CPG Manufacturers and MonarchFx
By: Gene Tyndall ,
The MonarchFx management team recently reviewed a paper by McKinsey & Company titled Should CPG manufacturers go direct to consumer – and, if so, how?. As usual, the paper is thought-provoking, as well as providing meaningful executive advice. The strategic concerns by Consumer Packaged Goods (CPG) manufacturers around eCommerce, and especially Direct-to-Consumer (DTC), are prevalent. The growth of CPG start-ups continues to receive increased pressure from retailers on supplier margins and the overall growth of digital channels expands dramatically.
We wanted to share our position on this topic with the followers of MonarchFx.
First, since our MonarchFx value proposition is appealing to all retailers, internet retailers, brands, and CPG manufacturers, we certainly endorse the four factors that the McKinsey authors use to summarize the CPG success criteria. These are:
- A clear definition of the DTC role for the CPG channel strategy.
- Giving consumers a unique reason to visit a website often.
- A thorough plan to gain the required capabilities for the strategy.
- A scalable economic model, combined with a venture capital mindset toward performance.
These factors can differentiate by CPG company, brand segments, their websites, and their needed capabilities. Engagement platforms, “unichannel” strategies, and driving consumers to websites, are all important for the “buy side” of DTC.
MonarchFx complements these success factors with two more that focus on the execution side of the equation:
- An agile and flexible online order fulfillment operation that is both efficient and effective.
Efficient and effective are not just words. Efficiency, of course, refers to the total operations costs of providing DTC services. This includes all incremental operations costs from planning, to creating, to storing, to processing, and on to deliveries (and returns). This relevant true cost is not only the price per unit processed, the rate for deliveries, or any other single component. It is the total to be expensed for successful DTC operations.
Once the total costs are known, CPG manufacturers need to determine how to reduce those costs that matter, the fixed and variable capital investments, the operating expenses for the availability of the goods, and the order processing associated with DTC. What we are finding at MonarchFx is that there are numerous ways to optimize online order fulfillment, minimizing operating costs and operating expenses. Backed by our supply chain consulting tools and analytics, we can help the CPG manufacturer minimize its DTC total costs, through what we refer to as “distributed logistics”.
There is another value proposition for using MonarchFx, which we refer to as “economic agility”. To a CPG manufacturer, this agility facilitates the rate of change for product mix. Rapidly changing customer demand and fulfillment options are essential in the uncertain world of eCommerce. Through our innovative strategy of “total unit pricing”, the CPG manufacturer obtains the full MonarchFx “ecosystem”, which has built-in economic agility. The company can model its “fully delivered costs” by program, which is less practical with rigid outsourcing models or with in-house processes.
Even more importantly, effective also means profitable growth. We know from years of experience that distributed logistics (locating goods closer to customers), translates into more sales. This is due to quick order turnaround time, product availability, and ease of deliveries and returns. This is why Amazon has developed literally dozens of fulfillment centers around the country. For CPG manufacturers to do this on their own is not feasible. The MonarchFx fulfillment centers will provide timely service to customers, as we build out the network.
- A relentless focus on the consumer, with perfect orders, and simple returns.
The customer experience does not end on the buy side. Effective DTC requires each and every consumer order to be perfect in terms of what is promised when the buy order is confirmed including items, deliveries, packaging, timing, and labeling. This operational excellence is what separates effective from average or normal. Consumer satisfaction, or delight, is what brings them back to the brand, the company, and the services.
The highest quality service does not necessarily mean the most expensive. Today’s supply chain planning and execution tools and analytics enable us to provide high quality service and optimized operating expenses.
Second, regarding “build, partner, or buy”, our view is in-synch with the paper, in that each of these three models has components that need to be evaluated. There are examples, of course, in each model and the paper provides selected well-known brands in each.
Fulfillment and delivery are our focus at MonarchFx. MonarchFx’s major value propositions are that it is fundamentally capital free, provides operational excellence, is readily scalable to the entire nation, provides for economic and fulfillment agility, and is priced reasonably. We do not know of others in the online fulfillment business that offer all four of these success factors.
The capital-free factor deserves some elaboration. Basically, a CPG manufacturer that comes to MonarchFx does not need to invest capital in material handling equipment, robotics, or new information technology. These are provided by MonarchFx and our selected Logistics Service Providers (3PL). All the CPG company needs to do is invest some OpEx in providing the goods to be sold online to MonarchFx fulfillment centers and replenish these as necessary. All the costs from that point on are reflected in our total unit pricing and delivery charges. Any value-added services not part of the standard operational functions are charged as incurred. This means that fixed capital is not needed for setting up “each processing” to fulfill orders. If the CPG manufacturer decides instead to build its own capability for e-fulfillment, the investment capital would be extensive.
Third, on the issue of measuring DTC performance, we agree that a sustainable economic model is necessary for a DTC business. We also agree that many performance metrics for the normal CPG business models do not apply and may even distract from what is important. Online order fulfillment is simply different. The real-world evidence on operating margins from many retailers, however, could mislead CPG manufacturers, as surveys have indicated the majority of retailers suffer from negative operating margins for DTC.
The goal of MonarchFx is to change this situation. As we interact in depth with retailers, we often find operating cost reductions that change the metrics in areas such as overall freight costs, overpaying unit prices, charges from fulfillment companies that are hidden in pricing models, and errors in inventory allocations. MonarchFx services are priced simply and include value propositions that address all costs and all reductions. These same approaches will work for CPG manufacturers as well.
Lastly, in terms of the issue that the DTC arena will only become more crowded and competitive, and thus each CPG manufacturer should first decide “whether and where to play”, our view is straightforward. Who can afford not to play? DTC is here to stay and will only grow over time.
Thus, the business decision, in our view, is not about why? Rather, it is about how? Each CPG manufacturer may have a different strategy and a different corresponding set of capabilities in order to achieve its strategic goals. However, each needs to focus on what to sell online and the value propositions for its target markets, while leaving the execution to experts. MonarchFx offers CPG manufacturers the preferred alternative for operational excellence and customer experience for fulfillment, delivery, and profitable growth.