Industry Value ChaIn strategIes

January 2010

Ten Predictions for 2010

by Lora Cecere and Allen Johnson

ing in the new, ring out the old. Forecast the future, make predictions bold. This is exactly what AMR Research has done to help you plan for the new year. And so, without further ado, here are our top ten predictions for consumer product (CP) companies in 2010.

Prediction No. 1Soon itll be all about the market basket

The use of TLOG data to better understand shopper trip types and market basket behavior will become a reality for retailers in 2010. In the last few months of 2009 we saw deployments at Family Dollar and Lowes; this could be the litmus test for trade effectiveness. In 2010, the basket will become more important. Consider the case of Wawa, a North American convenience store, which measures the market basket effectiveness of its programs in 15-minute increments. This enables the company to understand the impact of store format changes, trade promotion effectiveness, and category dynamics in near real time. In 2008, CP manufacturers made the shift to own the supply chain all the way to the store. This journey continued in 2009, with a focus on the shelf. Market basket analysis will add a new and needed dimension. The new goal will be the design of trade programs that not only drive volume for manufacturer brands, but ones that increase the size of the market basket and improve consumer loyalty as well. The shift will cause retailers and manufacturers to rethink trade programs that drive a trip with a small basket. As a result, promotions like five 24 packs of carbonated soda for $10 will be tough sledding in the holiday season of November 2010. This trend will benefit technology providers like Applied Predictive Technologies (APT), Market6, Retail Solutions, and 1010data.
Industry Value Chain Strategies | January 2010

Prediction No. 2The consumer wins!

In the 1980s, manufacturers of consumer brands had the power. In the 1990s, it shifted to the retailer, and in 2010, consumers will have control. Over 45% of retailers are actively spending to attract the digital consumer today, with manufacturers scrambling to catch up. Throughout the holiday season, retailers and manufacturers competed to enroll and control the shopper, but as 2010 progresses, new applications will change the landscape, enabling cross-store comparisons of shopping lists, online offers based on true consumer preferences, and in-store offers. This will be the year the value chain will be redesigned to serve the digital consumer. The focus on digital coupons and mobile offers will increase demand volatility and drive the adoption of market mix analysis and demand analytics. This trend will inspire a new generation of best-of-breed providers to design, deliver, and satisfy the digital consumer. Expect consolidation between demand insight providers, market mix analysis technologies, and trade promotion technology.

Prediction No. 3In a world without newspapers, new cycles appear

The rhythm of the consumer value network is largely driven by the weekly store circular. Merchandising, store set, and replenishment decisions are driven by this seven-day cycle, with all stores offered the same promotions by the flyer thats delivered with the Sunday newspaper.
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But what if the Sunday paper didnt exist? After all, it could happen. Newspaper advertising supports circulars, but readership is in decay. Only 40 million Americans currently buy a Sunday newspaper, with this number in steady decline since 1987. Supply chains will now have a new beat and march to a different drummer. 2010 will be the year the cycle of the circular is challenged. In parallel, the value chain response is becoming more granular, and its happening in two dimensions. The first dimension is time. Promotion offers are no longer a weekly cycle, with some designed for specific daysfor example, the Saturday and Sunday offers at Wal-Mart or the Wednesday night senior offers at Publix. The second dimension is the movement from broad-brush marketing, where all stores for a chain get all the same products, to a more granular store-clusterlevel product offer. For example, Kelloggs Kashi bars are on the shelf at Delhaizes Bloom stores, which are targeted at shoppers with more discretionary spending, but not at the companys Bottom Dollar chain, which is targeted at shoppers with less discretionary spending. Few companies have the systems to keep up, though, but General Mills, Kraft, and PepsiCo are in the lead. The gap is widening between companies that can sense consumer behaviors at store level and adapt offers and those that cant. New levels of store sensing and optimization are required for success.

The second approach is working capital management and rethinking the role of inventory. In 2007, WalMart controlled inventory-level growth in its U.S. stores to just 12% of sales growth (0.7% inventory growth versus 5.7% sales growth). In 2009, the termsfor-turns program upped the ante. Essentially, WalMart used inventory strategies to fund its recessionary spending. The pressures on manufacturers to redesign inventory programs, both levels and turns, will continue through 2010. Wal-Marts mandate for direct store delivery (DSD) programs to convert to scan-based trade (SBT) is only the tip of the iceberg. Although AMR Research doesnt think DSD will convert to SBT, we do think new programs will surface. As a result, multi-enterprise inventory management and the use of downstream data will debut once again. This trend will benefit technologies like ones from Optiant, Relational Solutions, Retail Solutions, SmartOps, Teradata, Terra Technology, and ToolsGroup. Inventory optimization and downstream data predictive analytics will converge. The third approach is the evolution of Wal-Marts Supplier Alliance Program. In the wake of CIT Groups bankruptcy, this program extended a Wal-Mart AA credit rating to suppliers, erasing issues with supply chain financing. As a rule, Tier 1 supply chain companies have the lowest cost of capital, but few use it to finance their supply chains. By making this move, Wal-Mart is joining the club with Johnson & Johnson and Honda to redefine supplier development programs to include supplier financing.

Prediction No. 4Wal-Marts long-lasting effects

Wal-Mart changed the game in 2009, and these changes will endure, with long-lasting impact. The company introduced a three-pronged approach to dominate the market: the launch of sustainability scorecards, rethinking inventory strategies, and the initiation of the Supplier Alliance Program. Prior to the launch of the sustainability scorecards, green initiatives were under the auspices of the corporate social responsibility (CSR) group. Filling out the 15-question scorecard has ignited the importance of sustainability in supply chain management (SCM). Note in Figure 1 how few are ready.

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Industry Value Chain Strategies | January 2010

Figure 1: How operational decisions link to sustainability

100% 12% 9% 10%

16%

29% 40% 47% 42%

Decisions are made on the grounds of cost reduction without speci cally considering sustainability Decisions are rst based on cost reduction and subsequently sustainability principles

45% 36% 36% 26%

Decisions simultaneously consider cost reduction and sustainability principles Sustainability is fully incorporated into operational and capital expenditure decisions

13% Total

8% CPG

16% Food and Beverage

16% Chemical

Q: With respect to your current transportation management strategy, which of the following best describes how operational decisions link to sustainability? n=154 manufacturing companies Source: AMR Research, 2010

Prediction No. 5Services will differentiate

In 2010, the need for service supply chains will grow in importance in consumer products. Whether its the new Coca-Cola fountain that enables 99 varieties of carbonated beverage delivery, the Unilever ice cream vending machines dotting every gate at the Heathrow airport, the cosmetologist in the CVS store suggesting a Neutrogena face wash to teenaged girls, a mommy blog with interactive online help, a kiosk to aid the consumer with buying a Nikon digital camera, or the installation of a home theater system by the Geek Squad, services are here to stay, differentiating products and redefining supply chains.

Prediction No. 6The rise of e-commerce

Whats old is new again, with e-commerce rising from the ashes of the dot.com bubble (Alice.com is not an anomaly). In 2010, e-commerce strategies will grow in importance for two reasons: Online stores will find a new niche, and having an online presence is foundational to reaching the consumer. Optimizing online savings programs from companies like Ebates, FatWallet, and Upromise will become mainstream, with companies investing in technologies and processes to make the most of their customers online product reviews. Sentiment analysis will become mainstream, benefiting companies like SAS and Infosys.

Industry Value Chain Strategies | January 2010

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Prediction No. 7Companies focus on margin management

2008 was a turbulent year for commodity prices. In 2009, it was about demand volatility. In 2010, well see both types of volatilitydemand and commodityat the same time. It will hit hard, and below the belt, on the bottom line. Although companies are entering the year with higher revenue and flat growth, 2010 will threaten earnings. Supply chain excellence, however, will make a difference. CP companies arent good at managing marginsthey lack alignment. Sales groups are given incentives on volume, marketing on market share, and the supply chain organization is driven largely by cost-based agendas. In the face of pending inflation, rising taxation, and commodity shortfalls, businesses will have to get serious about margin. Well see the acceleration in the adoption of demand orchestration processes (that is, the tie of commodity strategies to go-to-market strategies and the shortening of demand latency) to quickly respond to market shifts. Cost-to-serve analysis will drive alignment. For the first time, companies will get serious about trade promotion ROI. As outlined in Time to Focus on the Three Rs? ROI programs are easier said than done. Theres no industry standard practice for calculating ROI. Tax efficiency will play a supporting role in the cast to drive this change. By the end of 2010, taxation will have a more central role in supply chain strategy. Companies will realize that to gain the most from tax credits and properly pay looming VAT taxes, theyll need increased capabilities to track product conversion from the origin of raw materials to the point of sale. Itll be a scramble benefiting downstream data providers, B2B providers, network design providers (like Chainalytics, Forte, and TruEconomy), and commodity management technologies (such as Triple Point).

Prediction No. 8BPO will redefine the Back Office, SaaS will define the front office, and planning becomes important again
To contain costs and execute global strategies, backoffice transactional applications will be stabilized and outsourced in either nearshoring or offshoring arrangements. Cost pressures will force business process outsourcing (BPO). Why? Line-of-business (LOB) requirements and programs to standardize IT with the reduction of back-office systems have hit a stalemate. The average number of systems hasnt changed over the past five years. Software as a service (SaaS) will redefine the front-office IT landscape, and it wont look like the traditional CRM one. Instead, new predictive analytics (e.g., shelf sensing, damage and shrink sensing, returns management, and trade promotion compliance) applications will appear, with the front office redefined from the customer back. These outside-in processes will sense demand, translate market conditions, and redefine supply chains. 2010 will be a volatile year. As a result, planning will become more important. The lingering effect of having to respond to these issues has changed supply chains (see Figure 2). Planning takes on an elevated importance, with a new set of best-of-breed planning vendors emerging to enhance existing systems.

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Industry Value Chain Strategies | January 2010

Figure 2: Performance through crisis

810 rating CPG Period of rising oil volatility in 20072008 Food and Beverage Chemical 53% 38% 39% 56% 59% 47 rating 13 rating 43% 4% 6% 2%

CPG Major catastrophes like Hurricane Katrina Food and Beverage Chemical

51% 62% 55%

47% 36% 45%

2% 2%

The recession of 20082009

CPG Food and Beverage Chemical 43%

66% 58%

34% 38% 53% 4% 4% 100%

Q: How well did your transportation department perform during each of the following? (1=very poorly/10=extremely well) n=154 manufacturing companies Source: AMR Research, 2010

Prediction No. 9Food safety legislation becomes real

In 2010 manufacturers will realize they dont have what it takes to comply with the pending food safety legislation. Only one company out of 60 that AMR Research works with is ready. For the rest, itll be like TREAD Act dj vu. To comply, the answers to food safety are complex. Manufacturing outsourcing has increased, international sourcing is more important, and the shift in products for improved health and wellness raises the bar on whats required to deliver a safe and secure supply

chain. This year manufacturers will learn that food safety is about much more than track-and-trace capabilities. HAACP will grow up. Control points will be defined and monitored from field to fork. Process product lifecycle management (PLM) will grow in importance, with companies like Clarkston Consulting, Kalypso, and Wipro focusing on the delivery of pre-integrated software bundles of process PLM, recipe management, and manufacturing execution systems. The scale will tip in favor of Oracle, as food manufacturing companies finally begin the adoption of PLM to ensure specification management compliance to meet the requirements for the new legislation.

Industry Value Chain Strategies | January 2010

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Prediction No. 10BI becomes the new battleground

Business intelligence (BI) is both the most important and strategic technology investment area in consumer products for 2010. It will become the battleground where IBM, Microsoft, Oracle, and SAP square off in hand-to-hand combat to dominate the enterprise license software market. However, in the short term, none of the major contenders will deliver against the industry needs for industry-specific, content-relevant BI applications. Instead, best-of-breed analytics providers will fill the gaps as the battles wage.

Innovation in business intelligence will be strong in 2010. This is the year where geomapping meets downstream data, Google maps redefine supply chain visibility, visualization unleashes new opportunities, and search engines tackle the onerous task of master data management (MDM). Leaders will invest in technology scouts to identify new products, while laggards will implement rows and columns, becoming cannon fodder for LOB executives. Its is a good year for applications from ClickView, Google, Endeca, Netezza, SAS, and Teradata.

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Industry Value Chain Strategies | January 2010