Diamond Report Explains How Simplifying Standards Helps Consumer Packaged Goods Companies Reduce Complexity, Improve Company Performance
CHICAGO, Feb. 6 /PRNewswire/ -- Having spent millions on complex enterprise resource planning (ERP) systems, many consumer packaged goods companies still are out of tune with consumer demand. But other CPG giants such as Kellogg's, Nestle's, and Kraft have harmonized their operations by eliminating much of the complexity that is inherent in running a global company.
Most CPG companies have hundreds of standards for operations ranging from strategic planning to product replenishment. The key to eliminating complexity: establish a minimal set of standards that corporate management can rely on to run the business while providing the flexibility required to respond to diverse local market conditions.
"The goal is global business harmonization," contends Mark Baum, Managing Partner of the consumer packaged goods practice at Diamond Management & Technology Consultants, Inc. (NASDAQ:DTPI).
"The 'one-size-fits-all' approach of most ERP systems ignores the differences among local markets," Baum explained. "A shop owner in Southeast Asia might be selling gum by the piece, while a big box retailer in the U.S. sells by the carton. In one case, customer orders are cash transactions, in the other orders are processed electronically.
"A typical ERP system can't account for those differences," Baum added. "But there are some common standards -- about customer master data, for example -- than can be applied in both situations." Baum, previously executive vice president of the GMA, points to Kellogg's "Continuous Cost Improvement" program as an example of harmonizing operations to increase financial performance.
Kellogg's recognized in 2002 that they needed to address the impact of rising costs and volatile business cycles by instituting a series of sustainable improvements. By harmonizing standards that would work across more than 180 countries where Kellogg's products are sold, the company's annual return on its process improvement initiatives consistently ran from 29 percent to 32 percent of its cost base. In 2005 alone, Kellogg's kept gross margins flat despite an increase of 70 basis points in input costs due to rising commodity prices.
"We've seen that simplified and harmonized business operations, coupled with improved global performance management, can actually fuel business operations improvements by providing cost savings in the range of three percent to five percent of revenue," said Baum. "The potential for top-line growth ranges from one to two percent because harmonization can keep the company's products relevant even as markets evolve." Nestle's Global Business Excellence (GLOBE) initiative implemented a single set of procurement, distribution and sales management and systems with impressive results. The CPG giant reported savings of $2.9 billion in 2007. New purchasing processes in Nestle's Oceania region alone cut annual costs of almost $15 million.
Debbie Lentz, Vice President, Business Process Design at Kraft Foods, Inc. said, "A similar approach was used at Kraft. We established a governance structure to help determine where and why we would apply global harmonized business processes. Our North American ERP implementation leveraged our previous European ERP design to help accelerate our due diligence efforts to jointly identify, justify, and prioritize business process standards. This approach ensured up-front stakeholder alignment, confirmed a globally sustainable solution, and helped drive synergies across our operations." Achieving Harmony In a new Diamond report, "The Need for Speed: Don't Let Standards Slow You Down," the consulting firm explains how CPG companies can break from the "one-size-fits-all" attitude that undermines agility. To obtain a copy of the complete report, send an email to: .
According to Baum, "Standards are essential but too many standards put the brakes on agility. The key is to find the fewest number of standards across the processes, organizational structure, technology, and information that are the heart of the business." That process starts with building a business case that considers all the operations directly related to a company's strategy, as well as indirect operations that either have significant costs (financial planning, human resource policy management) or lend themselves to outsourcing (payroll, travel administration).
Questions that are typically addressed in the process include: -- How standardized are our core capabilities now? Are those standards
helping us or holding us back from competing in local markets?
-- Could we absorb an acquisition quickly, or is our current business
architecture too complex?
-- Are the heads of our business units and regions calling for greater
harmonization or greater flexibility in the processes, information
architectures, organizational structure, and technology they rely on to
make their numbers?
-- Can senior management rely on a common set of metrics across all
business units and regions to measure and monitor performance?
-- If we were to outsource any capabilities tomorrow, would the transition
be straightforward? Could we clearly articulate to an outsourcer the
service levels we expect?
Once management decides which operations appear to offer the greatest payback, it is necessary to understand the extent of commonality and diversity along all operational dimensions -- business process, technology, organization, and data/information. This eye-opening exercise helps set the right expectations with internal and external stakeholders who might feel threatened by doing away with the old ways of doing business.
Righting the company's standards requires rigorous governance. Baum recommends establishing a Center of Excellence as part of the global business harmonization initiative to actively govern the design, build, and adoption of harmonized standards across process, technology, organization, and information dimensions. A phased deployment with an upfront pilot increases the chance of success.
"A Global Business Harmonization initiative can deliver significant results in three to six months at a cost of only one to two percent of revenue," said Baum. "Considering that the time and expense of a typical ERP project can range from one to three years, at an average cost 3 percent to 5 percent of revenue, the case for eliminating complexity is clear." About Diamond Diamond (NASDAQ:DTPI) is a management and technology consulting firm. Recognizing that information and technology shape market dynamics, Diamond's small teams of experts work across functional and organizational boundaries to develop new strategies, improve operations, and deliver results. Since the greatest value in a strategy, and its highest risk, resides in its implementation, Diamond also provides proven execution capabilities. We deliver three critical elements to every project: fact-based objectivity, spirited collaboration, and sustainable results. To learn more visit http://www.diamondconsultants.com/.
Contacts:
David Moon
Media Relations
+1.312.255.4560
Margaret Boyce
Investor Relations
+1.312.255.5784
DATASOURCE: Diamond CONTACT: David Moon, Media Relations, +1-312-255-4560, , or Margaret Boyce, Investor Relations, +1-312-255-5784, , both of Diamond Web site: http://www.diamondconsultants.com/
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