Being Demand Driven May 1st, 2007

Trade Promotion Management Associates

“Business models will be built around greater customer intimacy – where every touch point becomes a moment of truth and customer relationships become the key competitive assets of the business.”

-Retail Forward

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Discussion Outline

1. Clarkston Introduction

2. Collapsing Value Chain & You?

3. Examples for thought

4. Ideas on how to leverage a collapsing value

chain

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Presentation Objectives

1. Convince you that your value chain is collapsing

2. Balance sense of urgency against order of

magnitude of change

3. Provide some pragmatic ideas where you may

want to begin adjusting your own model

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Who We Are – Fast Facts

Leading strategy, management and technology consulting firm• 250 employees • Durham, NC (headquarters) and offices in Atlanta, Dallas, Detroit, New York,

Philadelphia, San Diego, San Francisco and Calgary, Canada

Serving global consumer products and life sciences clients since 1991

Focused on the creation and execution of operational business strategies centered on bringing innovative new products to market

One of the highest customer satisfaction rates in the industry – dramatically exceeding industry norms by 20% *

Organically grown to current size

Key measures of Clarkston’s success:70% repeat clients & referrals

Consistent 5-year client satisfaction rating of 95% or higher*

* As measured by

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Unmatched Depth of Expertise

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Consumer Products Industry Experience

Sample Clients

                                         

Focused Experience

Food & Beverage Home Personal Care / Beauty & Cosmetics Apparel and Footwear Fast Paced Consumables

Functional Expertise

Strategy and Process Services: Organizational Effectiveness Business and Market Penetration Strategies / Simulations Brand strategies (mergers, divestitures, etc.) Innovation & New Product Development Services Business Process Re-engineering Program and Initiative Management KPIs/Metrics/Scorecards

Process and Implementation Services: Manufacturing and Supply Chain Solutions (planning & execution) Demand Chain Solutions (trade, branding, category management,

ideation, etc.) Customer Fulfillment Solutions Regulatory Compliance Practice – FDA, OHSA, etc. Innovation / New Product Development Warehouse and Logistics Management Quality and Regulatory Management Finance/HR

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The Collapsing Value Chain

Is your value chain is collapsing?

1. Can your company make a major packaging change to a leading product, email samples on a Friday and by Monday morning have 700,000 loyal consumers comment on planned changes?

2. Do you listen to consumers, incorporate one input from them and reduce your number of finished goods by 75% while becoming the category captain & reducing 90% of promotional activities?

3. Can you launch new products in effective tests that yield experience curves for adoption rates in 2 weeks – with very high degree of correlation to actual launch?

4. Does your board of your company know who your most profitable customers are? Would they give the same answers? Likewise does the board know who the most profitable consumer segments are?

5. Does your marketing team plan out of stocks on purpose – and increase demand?

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Industry Evolution – Death of the Average*

* Source of Death of the Average concept MVI Ventures, Cambridge, Mass

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Industry & DSD Drivers – The Collapsing Value Chain

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Industry & DSD Drivers - Technology Adoption Curve

Elapsed Time (Years)

Ra

te O

f A

do

pti

on

(%

)

0 20 60 80 100 120

Electricity

Telephone

Cell Phone

Blackberry

Internet

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Concepts supported by industry peers: AMR Research – Demand Driven Supply Chain

P&G – DDSN Model

Supply Chain Council – SCOR Model (incomplete)

Larry Selden states: “High profit and high-potential

customers deserve a superior experience – not all

customers are created equal and deserve equal treatment”

Today’s consumers are becoming ever more heterogenous

Number of messages touching consumers increasing

Brand loyalty changing

Bottom line – it is our FIRM conviction that today’s battle ground is the store shelf – integrating promotion effectiveness is a must

Summary - The Collapsing Value Chain

59% of U.S. consumers believe that very little, if any, marketing and advertising they see has any relevance to them

Share of media, and hence mindshare, has decreased from 45% in the 1980s to 19% today (CPG Industry)

58% of U.S. consumers believe that there should be more brands and types of products so people can pick the one that best fits their own individual needs

•Increasing number of U.S. consumers believe that it is not important to be brand loyal

Number of Messages

1960 1990 2004

1,5003,000

5,000

Sources: Clarkston research; K-C research; IBM research

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Examples

1. Major Global Tobacco Company

2. Behr Paints

3. P&G / Major Global Tobacco Company

4. Zara*

5. Customer Segmentation from “Angel Customer’s and Demon Customers”, by Larry Selden

A missed opportunity: L’Oreal

* Note – Zara is the only example that Clarkston has not directly consulted with

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Applying the Collapsing Value Chain

The increased size and strength of retailers has resulted in greater pressures on consumer products (CP) companies to quickly deliver customized products at customized products at reduced costsreduced costs.

Many of the classic supply management techniques that focused solely on cost efficiency and effectiveness are no longer appropriate in a consumer-driven consumer-driven environment.environment.

The supply chain must be able to react to customer demands quicklyreact to customer demands quickly to remain aligned to the supply chain of the future.

Retailers have been focused on top-line growth through differentiationdifferentiation and are looking to suppliers to provide improved services and products. Two “must have” requirements from retailers are improved on-shelf availability and innovative improved on-shelf availability and innovative productsproducts.

Customers are requiring manufacturers to be reactive and responsivereactive and responsive to their needs quickly and to keep costs down through lower inventory levels and collaboration.

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31%

21%17% 16% 13%

28%

23%23% 22%

20%

17%

24%27%

20%24%

13%

14% 15%

7% 7%

4%

8% 9%

20%22%

4%6%

6% 4%

6%

1993 1995 1997 2000 2003

Off Invoice

Market Development Funds

Accrual Programs

EDLP (taken Off Invoice)

Slotting Allowances

Scan-Downs

Card-Based ProgramsMenu-Based ProgramseMarketingOther3%

3%

1%4%

4%5%

5%

Trade promotions are changing quickly –

retailers want differentiated shopper marketing!

Applying the Collapsing Value Chain

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Adapting to the Collapsing Value Chain

This is not easy: Puts traditional and learned behaviors at risk

Plants and supply chains still largely evaluated on efficiencies

Entrenched thinking only slowly giving way to lean, six sigma, etc.

Sales people often still highly protective of customers/promotions, block real visibility

Activity based costing woefully under used – real segmentation work requires it

Challenges the fundamental power base – direct consumer demand is only means to fighting commodities and retailer strengths

Trade promotions are the last major frontier to impact behavior at the store shelf, integrate them seamlessly with your S&OP processes, demand planning and supply chain execution (consider DSD when needed)

Not one size fits all – a core capability will be adaptability and unique solutions for customers, categories, products, outlets and events

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Adapting to the Collapsing Value Chain

This is not easy: Consumer focus exceeds customer focus – difficult for many CPG

companies & consumers continue to get smarter with shorter attention spans

Quicker communications, yet much more clutter to sort through

Ever greater percent of sale generated by new products

Ever shorter new product development and launch cycles

Faster, more disruptive technologies

Shrinking / changing natural resources

Globalization – the need to balance centralization with local autonomy

Most struggle to understand – forecast less in a demand driven model, and when we do, at a higher level where noise cancels

Linking disparate data streams is not a core competency – just look at how few CPG companies link RFID case and pallet data with POS data

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Adapting to the Collapsing Value Chain Fundamental starting points are: Pilot projects

Pick one top customer to pilot with; begin with shared vision/strategy

Relationships key, find the partner you can actually make mistakes with

Don’t spend time on detailed benchmarks not much help during pilot phases

Pilot where data exists, build business case and prove new model (measure)

Once CREIDBLE pilot is complete, sell to board – this is a top down change

Customer Segmentation Apply Activity Based Costing principals to allocations

Work with board to prove customer profitability

Begin preliminary consumer segmentation

Capitalize on “new parts of the value chain” New product launches are ideal – slow them down and create a hypothesis and test for each

phase/part of the launch

Strongly consider exclusivity for key customer (that is what they really want)

Avoid over committing the supply chain – save the build up for commercialization

Use creative technologies to reach consumers/information bases – all in small pilots

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Starting points: Create a “Transparent” information infrastructure

Inven

tory

Log

istic

s

DemandMetrics

GlobalGlobalSupply Supply NetworkNetwork

DataData

EnterpriseEnterpriseEnterpriseEnterprise

Customs Customs BrokersBrokersCustoms Customs BrokersBrokers

International International CarriersCarriers

International International CarriersCarriers

Freight Freight ForwardersForwarders

Freight Freight ForwardersForwarders

TPOTPOTPOTPO

CustomersCustomersCustomersCustomers

ContractContractManufacturersManufacturers

ContractContractManufacturersManufacturers

ConsolidatorsConsolidatorsConsolidatorsConsolidators

SuppliersSuppliersSuppliersSuppliers

NPDNPDNPDNPD

Adapting to the Collapsing Value Chain

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Summary

Current state of industry leaves a lot of value on the table

Demand-Driven pioneers are creating profitable consumer-serving machines

Becoming demand-driven is not a quick transition

Customer product proliferation and globalization complicates being demand driven

Change processes, then use technology to automate processes and optimize decisions

Continuously measure to improve