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Supplier Tension, Increasing Complexity, and the Role of Technology

At the recent Nulogy xChange in Chicago, Nulogy CEO Jason Tham moderated a lively discussion of industry experts on developments in the manufacturing supply chain and co-packing industry. Panel participants were:

  • Art Mesher, currently the chancellor of Clean SL8 DNA (Development Network and Advisors). Art is a pioneer in harnessing the integration of business communities and is considered one of the founders of SaaS networks and cloud computing. He also launched the Integrated Logistics Strategies Services practice at Gartner Group Inc., a leading technology research and advisory firm, and built it into one of the premiere advisors to major global corporations.
  • Selena Sanderson is a senior C-suite executive with 25 years of experience in the consumer products food industry. Selena is currently chief executive officer of Growth by Design LLC, a consulting company she founded, which provides advisory services to high growth companies. Previously, Selena spent 22 years with Weston Foods, most recently serving as executive vice president of Weston Food’s Biscuits Division.
  • Doug Sharfstein. For over two decades, Doug was president of The Strive Group, a leading provider of integrated in-store promotional display solutions to many of the world’s most respected consumer packaged goods companies.

Tham lead the panel by posing a few questions about what these industry leaders have been seeing in the industry for the past decade or so, and predictions for the future.

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Tension between being best and being unique

One of the biggest observations made during the discussion was about the constant battle between being the best and being unique, a tension that all contract packagers feel. Mesher related that suppliers are saying— We think what you do is arming our competitors, so we’re going to build it ourselves.

“I had a conversation with someone several years ago about this,” said Mesher, “And I asked what is it going to cost you to build it yourself? He said, ‘Oh, about six million dollars.’ I asked what his margins were, and he said about two percent. So how much more would he have to sell that he wouldn’t have sold in order to make this six million dollars at two percent margin. You can do the math: he has to do more than $100 million in new sales to pay for this.”

“So I said I’m going to sell this to your competitor for a dollar a shipment, and you’re going to spend six million dollars a year to beat me, and unless you add more than $100 million in new business you’re going to be behind. And he said, ‘Yeah, that’s right.’ So then we beat them. We took this little company and provided them great technology and he lost a major contract to them.”

The lesson that Mesher relayed is simply this: the suppliers that refuse to use best-in-class technology have their sights on the wrong parts of their business. “He said he wanted to stop doing business with us because we were arming his competitor. And I said no, we’re not arming your competitor, we’re taking care of your customer. You’re not and someone else is.”

The root cause of this is the presumption that some people have, that it’s technology that gives them competitive advantage. It’s not. It’s the application of the technology. It’s the ability to use technology properly. There’s a big difference between being first chair and just playing in the orchestra, and there still are many companies who have lost sight of the objective— becoming the first chair.

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Shifts in increasing complexity, regulation, and speed-to-market

Sanderson says there are three big things that have happened over her 25 years in the business: increasing speed to market, SKU proliferation (i.e., mass customization), and regulation and compliance.

Speed-to-market is one of the biggest developments, according to Sanderson. In the past, a supplier could take two to three weeks to ship an order. Today, customers want it in two days, then one day, and with the rise of Amazon, within an hour. What this means for co-packers and manufacturers is that safety, quality, consistency, and value have to be realized faster and faster for them.

Another trend Sanderson highlighted is SKU proliferation. She explained, “As customers demand more customization, it brings about the challenge of managing complexity. It’s not just about collecting data, but analyzing it and determining which products are winning and which are not. Co-packers and 3PLs have to have a stronghold on that, which is valuable to the manufacturer.”

Finally, Sanderson asserted, regulation and compliance issues have changed the game. The Food Safety Monitorization Act, for instance, means suppliers must know the source of their product all the way upstream. Product genealogy and traceabilty have become a critical part of operations.

Sharfstein noted that because of the demands for speed-to-market, he’s seen a lot of supply chain compression over the past few years— a development that continues. The conversion has to get closer to the shelf because the demands are so intense. The increased complexities in the supply chain have to be figured out, and technology is helping the good get better, as they use technology effectively.

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The impact of private label

Tham noted that as the bar keeps getting higher, orchestrating the supply chain means relying on suppliers to be at or above standard. He posed the question to the panel: for retailers that rely on national brands versus in-store private label products— what distinguished those approaches?
Sanderson said that retailers are even more stringent on the private label side. “They assume national brands will have quality, but want to assure that private labeled goods are quality. Retailers work with private manufacturers for two reasons— quality and innovation. (Some major retailers do as much as 30 percent of business as their private label goods.) So they audit our plants. They want visibility into who is being used in our supply chain. And they demand fast feedback.”

This is complicated further as the demand for unique products rises. These are often sourced abroad, from smaller suppliers, and having systems that work together to communicate with them may be difficult. There’s need for seamless communications across the supply chain regardless of where it extends to.

“The days of having a vendor dictate how the customer does business are over,” Sharfstein adds. “The focus is clearly on the customers, who want what they want, when they want it.”

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What it takes to be world class

Mesher commented on the different orientations of IT departments and customers; the former looks to standardize and simplify business processes, the latter tells manufacturers they need to diversify and differentiate their product offerings.

Herein lies another natural tension as a company strives to become world-class. IT is looking to standardize and simplify, with the goal of minimizing integration liability, when what it takes to be world class is the opposite: maximizing your ability to integrate.

“That’s the recipe for world-class operators,” says Meshner, “Yet most wake up every day with someone saying to minimize integration liability, standardize applications, simplify business processes, run everything under an SAP stack— then the customer walks in and says I want mixed pallets, I want to eliminate your DC, etc. That’s where the tension is. Minimizing integration liability versus maximizing integration ability.”

“This is why what Nulogy does is so important. If the whole federation standardizes, everyone can interoperate, everyone can integrate, everyone can maximize their ability to plug and unplug in a clean and elegant fashion.”

The numbers back up what Mesher says. At the outset of the session, Tham announced the results of recent data analysis conducted by Nulogy of customers using its platform:

  • Those on Nulogy’s platform had an average CAGR of 21.6 percent, double the industry average in the contract packaging market.
  • Those on Nulogy’s platform showed a 20.6 percent CAGR of their production lines.
  • Those on Nulogy’s platform showed a 60 percent CAGR in SKUs, based on single sites.
  • Those on Nulogy’s platform had a 59 percent increase in new customers being served.
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Automation versus the human factor

The role of automation was discussed, but Mesher cautioned, “Computers will take us so far, but don’t underestimate human ingenuity. I’m more interested in that. Humans will surprise you, especially the young ones. This new generation of employees has come up as empowered employees— they came from a world where the data was theirs. In ten years they’re going to run over IT departments.”

Mesher related a recent fishing trip he took with Jason, where the two outfished others on the river despite not having the sophisticated electronics they did. “We knew the advantage of trolling upstream, which was a kind of human ingenuity. Nobody’s electronics will beat me on the river.”

“It’s the ingenuity behind the automation that really counts,” says Sharfstein, citing an algorithm developed (by a young data scientist) to take the emotion out of rate buying in logistics. “And when it comes to SKU proliferation, it’s more like fly fishing. You have to match the hatch if you’re going to catch fish.”

All three panelists agreed that in order to fully service a customer’s variable, customized, and ever-changing requests, the human ingenuity will never be flushed out of the equation. In today’s consumer market, it becomes ever more important to couple great technology with great talent.

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