needs effort up front, as does any good relationship, with the sharing of information and the gaining of trust. Learning to see the supply chain as an integrated network means communication lines need to be established and stay open, and may require the integration of data networks between businesses. Forecast and planning spreadsheets become as redundant as fax orders. Enterprise resource planners should no longer concentrate on just managing processes but

rather move toward establishing and sustaining integration between businesses.

At Pollen Consulting group, we estimate the benefits of vendor-managed inventory could be between $2 and $5 billion in the Australian FMCG sector, offering significant cost savings and creating a new paradigm for the world to follow.

Imagine a supply chain where products are moved only once after manufacture, allowing the businesses involved to focus on their key strength of making great products efficiently. The retailers can drive shareholder value by vertically integrating warehousing services, which should be a core competence. Logistics providers focused on vehicles and distribution networks leave third-party warehousing businesses at risk of demise.

As an example, Coles and Woolworths have a combined turnover of more than $75 billion, so by releasing five days of stock-holding in the end-to-end network could free up a $1 billion to invest back into the sector.

MONITA BROUGHTON, Consultant, Pollen Consulting Group