Santa may be late getting to your neighborhood this year, due to a slight detour. He has to make an extra long stop in China to fill up his sleigh with all the usual goodies-cameras, toys and watches, in addition to electric razors.
For many years, the ubiquitous consumer product has been a popular Christmas gift. Twenty years ago, the president of one of the largest personal care product companies in the United States appeared in a famous series of television commercials boasting about how his products were "made in the USA." Today, if you purchase one of those razors, you'll find a "made in China" mark.
Unfortunately, fewer and fewer consumer products are assembled domestically. "All you have to do is walk into your local Wal-Mart store," says Karl Schultz, a manufacturing consultant based in Sherwood, OR. "It's hard to pick up anything that's made in the United States." In fact, Wal-Mart purchased $12 billion worth of Chinese products in 2002, which represented 10 percent of all U.S. imports from that country. Some experts claim that up to 70 percent of all Wal-Mart products come from China.
Volatile market conditions and intense competition are forcing manufacturers of batteries, disposable lighters, electric toothbrushes, flashlights, jewelry, lightbulbs, padlocks, personal care products, pens, sporting goods, spray pumps and other high-volume items to seek ways to reduce production costs. However, offshore assembly is only one strategy that manufacturers are exploring. Schultz and other observers claim that there are other ways to control costs, such as focusing on new technology and exploring new distribution strategies.
A Power Shift
The vast consumer goods market is dominated by constant change and fickle tastes. In recent years, consumers have grown accustomed to unprecedented options. That's why store shelves are filled with a mind-boggling array of new and improved products.
As the number of product choices has multiplied, power within the consumer products industry has shifted from manufacturers to retailers. Today, retailers are holding less inventory, demanding faster replenishment and expecting suppliers to provide value-added services, such as order tracking and inventory management. For instance, Wal-Mart Stores Inc. (Bentonville, AR) wields huge power over every major consumer products company in the United States. In its relentless drive for "everyday low prices," the retailer influences where, when and how numerous items are manufactured and distributed.
"This power shift gained momentum as the retail industry consolidated into a smaller number of large retailers with greater market clout," says Peter Wietfeldt, director of the consumer products practice at PRTM Management Consultants (Waltham, MA). "As consumer preferences evolve, product life cycles shrink and retailers gain market clout, consumer product companies are under increasing pressure to deliver new products that consumers really want."
During the next 10 years, another power shift will occur. Technology will change "the dynamics of the buyer-seller relationship, giving consumers unprecedented control in the marketplace," says Tom Rubel, president of Retail Forward Inc. (Columbus, OH), a management consulting and market research firm. "In this new environment, where access to products and product information has grown dramatically, consumers will do more for themselves. They will have more control over the shopping process."
Today, new product development is more important than ever, but it is also growing more complex and expensive. Manufacturers must deal with rapidly changing, highly competitive markets as consumer expectations for product customization, assortment, availability and price continue to increase. According to Schultz, success in this environment depends on agility, as well as rapid modification to meet evolving conditions.
To stay cost-competitive, manufacturers must ensure that fast product changeovers produce better first-time yields. Improved planning accuracy can help balance inventory against customer requirements and supply constraints, while improving product quality and customer responsiveness.
Making real-time data available upstream and downstream in the supply chain can optimize new product introduction and replenishment. Synchronizing market demands with production and distribution ensures quick and accurate delivery of the right product, at the appropriate volume, with the correct product mix.
Consumer product manufacturers that follow that strategy "can deliver products 6 days faster, meet customer requirements almost 100 percent of the time, and have total supply chain management costs that are 20 percent lower," says Wietfeldt. "Given this segment's focus on cost management and control, these benefits translate into a tremendous competitive advantage."
The era of mass production is starting to give way to build-to-order and mass customization. "Customization" means making products in small lots or batches with volumes as little as one. It is the antithesis of everything that mass production is.
Mass customization refers to the design, production, marketing and delivery of customized products and services on a mass basis. It means that customers can select, order and receive a specially configured product-often choosing from hundreds of product options to meet their individual needs.
"Build-to-order can be defined as the on-demand production of standard products, whereas mass customization is the on-demand production of customized products," explains David Anderson, Ph.D., president of Build-to-Order Consulting (Cambria, CA).
The concept of mass customization has been discussed since personal computers first appeared in the mid-1980s, but there has been mostly talk and not much action. However, some apparel manufacturers have experimented with it. For instance, Levi Strauss & Co. (San Francisco) recently offered mass-customized jeans for women, but never extended that to build-to-order production of anything else. "Ironically, they just closed all their domestic factories because they couldn't compete on cost," says Anderson. "But, building all clothing on-demand would have kept store shelves more complete and enabled all clothing to sell at full price instead of the usual 50 percent."
"The ability of the manufacturing organization to be highly flexible and responsive to customer demands is an essential ingredient for mass customization," adds Richard Bourke, principal consultant at Bourke Consulting Associates (Pasadena, CA). He urges companies to make the transition from a "make to stock" mentality to a "build to order" environment.
According to Bourke, the goals of mass customization are entirely consistent with the objective of lean manufacturing: produce a high quality product in the shortest order fulfillment time at the lowest cost. It is based on pull methods rather than push execution. In other words, customer demand triggers the manufacturing process, rather than a forecast and a master schedule based on the forecast.
"The methods of mass production must be replaced by the methods more appropriate to mass customization," says Bourke. "A prime example is lot sizes in mass production where large quantities are necessary to get lower unit costs from production runs. In contrast, one of the basic concepts of mass customization is to produce in small lot sizes to gain more scheduling flexibility and speed throughput in the plant."
Anderson believes consumer product manufacturers must implement mass customization strategies "for profits, growth, competitiveness and even survival, especially against imported goods. Many consumer goods are in danger of becoming commodities; indeed, many already have. When that happens, competition then boils down to price. If there is no product differentiation, powerful retailers can play manufacturers against each other and go with the cheapest products, often from offshore."
According to Anderson, life as a commodity supplier to powerful retailers is not going to be very profitable unless they can stay on top of the heap. "However, mass customization can allow manufacturers to escape the commodity trap by offering a greater range of products than the mass-producers can, especially from overseas, including items customized for individual customers," says Anderson, author a new book entitled Build-to-Order & Mass Customization (CIM Press). "Build-to-order can enable manufacturers to make a wide variety of goods on-demand and supply stores at a 100 percent fulfillment rate without inventory.
"Mass-producers sell from inventory, which is getting harder and harder to satisfy retailers who demand rapid replacements based on real time sales data," warns Anderson. "Mass producers have the classic inventory dilemma: Too little inventory saves cost, but creates out-of-stocks, missed sales, expediting and disappointed customers. Too much inventory adds cost and costly obsolescence risks. This dilemma gets exponentially worse as variety increases and market volatility gets worse. And it gets worse yet for the offshore mass producers with long pipelines."
To cope with the demands of a fast-changing marketplace, Anderson believes manufacturing engineers must learn to think differently and embrace the concept of mass customization. "As market niches continue to narrow, customization will become increasingly critical," warns Anderson.
"The way to apply mass customization is to start with the build-to-order of standard products to which mass-customized products can be added," explains Anderson. "Implementation should start with standard product lines that have more product variety than can be efficiently handled by mass production and finished goods inventory; unreliable forecasts; inventory problems; response time challenges; and customization opportunities. Marketing would be unchanged at first and order fulfillment would change from selling from inventory to on-demand production.
"With the capabilities to build a wide variety of products on-demand, the standard product lines could be extended to include various niche market products that were not possible to address in mass production," adds Anderson. "When the build-to-order operation is up to critical mass, mass-customized products can be marketed to consumers, first addressing new features and combinations of existing features. Later, customized dimensions or specifications could be added."
New technology is radically changing the way products get from the assembly line to the consumer. Today, many manufacturers are scrambling to embed radio frequency identification (RFID) technology into their packaging. The move toward RFID is being fueled by Wal-Mart, which also spurred the development of bar coding 20 years ago. However, smart tags embedded with microchip transmitters could give manufacturers unprecedented access to consumers.
Using RFID technology to track inventory could save the consumer products industry billions of dollars annually. For instance, AMR Research Inc. (Boston) claims that the supply chain loses 4 percent to 6 percent of total sales as products move from the assembly line to customers. Half of that loss results from failure to restock popular items and much of the rest comes from lost or stolen items. Kara Romanow, a senior research analyst at AMR, says RFID offers "the best solution for dealing with issues of tampering, safety, compliance and theft."
The technology allows manufacturers to capture accurate information about the location and status of physical objects and track them as they move from the assembly line to the retail store. "This capability increases the efficiency of individual processes and asset utilization, enhances forecasting and inventory accuracy, and improves the ability of companies to respond to rapidly changing supply and demand with a high degree of certainty," says Lyle Ginsburg, managing partner for technology innovation in the products operating group of Accenture Ltd. (Hamilton, Bermuda). "We expect the RFID application market to expand to almost $7 billion by 2008. Companies that wait to use this technology will not only miss out on significant cost savings today but also risk losing their future competitive edge."
Ginsburg claims that consumer product manufacturers could improve demand planning forecast accuracy 10 percent to 20 percent by harnessing auto-ID technology, which is a combination of RFID and electronic product codes (EPC). "Manufacturers should prepare to meet the demands of their biggest customers, who are already-or will soon be-requiring suppliers to employ auto-ID technology," warns Ginsburg.
"Auto-ID can dramatically improve production operations, asset utilization, forecasting and inventory accuracy and, ultimately, customer satisfaction by pinpointing the location and status of products as they move through the manufacturing and retail value chain," says Ginsburg. "These improvements can increase the quality and efficiency of the entire supply chain and lead to significant savings in areas such as inventory and labor costs.
According to Ginsburg, manufacturers can dramatically improve assembly operations, customer satisfaction, profitability and shareholder value. "RFID can deliver significant economic and competitive advantages," claims Ginsburg. "Manufacturers have a tremendous amount to gain and can realize the benefits by using RFID and EPC at the case, pallet or item level."
Ginsburg says there are five immediate ways that it can benefit manufacturers:
- Flexibility. For the first time, companies can view an accurate picture of their product inventory, wherever it is in the supply chain. This enables manufacturers to redirect flow patterns to meet the changing delivery needs of customers as they arise.
- Responsiveness. The high level of visibility allows for better response to urgent orders by making concurrent changes in the supply chain.
- Enhanced service. The flexibility to deliver instant access to product status information gives more accurate delivery dates and ensures that deadlines are met.
- Control. Manufacturers are able to track materials and product at any stage of the supply chain-from supplier to manufacturing to warehouse to retail shelf.
- Security. End-to-end tracking enables manufacturers to reduce theft and counterfeiting.
The Gillette Co. (Boston) has been testing RFID tag technology developed by researchers at the Auto-ID Center headquartered at the Massachusetts Institute of Technology (MIT, Cambridge, MA). It has inserted tiny RFID tags in selected products, such as Mach3 razor blades and Duracell batteries.
The tags make it possible to track products from manufacturing to retail point-of-sale. Smart shelf technology, also developed by the Auto-ID Center, will be used with the tags. The shelf monitors the status of products on display, alerting retail staff to low stock or product theft, and enables automatic re-order.
The Benetton Group (Treviso, Italy) has also been experimenting with microchip transmitters that allow the retailer to track its garments from their point of manufacture to the moment they are sold in any of its shops. The smart tags are imperceptible to the wearer, because an antenna-bearing chip smaller than a grain of rice is attached to the clothes' labels.
Despite the advantages of RFID, the technology must address consumer fear and criticism before it gains widespread acceptance. Privacy groups are worried that the technology could easily be used for unauthorized customer monitoring. A group called CASPIAN (Consumers Against Supermarket Privacy Invasion and Numbering) has mounted a successful anti-RFID lobbying effort. It claims that RFID has the potential to be the most invasive consumer technology ever.
Despite that concern, Wal-Mart is pushing ahead with plans to require all its large suppliers to attach RFID tags to every box, carton and pallet shipped to the retailer by January 2005. Initially, RFID applications will be limited to Wal-Mart's distribution centers and back rooms. However, most experts predict that tags will eventually be embedded in individual products and store shelves.
European retailers are also a driving force behind RFID applications. Earlier this year, Metro, the largest retailer in Germany, opened a high tech store in Rheinberg. The Future Store is a showcase for RFID and other state-of-the-art technology.
British retailer Marks & Spencer recently implemented an RFID tagging trial. One of its stores is offering men's suits, shirts and ties carrying large, lilac-colored hang tags that are equipped with RFID devices. However, customers are given the option to have the tags clipped off at the point of purchase.
While Marks & Spencer has taken steps to protect consumer privacy, Katherine Albrecht, founder of CASPIAN, fears that other retailers will not be so careful with their implementation of the technology. "Many stores won't even acknowledge their RFID trials much less give consumers proper notice," she claims. For instance, Albrecht points to the example of Tesco. She says the British retailer used smart shelves to secretly photograph consumers who picked up RFID-tagged Gillette Mach3 razor blades.
Convergence of form and function is starting to occur in the consumer products industry. Within 10 years, consumers may be carrying around a copy of their master DNA blueprint on a piece of jewelry that doubles as a house key.
Battelle (Columbus, OH) recently conducted a survey of its technologists and business managers to paint a picture of future products.
They identified 10 major new advancements in technologies, products and services that will affect consumers over the next decade and provide new opportunities for manufacturers. Some products have already begun appearing while others may still be a few years away.
"We've made great leaps in welcoming technology into our homes," says Steve Millett, author of the forecast. "In fact, technology more and more is essential to our home comfort, a trend that will only accelerate over the next 10 years."
By 2012, Millett predicts the following innovations:
- Universal controls for home appliances. "Consumers are now comfortable using handheld wireless controls for locking and unlocking their cars, activating automatic garage doors and accessing their TVs," notes Millett. "These devices will become more pervasive because of rapid advancements in microprocessors and wireless communications and will lead to a real ‘universal control.' This is the remote control you'll hate losing the most, as its use will be expanded to include access to computers, lighting, heating and cooling." A laptop or handheld computer may become the universal control for all types of products.
- Personalized health monitoring and care. Virtual house calls will become a reality as consumers access health monitoring devices in the comfort, convenience and privacy of their own homes. "Circulatory, heart or kidney testing will become as easy as home pregnancy tests," predicts Millett.
- Home environmental quality. "An airtight home is good from an energy savings perspective, but it's not good from an indoor air quality perspective," says Millett. "Consumer demand will lead to improved ventilation along with the energy efficiency that airtight homes bring to homeowners." Indoor air quality will be greatly improved through advanced fans and filters that remove allergens from the air including outdoor pollens and indoor molds, pet dander and other particulates.
- Integration of television, telecommunications and computing. "Homes of the future will have access to the most powerful of computers and the most complex of software programs-and often these will be miniaturized to fit into the smallest of electronic devices," Millett predicts. "This access will come through TVs, cable or satellite. Computers will be operating throughout the house." According to Millett, handheld and laptop computers will be as common as telephones. He says video telephoning will be done though various methods, such as TVs, computer screens and mobile telephones, and will become "as common as telling time with watches and clocks."
- Voice recognition and activation. "We've come a long way in optical recognition of text, which was very difficult and expensive 30 years ago," says Millett. "It's common today to see scanners, printers and copiers that have optical readers. The same trend will be true for voice recognition and activation. By 2012, security systems in homes will be activated by your unique voice pattern. You'll be able to speak into a computer, which will translate voice patterns into digital text."
- Personalized energy. Millett believes micro fuel cells will replace traditional batteries and provide long-lasting power for portable consumer devices. Miniaturized proton exchange membrane fuel cells will significantly increase energy efficiency and density of storage. Heating, cooling and other major appliances will be run from fuel cell power or from the electrical grid.
- Environmentally friendly and sustainable materials. "Some people hate the ‘new car' or ‘new house' smell that comes from carpets and construction materials synthetically made from chemicals," says Millett. "New, more economical materials will be developed using naturally derived fibers, including genetically engineered trees, plants and crops." These new materials will be more environmentally friendly and acceptable to homeowners.
- Home waste treatment. "We will see a backlash against the throwaway society that we have become," predicts Millett. "Municipalities will continue restrictions on the content and amount of garbage collected. Homes will be required to pretreat solid trash leading to, among other things, a new generation of trash compactors. Homes may also be required to pretreat wastewater."
- Personalized identification and security. Personalized biochips are just being introduced to the marketplace today. "Over the next 10 years, virtually everyone will carry their health and medical records with them, either as a piece of jewelry or as an implanted chip that will be easily read and understood," says Millett. "In addition to vital statistics, bio IDs will contain your individual DNA master blueprint to help identify people and their medical needs." Other potential uses include providing access to cars, homes and computers in conjunction with voice recognition technology.
- Home zone temperature, humidity and lighting. "If you like it meat-locker cool while you're bustling around the kitchen, but your spouse likes it toasty warm while watching TV in the den, new technology is going to help you," claims Millett. "Today, HVAC systems heat and cool the entire house from one thermostat location. By 2012, we will see room by room heating and cooling for better comfort zones and more energy efficiency. Humidity controls will keep 30 percent to 50 percent relative humidity throughout the year. Zone lighting now common in commercial settings will become common in houses with sensors automatically turning lights on and off as you enter and leave the room."
A Brave New World
By the end of this decade, the consumer products industry will be significantly different than it is today. "Consumer targets, retail categories, channels of distribution, and retailers and suppliers alike will undergo radical transformation through the end of the decade," predicts Retail Forward's Rubel. "The year 2010 will be a whole new world."
According to Rubel, the following trends will alter the face of retailing by the end of this decade:
- The big get bigger. Wal-Mart will be even more successful by 2010 as it extends its reach with customers into a variety of new businesses, products and service offers. "Wal-Mart's [current] push into the grocery business is changing the way we shop," notes Rubel. "As consumers search for greater shopping efficiency, their store preference is shifting away from traditional supermarkets and discount department stores toward supercenters." A supercenter is a combination supermarket and general merchandise store. Rubel predicts this shift will have a significant impact as supercenter sales triple by 2010. For instance, Wal-Mart alone plans to open 1,000 supercenters in the United States over the next 5 years.
- Fall of the mall. As department store market share continues to decline, so will consumer preference for mall shopping. There will not be enough demand to support all of the malls already built. Some malls will die, while others will be reformulated and reborn. "The mall of the future must have a clear market position," warns Rubel. In addition, he says "compressed life cycles for products, retail concepts, and brands mean the days of the large, mass-merchandised specialty chain are over."
- Smarter shoppers. Smart cards, e-kiosks and RFID-enabled checkout will give customers more power. "Mobile devices are expected to be a major technological change driver in consumer products distribution over the course of this decade," says Rubel. "The Internet will transform many aspects of the shopping process, but the online action will include relatively few transactions. Even though e-commerce sales are expected to continue to grow through 2010, they will remain a relatively minor slice of overall retail sales." Rubel predicts annual e-commerce retail sales will reach $230 billion by 2010.
- Supply and demand. As retailers grow and become more global, they will seek alternative sources of supply. By 2010, Rubel believes many suppliers will find their biggest competitors are their retail customers. "As retailers look for new ways to grow and differentiate their offerings, many will become brand managers and some will pursue innovative store-within-a-store, or brand-sharing, partnerships," he explains. "Others will become über retailers' leveraging their brand identities, customer relationships and scale to move from share of market and share of wallet to share of life."
- Suppliers go retail. "Suppliers that survive the decade will be best-in-class category consultants as they take on an increasing number of activities that traditionally have been the responsibility of the retailer," claims Rubel. "And, as more suppliers get locked out of traditional retail channels, expect supplier direct-to-consumer to be a more viable scenario in the future."
- Consumers call the shots. "Shopping in 2010 will be much more personal as retailers adopt a more robust portfolio approach to the market to appeal to the multidimensional consumer mindset," concludes Rubel. "Technology is changing the dynamics of the buyer-seller relationship, giving consumers unprecedented control in the marketplace. We will see a new customer-driven business model by 2010, 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."