Coca-Cola, Mondelez trim SKUs as CPGs tackle pandemic stresses
Date: Thursday, June 4, 2020
Source: Supply Chain Dive
Supply chains are reducing complexity to better operate in volatile market conditions.
With 126 manufacturing facilities and 110 distribution warehouses worldwide, Mondelez has plenty of complexity to work with. But demand spikes and complexity don't always mix.
"Our retailing clients needed us more than ever. They were seeing huge demands for the pantry loading," said CEO Dirk Van de Put at an investor conference in late May. Revenue (excluding currency fluctuations) for the company was up 6.4% year over year in Q1, but "costs to serve" or operating expenses were up too.
Van de Put described the company’s supply chain as "resilient" on a conference call with analysts in late April, but conceded that the abrupt shutdowns around the world added difficulty to sales and distribution, and gross profit margin fell more than three percentage points. His plan to meet the moment was to do less to deliver more.
"We are working on making our business simpler," the CEO said.
Mondelez, Procter & Gamble and Coca-Cola are world-renowned for their immense supply chains — built to consistently deliver some of the most ubiquitous products in the world. They’ve also all made moves to reduce the complexity of their supply chains amid stressors presented by the pandemic.
"We’ve seen an increase in demand in developed markets, and we’ve met it by focusing on the most important SKUs," said Van de Put in late April — calling the reduction "significant" without putting a number on it. During the first quarter, Mondelez reduced its total SKU count in search of greater simplicity.
Coca-Cola CEO James Quincey said in late April the company was "ruthlessly prioritizing to deliver on core SKUs" to drive efficiency in its supply chains and streamline operations for retail customers.
Procter & Gamble too narrowed production focus on core SKUs to ensure supply flow despite an influx of demand. "We’re discovering daily lower-cost ways of working with fewer resources," said COO and CFO Jon Moeller on an April earnings call.
"The 'physics' of supply chains means that by adding SKUs, response times, inventories, and performance are all adversely affected," Simon Croom, professor of supply chain management at the University of San Diego, told Supply Chain Dive via email.
The business models of major CPG companies are built on supply chain efficiency, but the supply chain behind turning one product — for example, a single soft drink recipe — into multiple SKUs means variation in form factor and packaging materials. Even if the liquid inside six different SKUs of Diet Coke are identical, the various sizes and marketing efforts complicate the supply chain.
"If I reduce the variability, my manufacturing unit cost goes down, because I can buy the same part in a larger volume," Peter Bolstorff, EVP of the Association for Supply Chain Management, told Supply Chain Dive in an interview.
Chopping the long tail
Moeller said efforts to prioritize and focus P&G's supply chain may have lasting effects. "There’s potential for this to result in a cutting of the long tail of inefficient SKUs and brands in our categories," Moeller said.
The "long tail" refers to the end of a list of SKUs, usually sorted by total sales.