1. Opportunities and Challenges
for the
Food, Beverage, and CPG Industries
John Blanchard
Research Director
Food , Beverage , and CPG Industries
ARC Advisory Group
jblanchard@arcweb.com

2. Challenging Times
Food, beverage, and CPG manufacturers find
themselves caught between slow growth, rising
costs, waning pricing power, accelerated regulatory
and customer requirements, and a growing
p
percentage of sales from a limited number of
g
powerful and demanding retailer, and increasingly
limited capital, human, and even material
resources
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3. Challenging Times
How do we improve margins
and increase profitable
growth to sustain
shareholder value?
3
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4. Business Environment
♦ F d and product safety d dili
Food d d t f t due diligence i
increasing
i
• Concerned consumer
• Yearly food borne illness statistics
• Global terrorism
• Global sourcing & rapid high volume distribution
• These facts plus product counterfeiting are producing
• New industry and company food safety initiatives
• Increased regulatory and customer requirements
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5. Business Environment
♦ I
Increasing government regulations
i t l ti
• US Bioterrorism Act
• FDA and USDA regulations
• CBP/CT PAT
CBP/CT-PAT
• DHS
Customs- Trade Partnership
Against Terrorism
Recall Reason
• Truth in labeling laws
E. coli
Foreign
Matl Listeria
• FDA & USDA mandated HACCP programs Staph
St h
Allergen
for fish, meat, poultry, and juices Salmonel
• Environmental regulations: land, water, air
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6. Business Environment
♦ Increasing share of market controlled by a limited number powerful
retailers, manufacturers, and suppliers
♦ Increasing global competition for everyone
♦ Mature US and European markets with limited growth opportunities
♦ Seeking opportunities in high growth emerging markets
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7. Rapid Change, More Complexity, Limited
Resources
♦ Global sourcing of more limited, higher cost, more exotic ingredients
♦ Value health, and environmentally conscious and demanding new
Value, health
consumer
♦ Lots of consumer short (fads) changing purchasing patterns
♦ Rapidly changing demographics and new geographies (small
bodegas)
♦ Increasing number of SKUs and new product introductions
♦ Increasing percentage of sales from promotions
♦ Increasing importance of packaging
♦ Limited resources
♦ Available capital
♦ L b pool and skill sets
Labor l d kill t
♦ Water, energy, ingredients, packaging materials
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8. More Sustainable Manufacturing
♦ Driven by retailer initiatives
• “The challenge of creating a low-carbon society will
require a revolution in thought and action – a
revolution in green consumption.” - Terry Leahy –
CEO Tesco
♦ Driven by business and regulatory
y g y
requirements
• As a part of their effort to eliminate waste and
improve efficiency, Pepsico has been applying eco-
friendly technology in packaging, deploying solar
energy and methane gas recovery technology, and
testing hybrid vehicle programs in their delivery fleets
♦ Driven by limited resources for manufacturing in most
parts of the world
♦ Driven by the “green” consumer/shareholder
• A recent survey over 50% of consumers consider “
f id “green” i their purchasing
” in h i h i
decisions and 20% are ardent “green” even concerned over how a company
treats its employees
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9. Sustainable Manufacturing
♦ To the consumer
• Product availability
Environment
• Environmental & Resource
responsibility Friendly
Products
♦ To the employee and
his/her family
/ y
♦ To the local community Environment
& Resource
Environment
& Resource
Friendly Friendly
♦ To many segments of Supply Chain Plants
manufacturing
♦ To Wall Street
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10. Response to Changing Business Environment
♦ Initial Strategy
i i l “Margins rise while returns are flat”
• Mergers, acquisitions, divestitures, outsourcing
• Product portfolio rationalization/optimization
• Productivity initiatives
• OEE, TPM, continuous improvement
• Supply chain optimization programs
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11. Now Food, Beverage, and CPG Manufacturers Are
Asking
♦ How do I address the fluctuating price and availability of
commodities?
♦ How do I reduce my energy and other utilities costs and
ensure the long term availability of these resources?
♦ How do I find and evaluate new technology that will support
innovation and speed time-to-market?
♦ How do I reduce my manufacturing cycle time?
♦ How do I come up with new ideas or equipment that is multi-
tasking and that can reduce change over time?
♦ Wh t are th b t metrics to support future manufacturing
What the best t i t tf t f t i
requirements?
♦ How do I support my ever expanding manufacturing and
business automation systems and networks?
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12. Response to Changing Business Environment
“An agile, innovative enterprise to
sustain growth and improve
♦ Strategy Going Forward – margins”
• Global “super branding”
• Expansion of distribution channels
• Process automation and integration of
manufacturing & business processes enterprise-wide
• More sustainable & flexible manufacturing & supply
chains
h i
• Develop a more innovative and extended
organization and culture (people)
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13. Operational excellence is no
longer enough.
Its power to differentiate has
eroded.
Rory A. M. Delaney
Senior Vice President
Strategic Technology
General Mills
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14. A Discipline of Innovation Emerging
Innovation is generally recognized as the principle
driver of growth and shareholder value
g
• An increased rate of change has made an
ability to change more valuable
• Methods and tools are emerging to vastly
improve innovation success rates
• Companies need new insights to achieve
p g
growth
• Companies are “globalizing” their innovation
p
processes. A “follow the sun” p
process is
emerging
• Companies are also utilizing more external
resources to drive innovation
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15. A Discipline of Innovation Emerging
Innovation is generally recognized as the principle
driver of growth and shareholder value
g
• Companies involving suppliers earlier in design phase of
new products and processes
• Some OEMs are driving innovation faster than their clients
– even in non-traditional areas of their business
• Patented p oduc pac ag g
a e ed product packaging
• More functions on a single unit or machine
• More continuous on-line quality verification
• New environmentally friendly technology
• Packaging end line provider
• Sustainable manufacturing and limited
resources in emerging markets will
drive innovation even faster
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16. Where Are We Today?
♦ Few food, beverage, CPG manufacturing sites have
their processing, packaging, warehousing, logistics,
and business systems networked together with bi-
bi
directional electronic exchange of information
♦ Over 67% of packaging lines do not measure
performance
♦ All respondents felt there was room for improvement in
on-line quality verification, with almost two thirds
saying there was significant room for improvement
ARC Insights & Manufacturing Performance Surveys 2007
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17. Increased Need for On-line Quality Verification
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18. Where Are We Today?
♦ One of the primary reasons for purchasing production
management software is compliance
♦ Leading edge companies depend upon production
management software to optimize margin and quality
ARC Insights & Manufacturing Performance Surveys 2007
♦ Some factors inhibiting adoption of technology
• Lack of ease of use for operators
• Cost and complexity of maintaining technology
• Lack of resources to evaluate new technologies
• Long standing purchasing & amortization policies
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19. What Do We Need To Do?
♦ A More Comprehensive Plan to Meet Business and
Regulatory Requirements includes:
• Increased emphasis on performance monitoring ,
continuous improvement, and flexibility
• Improved electronic tracking and tracing from the source
to the consumer
• Improved manufacturing plant security
• Increased on-line quality verification and Quality by
Design (QBD)
• An “in depth” sustainable manufacturing strategy
• An automation strategy that recognizes the commonality
in both business and regulatory requirements
• Affocus on people – your most valuable resource
l l bl
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20. It’s Not Just About Technology
“To sustain the productivity surge, today's managers must
develop incentives that encourage their workers-as well as
themselves-to be more creative, self-starting, educated, and
willing to experiment. Jobs that call for simply following recipes
will become scarcer, and demand for an innovation-driven
workforce will continue to grow.”
“……..It took 40 years for businesses to figure out how to
redesign their factories and processes so that electricity could
deliver a productivity payoff. Managers cannot afford to wait
decades to harness the greater productivity offered by today's
today s
IT advances. …….
“Productivity's Technology Iceberg” March, 2004
by Erik Brynjolfsson,
Professor of Management
MIT Sloan School of Management
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