"Nature Line" is an interesting FMCG
producer. It has two product ranges that are leading brands; one is a hair
treatment and the other edible oil. The company, under any evaluation criteria,
is exceptional. It has a loyal and steady work force, extraordinary business
performance, delivers consistent growth and enjoys high appreciation from all
of its stakeholders. It also has a brilliantly operating supply chain, with low
inventories and high availability across a huge supply and demand network. The
company has always been driven by the un-compromising quest to be better and is
accustomed to finding ways to sustain its uniqueness. Nevertheless, it was not
prepared to the findings and ramifications of adopting a different perspective
on their supply chain. A perspective that
revealed meaningful lost opportunities and clear pathways to capitalize on
these opportunities, leading to impressive business effects.
We are celebrating our 20th
anniversary. It has been a marvelous journey so far, starting from my father’s
small oil workshop to a company that sells over $1B a year, in more than 20
countries around the world, with great reputation, strong brands, extremely
high stakeholders’ satisfaction, good profitability and steady growth - things
are looking brilliant. But, we did not make it by being content - we made it
through always searching for more, challenging ourselves and knowing that our
only limitation is our imagination.
So, while everyone around me smiles
happily, drinks another cocktail, and dances to the happy music I am smiling
with them but am preoccupied – I am afraid our continuous success may numb us
and as I am no longer active CEO, just active chairman I need to find ways to
keep the tension and guide the current top management so that the survival quest
of the small workshop does not turn to the decline of a giant. I am excited,
this is a new challenge for me and I feel energized. I believe I have an
interesting way forward, and I am going to try it Monday morning in my weekly
(yes, I still am involved to that extent) meeting with the top management team.
Our Monday meeting starts as usual, John
the CEO presents the performance of the last week (sales by product segments
vs. our weekly targets) and the accumulated financial performance to date. It
is satisfying, as almost every week we are exceeding our targets and continuing
to deliver extraordinary business results (in comparison to other market
players our top line rate of growth is 25% higher than the best performer in the
market and our profitability is 40% higher than the best performer). Usually we
will continue to the COO report followed by New Product Development and ending
with Marketing and sales. However, after John ended I asked to deviate from our
regular process and to use the time we have to do some thinking.
I started by recognizing the
excellent job this management team is performing and emphasizing that keeping
such performance, for as long as our company has been doing it, cannot be taken
for granted. I then said “I would like us to invest this meeting time in
thinking about being even better. I am not expressing by that any
dissatisfaction with the current performance, rather a profound belief that
self-challenge is a key component for continued success whether it will lead to
immediate practical actions, or only open our minds to explore and search, and
avoid numbness”.
I then asked that we take a look at
our supply chain, and said “we have an extraordinary well performing supply
chain. We offer more than 200 different SKU’s, buy the raw materials for them
(which is not a simple task given the core RM is farm grown), produce them in
our factories, send them to our central warehouses and then distribute them to
more than 500,000 retail outlets and distributors most of them on a VMI (Vendor
Managed Inventory) service. And all of that with modest levels of inventory,
investment and cost coupled with relatively high – 95% service level. We also
have absolutely exceptional planning and execution capabilities. Still, I would
like to ask you - Do you think we may be losing sales opportunities?”
I allowed the evolving discussion to
take place. It was confusing, we know our level of availability is extremely
high, our service level is exceptional and it took the team sometime to move
away from a “defensive” mode to a more “embracing” mode. It was when, Dany our
CFO asked “Can we for a moment not look at ourselves but rather ask what are
the occasions that, a consumer goods producer (like us), may experience lost sales?”
This lead to the following answers:
- When consumers have the intention to buy our products but cannot
- When Consumers do not have the intention to buy our products but can
We quickly agreed that the likelihood
of the first event – a consumer walking into a store with the decision to buy
one of our products that is supposed to be there, and will not find it is
insignificant to even consider. But, we were not clear about the second
scenario – a situation when a consumer wants to buy one of our products that is
not available at the retail outlet and according to our plan is not supposed to
be there. Is this interesting to look at? Can this be happening? Can it be
meaningful?
I was confident we will be able to
answer these questions in our meeting, our supply chain manager – Uday was always ready with the data and very quick in
making smart analysis. This discussion, naturally made him tick. Within a few
minutes he came up with the following data:
- The stores that sell our products hold anything ranging from 1 to 69 of our SKU’s and surprisingly the median is 7 SKU’s! (we do have about 200 in our portfolio)
- There is a clear correlation between the number of SKU’s a store holds and its revenues of our products (and thus our revenues)
This was a big surprise to all of us
(I admit I suspected this, but was not aware to the magnitude). As we have
excellent IT system, we can easily identify the best running products per
region and offer a smart portfolio enhancement to the region stores.
Accordingly we made an immediate decision to make this offer, and to couple it
with a three months guarantee to the stores that if the new SKU’s are not
selling well, we will take them back (considering the previous mentioned
information, we did not think this is a major risk).
Even though we all felt this was a
meaningful revelation, I asked that we make some more effort to think about
another issue. Over the last few years our new product development (NPD) efforts
were failing. We are introducing between five to ten new products a year, but
so far none of them made it. Our core, original products continue to be our key
growth drivers. I had a big idea about changing totally the strategic direction
of our NPD, but decided this can wait for another time.
After we all agreed on the
unsatisfactory facts, I asked “Do you think that even when a wide and
appropriate portfolio of products is available at the retail outlet, we may
still be losing sales?” Again, Dany came to the rescue (I am thinking he will
make an excellent CEO one day) and said “I assume you are not referring to the
discussion we already had and thus you are asking if there is an option that a
consumer sees the product they want on the shelf and still do not buy it?”
“Exactly”, I replied.
Well that is easy, was the general
reaction, it is only when the price is too expensive, but you (I) never allowed
discounts as means for growing top line. “This is true” I said, but do you
think too expensive is the only issue? Can it be that too cheap is also a
problem? And if it is too expensive, can we make it cheaper only by
discounting?” This was again confusing, “too cheap”, and “making it cheaper
without discounting” what do you mean?
I answered “Do you ever find yourself
deciding not to buy a product because it is too cheap?” interestingly I got a
very quick response from our marketing VP – Lenna; “When I see fast food that
is too cheap I generally avoid buying it”. Brilliant, I thought and not long
after the discussion resulted with many more examples. It allowed me to
conclude by saying “for every product there is a range of values that are
acceptable to different buyers. When we have a single price policy for some
buyers the value is far lower than our price, thus the product is too expensive
and they will not buy. For others the value is far greater than our price thus
the product is too cheap and they will not buy. Now we have two very strong
brands, and we leverage them in the market by charging premium pricing, this
means that there are many that would like to buy our products but it is too
expensive for them. And there is another market segment, to which we are not
relevant at all”.
“Let me add” I asked, “that price
differentiation can be done not only through toying with the price (i.e.
discounts or premiums), but there is another way, any thoughts about it?” Given the fact this discussion started over
NPD, quite rapidly we agreed that price differentiation can be reached through
product differentiation that can be realized through our marketing and R&D
focusing on product characteristics that create a different perception in the
mind of the consumer, thus allowing price differentiation. I think I saw light
in the eyes of Lenna and Sato-san (our R&D VP).
This meeting ended with a decision to
explore this direction. Within three months we experienced additional 8%
increase in sales just from piloting the direction of enhancing product
portfolio at the retail outlet. The acceptance was not so encouraging with the
first retailers, but after a few success stories, we started getting requests
from retailers to assist them in extending their portfolio. As far as our
R&D efforts, we assigned a small team to focus on one range of products and
to build differentiations. Together with our marketing a new range of products
were presented providing a wide range of market prices to (almost) the same
product. The effects of this are still overwhelming to us.
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