The New "Demand-driven" Reality: Two Takes on What Being Driven by Demand Means Today - Part 2

Party's Over: Re-gearing for New Demand Patterns in the Consumer Sector

Mark Sutcliffe is the president of CDC Software's CDC Factory
Mark Sutcliffe is the president of CDC Software's CDC Factory
By Mark Sutcliffe

As the economic downturn continues, frugality has become a core consumer value. No one can predict how long this sentiment will last, but one thing is clear: shoppers are simply not going to leap back into premium product categories.

For food and beverage producers, who have traditionally relied on margins from premium categories, the continued shift in consumer behavior is rapidly changing the dynamics of the demand-driven supply chain. These producers must come to grips with the fact that much — if not most — of the demand they experienced over the past five years was "artificial," based on unsustainable consumer spending patterns.

Similarly, companies that have traditionally depended on a broader product portfolio must face the fact that although volumes may be up overall due to more in-home dining, the margins across their whole mix of products may erode as more of their capacity is geared up for products with a lower operating margin.

With the artificial demand now gone, companies that react quickly to become the lowest-cost producers in value categories will be in a strong position to redraw the market-share map once the recession is over. They will take volume and customers from those companies that fail to develop the level of agility needed to pivot faster and maintain or even improve their standing.

Margin headroom is now the name of the game, and being in control of the cost of production and operating under the lowest-cost conditions enables companies to make strategic decisions and respond to the changing demand-driven supply chain.

How can producers re-gear for these changes in demand? Here are three core ideas, based on principles from Jim Collins' classic Good to Great.

Confront the brutal facts. As long as 15 million Americans are unemployed, consumers will view the new level they've traded down to as the "new norm," placing additional price pressure on retailers and producers. As such, any hesitation to commit to the new low-cost-producer imperative will make a significant difference on producers' standing once the storm blows over.

Apply the "Hedgehog principle." Producers must rethink what's most important. They must get behind the thing they do best and drop everything else. This means scrapping esoteric data-capture projects and putting an end to obsessive measurement and analysis, which too often becomes the end goal. In their place, companies should deploy action-focused projects to improve labor productivity and fully leverage the company's human capital.

Just as important, these projects must be supported by measurement and analysis of variables that move the dial on outcomes — otherwise known as "red flag" information. Because the problem for most manufacturers today is not a lack of data, but rather, a lack of real-time visibility and transparency to help line workers, supervisors and managers quickly identify the root cause of a problem and take action to resolve it.

Going back to basics. This is about being efficient and better utilizing existing resources to produce the same volume with fewer personnel, less material or in less time, all with the end goal of increasing productivity per labor hour. This means viewing plant workers as the biggest variable cost in a food plant and increasing productivity by giving them the tools they need to improve performance. Not only is this approach proven to be highly effective, but changes in people and process are faster to implement and require limited capital expense — with results that can be measured almost immediately.

With the artificial demand for premium products gone, manufacturers that take action now to re-gear for greater profitability at lower price points and with a smaller product mix will emerge stronger and be in a much better position to prosper in the economic recovery.

About the Author: Mark Sutcliffe is the president of CDC Software's CDC Factory, a manufacturing operations management solution. More information at www.cdcfactory.com.