Managing the supply chain efficiently is becoming a high priority for companies on the FMCG market. Relationships between suppliers, producers, distributors, retailers and customers are becoming closer and more collaborative, more emphasis is being placed on enhancing the current low level of technology integration and effective performance management systems are being introduced by a growing number of companies.

These are the main findings of the survey carried out by KPMG Consulting among companies in this sector. This is the first industry analysis carried out in Hungary with the purpose of understanding how closely current supply chain operations reflect world class supply chain management principles. The main conclusions of the survey were revealed to participants at KPMG headquarters on December 6.
 
KPMG Consulting has analysed the practices of supply chain management at 74 companies in the Hungarian FMCG (Fast Moving Consumer Goods) sector, including companies manufacturing, distributing and trading food and HPC (Home and Personal Care) products. (30 of the respondents are from the Top 200 Hungarian companies)

The goal of the survey was to establish to what extent companies in the Hungarian FMCG sector collaborate with each other in the supply chain management area, what key performance measures they operate with and what sort of information technology support tools they use. Logistics leaders or top management members from the chosen companies answered the questions independently, and the results were then summarised by consultants for 13 segments of the sector.
 
Collaboration
 
Concerning collaboration, respondents judged their relationships with their top 10 suppliers and customers very positively, although relationships with suppliers are considered as significantly better than those with customers. The level of customer involvement is the highest in demand planning and forecasting, while the highest level of supplier involvement was recorded in supply planning and scheduling. 

The majority of the respondents are satisfied with the current structure of their supply chain (84% indicated that its current structure supports the realisation of their business strategy) and the level of co-operation between their internal departments (82% indicated that it supports the optimisation of their supply chain). 
 
Information Technology
 
The differences are more significant concerning the information technology used to support SCM.

62% of the companies use some sort of Enterprise Resource Planning (ERP) system - this rate is even higher among Top 200 companies, at 83%. At the same time, 38% of respondents currently do not use any ERP system (for which one of the reasons could be that there were several small and medium-sized companies among the participants using islands of automation.
 
The results show significant variances at a segment level. ERP systems are used in the greatest proportion (above 80%) in the Canned and other Food, Home & Personal Care, Meat, Fish & Poultry and Trade segments. However, in segments such as Diary Products and Bakery Products, less than a third of the companies reported that they used ERP applications. The lead ERP application is SAP R/3 system, used by 31% of companies - other systems such as Scala (6%), JD Edwards (5%), BPCS (5%), Apollo (5%), and PRISM (5%) all lagged well behind. The proportion of in-house tools and systems was also quite high. 

Advanced Planning Systems (APS) providing complementary functions to ERP systems are less widespread - only 17% of companies (33% of Top 200 companies) indicated that they use an APS. The most widespread solution is SKEP, a middle-range supply chain decision support software tool. Of other well-known APS systems (I2, Manugistics, SAP APO), only Manugistics had a reference in the Hungarian FMCG sector.
 
IT integration proved to be the biggest challenge to companies. Integration between the companies#; and their business partners#; IT systems is quite low - 88% of respondents indicated either no integration at all or limited integration. Internal integration of support tools is considerably higher. The majority of respondents indicated partial (57%) or full (13%) integration. 
 
Companies most commonly have e-Business initiatives in the areas of B2B (32%) and Intranet (37%) - the majority of these initiatives relate to information distribution, communication and transaction processing.
 
Performance measurement
 
Regular performance measurement of competition factors such as speed, flexibility, quality and price is important to ensure that supply chain processes are effective and efficient. Service Level Agreements (SLAs) embedding clear performance metrics are used to track the performance of key suppliers. According to the survey, companies stipulate the tolerable limits of quality rejects (90% of respondents had an agreement on quality rejects with their top suppliers) and volume fill rates (84% of respondents track this metric) in SLAs. On-time delivery, order fill rate and invoice accuracy were seen as less critical, although the average was above 75% for each of these.
 
The service level within the FMCG sector is quite high, mainly due to fierce competition. The average is 94% both for volume fill rate and on-time delivery, reaching international averages.
 
The study showed that inventory planning and deployment is rated as the highest priority supply chain activity. Though inventory practices vary widely depending on the sector, the average inventory levels in the FMCG sector are as follows: raw material - 33 days, packaging materials - 31 days, work in progress - 19 days, finished goods - 25 days.

Examining financial performance measurements, Hungarian FMCG companies are working, on average, with a 7% operating profit. 78% of companies#; revenue comes from domestic sales, 18% from exports and 4% from intra-company transfers, reflecting the fact that products from domestic production are mainly sold on the domestic market.
 
Companies consider the reduction of logistics costs as a priority. On average, logistics costs add up to 11.5% of companies#; sales revenue - from this, the cost of outbound transportation is 4.2%. Warehousing and inventory holding costs together amount to 5.4% of revenue.
 
The Internet is not used as a potential sales channel (there are very few B2C solutions). To market their products, companies mainly use trade channels (wholesale and retail - 82%), while sales direct to consumers accounted, on average, for 15%, and the HORECA/Catering channel for 3% of sales revenues.
 
Another important area of performance measurement is the cycle time of the main processes (purchasing, production and order fulfilment). Order fulfilment cycle times are within 3 days for 85% of companies - the average cycle time for sourcing and procurement is 15 days and 7 days for production. Considering the given cycle times, it can be seen that only a few companies could afford to produce to order.

It is clear from the survey that private labels represent an increasing proportion of sales revenue (currently 11%, on average) in the FMCG sector. They are the most widespread in segments including Soft Drinks (23%) and Pet-food (18%), while they are much less significant in HPC (1%) with strong manufacturers#; brands.
 
 
Further information on the study:
KPMG Consulting
Istvan Lukacs, Partner
Dr. Karoly Teleki, Senior Manager
Tel:  +36 1 270 7100
Fax: +36 1 270 7392 
e-mail: karoly.teleki@kpmg.hu
 
What is Supply Chain Management (SCM)?
The supply chain consists of the processes which link suppliers, manufacturers, distributors, retailers and end consumers. The performance of the supply chains can be vastly improved if the members of the chain collaborate with each other, thereby satisfying customer requirements more cheaply, with shorter cycle times and higher service levels.

In addition to the ability and willingness to collaborate, real time information exchange and visibility, the application of a well-designed performance measuring system as well as accurate planning and optimum computation are equally necessary factors for the successful operation of the supply chain.