August 17, 2009

By Mike Stone

The consumer packaged goods (CPG) industry could save almost half a trillion U.S. dollars every year.

This finding comes from the Cisco® Internet Business Solutions Group (IBSG), which has calculated that by radically re-thinking the way it looks at product innovation, market intelligence and product manufacture, the CPG industry could reduce its wastage by some USD$460 billion.

Although the CPG sector is immensely profitable, the net sales of its biggest products are in fact declining, due to increasing competition for both consumer wallet share and retail shelf space.

So far, the industry's answer to the problem has been to increase levels of product innovation, but this is no longer proving to be the panacea it once was.

A recent study shows that the amount spent on R&D over five years did not correlate to increased market capitalization in the same period at all.

Ronald van Zanten of IBSG describes one of the practical consequences of product innovation's failure to deliver: "In 2005, CPG companies introduced 156,125 new products. Only about four percent of these, however, made annual sales of more than $50 million.

"Roughly 80 percent achieved annual sales of $10 million or less. Estimates of product failures range from 53 to 86 percent."

It is figures like these which have spurred van Zantan and his colleagues to explore ways to reverse the situation, and restore the sector's profitability.

Their solution is for human and computer networks to mount a three-pronged attack on the current linear approach of most CPG multinationals.

These three approaches deal with consumer insight, innovation and operational agility, respectively. They involve techniques as diverse as chat-room lurking, customer participation in the product design process and hi-tech logistical control systems.

The first line of attack is the creation of what is called a Consumer Insight Network, which provides a whole range of methods for obtaining new, significant and useful information about customers and the way they behave.

The idea is to reduce the number of new product failures by learning what consumers really want.

By listening to, contributing to and developing online social networks, companies can gain a much greater depth of knowledge, identifying new market niches and opportunities to extend product lifecycles.

In practice, the Consumer Insight Network relies on a lot more than old-school data mining, emulating the success of initiatives pioneered in other sectors by companies such as Starwood Hotels and Resorts Worldwide, Inc.

In Starwood's case, according to an IBSG white paper, customer services coordinator William R. Sanders contributes as the 'Starwood Lurker' to message boards in order to actively engage consumers and listen to what they had to say.

By understanding customers in depth through comments and buzz across the talk boards, Starwood can ultimately create stronger loyalty.

Moreover, Sanders has gained credibility as a customer advocate through posts to FlyerTalk, billed as the 'world's most popular frequent flyer community'. Gaining influence in such a forum has obvious long-term benefits to a hotel operator such as Starwood.

While consumer insight is mostly concerned with in-depth data gathering, the second proposed solution to CPG product delivery is an Open Innovation Network, which is all about using intelligence creatively and effectively to get new or improved products to market in short order.

An Open Innovation Network seeks to leverage knowledge from across the company, its target markets and beyond.

As well as drawing on information from the market, specific consumers or consumer groups may be invited to become a part of the whole process to ensure their needs remain central.

They and the consumer insight group may also participate in the validation, testing and collaboration of a new or improved product.

Unlike the others, the third network solution, concerned with Operational Agility, requires real, physical changes to the company that go beyond enhanced networking and communications systems, particularly the manufacturing environment.

It focuses on driving short-cycle production and the quick turnaround for line changes that allow CPG organizations to tie in point-of-sale (POS) data directly with production schedules.

It also provides enterprise-wide visibility of inventory, enables daily adjustments to sourcing material and automates promotional feeds to adjust production schedules. Operational Agility Networks are already used by companies such as Boeing.

The aircraft manufacturer's final assembly phase of production is enormously complex and needs to coordinate 132 structural and systems partners spread around the globe.

During the process, says IBSG's white paper, Boeing needs to secure the critical component for composites, titanium, and make it available to its supply partners.

Then supply and demand must be synchronized to ensure components arrive at Boeing's Washington assembly line on time, as needed.

To do this, Boeing uses Exostar, an Operational Agility Network which provides a single point of connection for electronic security, commerce and collaboration.

Exostar handles supply management duties and the complete order and returns lifecycle process, as well as tracking consumption and replenishment for Boeing's Partner Managed Inventory program.

It allows the company to respond quickly to any changes that might adversely affect production.

Although it has not been deployed in a CPG environment, Exostar provides an impressive example of how networked systems can make even the largest companies nimble enough to respond to the demands of their environment.

Van Zanten says: "The idea of using networking technologies to boost innovation is only just beginning to catch on in the CPG market.

"Using elements of this approach, Procter & Gamble has already doubled its innovation success rate. Innovation productivity was increased by 60 percent with a reduction in internal R&D expenditure of 29 percent.

"Those kinds of results are available to many more CPG companies, provided they are willing to change the way they carry out their R&D."

Mike Stone is a freelance journalist located in Barcelona, Spain.