The fast moving consumable goods (FMCG) market is faced with a number of challenges with regards to profitability analysis, which is an essential part of ensuring the overall success of the business.
Simply analysing individual products is not sufficient, as the cost and margins of specific customers can also be an important consideration when determining exactly where profits are being made and where they are being eroded.
Performance management (PM) tools in the form of both customer and supply chain intelligence are essential in taking the guesswork out of profitability analysis to improve efficiency and profitability in FMCG organisations.
The very nature of the FMCG market is often its biggest challenge – a fast moving environment with hundreds or even thousands of line items and products. Understanding the success of the business as a whole is impossible without an understanding of the profitability of each and every product.
FMCG companies need to ensure that resources are allocated to the right products and line items whilst improving performance, streamlining business processes and reducing costs. The need for supply chain performance analytics is one that is well understood, and this discipline has been developed according to the Supply Chain Operations Reference (SCOR) model.
Using well-defined metrics from the SCOR model, PM solutions can be tailored to help FMCG organisations gain a better understanding of their organisation.
However, analysing product profitability alone will not provide a complete and accurate picture. In order to ensure a full understanding of the profitability of the FMCG business, it is vital to also analyse customer profitability.
This is a more challenging task, since a single customer may interact with many divisions across the organisation, which adds a layer of complexity when it comes to analysis. Allocation of costs, therefore, may not be an exact science. However, even though this process may be subjective, it remains an important step for a complete understanding of performance.
High cost customers may not be immediately obvious without critical analysis – they may be purchasing large volumes of products frequently, which would on first inspection make them appear to be profitable. However, general overheads such as transport costs, volume rebates and other factors that will affect customer margins may be hidden from this view.
A major customer that purchases large volumes at a substantial rebate, with high delivery costs, may be far less profitable than a smaller customer that purchases lower volumes less frequently, without the rebate or need for expensive transport.
Without customer analysis, high cost or low margin customers are difficult to identify, and FMCG organisations may allocate their customer retention and promotions budget incorrectly as a result, for example, negatively affecting profitability.
PM tools have many applications in the FMCG space. Through effective analysis, FMCG organisations can more accurately budget, plan and forecast many areas, such as sales, production, and even staffing. The impact of changes on demand can be catered for in terms of production and employee headcount, general expenses such as logistics, administration and promotions can be more effectively managed, and expenses can be more accurately allocated.
Ultimately, PM should be a tool that enables FMCG organisations to monitor and measure business performance, which includes both products and customers, and present this information to the right people, in the right format. This will then enable them to take appropriate strategic action to maximise efficiency, effectiveness and productivity through analysis and improvement, even if this is not an exact science.
