Survey Report: The Future of Japanese-style SCM

TOKYO, JAPAN - March 3, 2010 – ABeam Consulting Ltd. announced today a survey report, “The future of Japanese-Style SCM: Findings from the current state of CPG Manufacturers.” The report is based on studies of Japanese consumer packaged goods (CPG) manufacturers to discover initiatives to further sophisticate the supply chain operations.

More focus is put on SCM among Japanese manufacturers due to sluggish economy, cost-cutting pressures from shareholders, and to realize post-M&A synergy. In course of exploring a proposition to better profit from SCM, ABeam Consulting focused on Japanese CPG manufacturers who have markedly low inventory levels compared to Western benchmarks.

The study show that companies with best inventory level entails an autonomous, decentralized control over their supply chain despite the conventional wisdom that centralization of control achieves better results. The study also show that they are striving with two key strategies: First is to improve accuracy of their sales plan to better cope with demand fluctuations, and second is the reformation of their supply chain management schemes to thrive in the global market.

Conducted from August through December 2009, the study includes interviews with 18 mid to large sized Japanese CPG manufacturers. The interviewee consists of 14 food and beverage manufacturers (Note 1) and four household and beauty care product manufacturers. ABeam diagnosed the maturity of SCM operations by days-inventory (Note 2) of finished goods, and conducted interviews in the following points to organize their historical and current effort towards SCM sophistication:

－ Organizational structure, roles & responsibility over SCM control
－ Supply & demand planning cycle
－ Process of demand planning, production planning, and distribution planning
－ Current initiatives to reduce inventory

Note 1: Manufacturers of chilled and dairy product were excluded because of their exceptionally short shelf life.
Note 2: Days-inventory was derived from interviewee’s internal KPI (not calculated from the financial statements).

Survey summary

1. The food manufacturers included in this study is clustered into three groups based on their days-inventory.

－ Group 3: 30 or more days-inventory. Monthly production planning
－ Group 2: 20-26 days-inventory. Weekly production planning
－ Group 1: 15 or fewer days-inventory. Daily production plan adjustment based on manifested rules

There is a gap between the three groups where no companies could be found (i.e. no sample could be found with days-inventory of 27-29 and 16-19). Our hypothesis is that these gaps exist due to difference in when the SCM initiatives took place. Group 1 companies had already renovated their SCM during the 1990s, but Group 2 companies did not renovate their SCM until the 2nd SCM boom around 2005. Further study is needed to determine whether this trend can be generalized.

2. All of the household and beauty care product manufacturers surveyed had days-inventory of 30 or larger (Group 3). These manufacturers produce in very large batch size to reduce per-unit cost. Relatively low risk of depreciation and wastage also supports the large batch size and high days-inventory. Whether their inventory is optimal or not cannot be determined without further study, however, household and beauty care product manufacturers still seems to have room for inventory reduction.
Categorizing CPG manufacturers by days-inventory

3. Firms in Groups 1 and 3 are characterized by decentralized organizational distribution of SCM functions, whereas the majority of Group 2 firms have centralized their SCM functions. What starkly distinguishes Group 1 from Group 3 is that the organizations responsible of the decentralized SCM functions operate spontaneously and independently in response to changes in market conditions. Our report refers to this kind of distributed organizational design as “autonomous decentralized control.” In addition, all Group 1 firms have once had a centralized SCM organization in the past.

Recommendations

1. In order to make the transition from Group 3 to Group 2 (i.e., switching from monthly to weekly production planning), it is essential to integrate all planning functions into one organization to cohere the demand plan and production plan. Centralization of planning functions will align the focus and awareness of sales and production towards inventory reduction.
2. In order to ascend from Group 2 to Group 1, gaining agility against demand fluctuation is a must. Establishing an autonomous decentralized management structure and binding them by manifesting a production adjustment procedure is effective to achieve agility and control at the same time
Steps Toward Inventory Reduction

3. The following two strategies are undertaken by Group 1 companies to further improve their SCM operations.

• Shorten the response time to demand fluctuations by improving accuracy of sales forecast/planning, and by streamlining the demand chain to make the dissemination process faster.
• Reorganize the whole supply chain as a group to actualize post-M&A synergy and thrive in the global market.

The two strategies can be pursued simultaneously, but the difficulty of execution varies from business to business.

Remarks

Masaki Yasui, the head of SCM practice, comments as follows:
The majority of mid and large sized CPG manufacturers have adopted a centralized SCM control structure to make the transition to weekly demand & supply planning. The next step is to empower individuals to push their envelope and better respond to the market. Each employee should respond to the market at the very best of their discretion to collectively achieve companywide goals through a high-speed supply chain.

Sales division is no exception from this line. Application of sales & operations planning (S&OP) should arise in the near future, where each sales department is responsible of maintaining the sales plan until the last minute and committed to meeting the sales plan. Furthermore, scratch-built SCP (Note 3) application software should gain momentum against application packages to fully take advantage of accumulated proprietary knowledge.

Note 3: Supply Chain Planning

*ABeam and the ABeam logo are registered trademarks in Japan of ABeam Consulting Ltd.
*All company and product names included in the text of this report are registered trademarks or trademarks of their respective companies.

About ABeam Consulting Ltd.
ABeam Consulting Ltd. is an integrated management consulting firm providing global services primarily through its overseas networks centering on Asia in keeping with clients’ domestic and regional needs. Possessing strategic, BPR, IT, organizational / human capital and outsourcing expertise, as well as a workforce of approximately 3,800 professionals commanding a wealth of experience, ABeam provides a wide range of consulting services to companies and other organizations in areas such as finance, manufacturing, distribution, energy, telecommunications and public relations. Sales for the fiscal year through March 2009 were ¥55.5 billion (U.S. accounting practices).

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