HARNESSING THE POWER OF SIMPLICITY IN A COMPLEX CONSUMER-PRODUCT ENVIRONMENT - MCKINSEY
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Marketing & Sales Practice
Harnessing the power of
simplicity in a complex
consumer-product environment
Companies can generate significant value by deliberately managing sources
of complexity, including those presented by the COVID-19 landscape.
by Christina Adams, Raphael Buck, Gary Herzberg, Janine Mandel, and Curt Mueller
© Yongyuan Dai/Getty Images
June 2020Even before the onset of the coronavirus short-term needs of securing the business and
pandemic, complexity in consumer goods was success in the longer-term environment.
increasing at an accelerated rate. The evidence can
be seen all around: in grocery stores alone, new CPGs that tackle complexity will see an impact far
product launches have risen dramatically, from beyond streamlined product portfolios: successfully
around 20,000 in 1996 to 39,000 two decades managing complexity can increase net sales by 1
later. The evolving retail landscape has created to 4 percent and boost margins by up to 8 percent.
new and different ways for consumers to shop, Further, implementing processes to combat
with each channel bringing its own product and value-diminishing complexity can have additional
packaging requirements. Meanwhile, direct-to- benefits, including unlocking employee capacity
consumer models and the growing demand for and refocusing leadership and employee resources
personalization have led to faster cycle times and on critical business areas. Since CPGs have been
ever-smaller shipments, and the explosion of small, struggling to maintain healthy growth, they can ill
nimble players across industries is forcing legacy afford to overlook any promising option.
manufacturers to expand their supply chains to
be more responsive. The current crisis and market Yet many CPGs lack the discipline and capabilities
landscape are making choices in assortment more to manage sources of complexity across the full
important than ever. value chain. Executives should first familiarize
themselves with the different types of complexity
Adding some complexity to address consumer created by external factors such as market forces
and retailer needs is inevitable—and can spur and internal processes within the organization
tremendous growth. But as the current market itself. To determine a starting point for initiatives
landscape highlights, it also needs active to streamline operations, executives should then
management to avoid an erosion of productivity and pinpoint their company’s sources of complexity.
profitability for consumer-packaged-goods (CPG) With this visibility, companies can then make
companies. targeted investments to reduce complexity and
reallocate resources to higher-value activities.
The implications of COVID-19 have created more
urgency for CPG companies to act. Certain
businesses have performed well during this time: for Identifying where complexity is
example, over-the-counter cold and flu drugs saw a smothering value
150 percent increase in sales in the weeks following Companies must be able to recognize the difference
the outbreak, while grocery e-commerce increased between strategic, incremental portfolio growth
by 25 percent. But many more have struggled, as and costly, unprofitable SKU proliferation.² For
more than 40 percent of US consumers have slowed organizations that play in categories requiring
their purchases.¹ a certain level of complexity, recognizing these
dynamics can create new opportunities. The
To adapt to this new market landscape, confectionery category, for instance, demands a
manufacturers are being forced to make difficult broader SKU portfolio that accommodates seasonal
assortment decisions, as retailers, given rapidly products and flavor variations, both of which
shifting consumer tastes, are demanding different are necessary to support growth as consumers
products on their shelves. Further complicating continue searching for novelty.
the situation, prioritizing the well-being of vital
employees affects the day-to-day operations of A look at a CPG manufacturer’s typical value chain
manufacturing and the supply chain. The cumulative highlights the potential impact of value-diluting
effect of these forces can feel overwhelming. Still, complexity and the common areas where it can
it is important to keep a balanced view of both the creep in (Exhibit 1).
1
“Survey: US Consumer sentiment during the coronavirus crisis,” May 29, 2020, McKinsey.com.
2
For more on good and bad complexity, see Christina Adams, Kari Alldredge, Curt Mueller, and Justin Whitmore, “Simpler is (sometimes) better:
Managing complexity in consumer goods,” December 2016, McKinsey.com.
2 Harnessing the power of simplicity in a complex consumer-product environmentExhibit 1
Complexity—good and bad—occurs throughout the value chain.
• Strong innovation • Strategic use of • Broad, robust • Innovative • Streamlined,
pipeline specialty materials in-house packaging that cost-effective
Good
• Customer- to drive value manufacturing drives consumer merchandising
specific SKUs
complexity where needed
capabilities value • Accretive
• Strategic use of promotional activity
• SKU variation co-manufacturing/ for key customers
that supports co-packing where
category it provides
competitiveness leverage
Portfolio Sales and
Procurement Manufacturing Packaging
development marketing
• SKU proliferation • Lack of common • Co-manufacturing • Packaging that • Margin-dilutive
driven by lack of raw materials used as flex requires co- merchandising
process sourcing across production due to packing, manual without common
Bad • Unclear strategic product groups suboptimal labor, and/or chassis across
complexity roles of low- • Proliferation of forecasting incremental product groups
margin SKUs similar types of raw • Overtime, excess distribution or • Last-minute
without active ingredients, leading changeovers, logistics steps promotional activity
discontinuation, to lack of waste, manual • Secondary and that dilutes value
yearly cleanup, economies of processing tertiary packaging
or offsets scale, waste, and that does not drive
spoilage consumer value
Portfolio development and innovation Manufacturing
Consumer demand for innovation and specialization, Smaller runs make production more difficult to plan,
combined with category dynamics, can result in an leading to reduced fill rates. Changeovers become
upward-spiraling stock-keeping unit (SKU) count. more frequent, along with accompanying idle line time
Without strict process management, organizations and higher expenses. Warehousing costs for finished
can find themselves with an unwieldy portfolio and goods may increase, and customer-service levels may
a growing portion of low-margin SKUs with no clear fall.
strategic roles.
Packaging
Procurement Smaller, niche products may need bespoke packaging
A broad and growing portfolio can create a long that existing packing equipment is unable to handle.
list of raw inputs needed to create products. More Specialty packaging needs result in costly manual
and more SKUs are niche or limited-time offerings, packing or use of copackers. Incorporating custom
which means materials orders are smaller, more secondary or tertiary packaging without a clear view
specialized, and harder to manage, with fewer of the value it may bring further reduces margins.
common inputs across SKUs. The resulting
complexity makes demand planning difficult, raises Sales and marketing
out-of-stock and carrying costs, and increases the Shelves that are increasingly crowded by niche
risk of spoilage and waste. players and small SKUs give channel partners
Harnessing the power of simplicity in a complex consumer-product environment 3negotiating leverage, squeezing bottom lines Proven levers for reducing complexity
through increased promotional spending, slotting Broadly speaking, CPGs have four primary ways
fees, and discounts. Portfolio fragmentation to address complexity: assortment optimization,
also challenges manufacturers’ marketing focus, simplification of design, design to value (DTV), and
diluting messaging and making it more challenging process management (Exhibit 2).
for consumers to find products on shelves.
Manufacturers may increase merchandising activity Assortment optimization
McK Consumer
to improve relationshipspackaged
with customers, goods 2020This approach eliminates SKUs that erode margins
but without
streamlined planning
Consumer complexity and production, such activity and redirects resources toward portfolio gaps, thus
can quickly destroy value. increasing distribution of higher-margin SKUs that
Exhibit 2 of 4
Exhibit 2
CPG companies have four ways to address complexity.
Assortment/portfolio DTV: Product design
optimization (formula and pack)
Operationalize portfolio Take out cost for features
platform strategies that consumers and
customers do not value
Fill relevant gaps in
assortment Enhance consumer and
customer value with
Take out non-value- additional/new features
adding SKUs Increase
value
Increase Reduce
Simplification sales cost Process is best with
transparency on...
Reduce unnecessary Brand positioning
complexity Market dynamics
Implement common Consumer/customer
platforms across markets insights
Competitive dynamics
Cost structure
4 Harnessing the power of simplicity in a complex consumer-product environmenthave room to grow. Companies should assess a Design to value
number of factors, in particular the impact of the Many products are burdened with more specs
SKU assortment on velocity and supply chain than the consumer actually values, which
(Exhibit 3). This action is also the fastest one to take results in unnecessary cost and complexity. For
when faced with a crisis such as COVID-19. overly complex product lines, gaining a better
understanding of which product and packaging
Simplification of design features consumers truly care about can
Organizations can reevaluate product development, eliminate waste, raw ingredients, and excessive
procurement, manufacturing, and merchandising labor, all of which squeeze margins.
to ensure common sourcing and develop more
standardized product and packaging chassis Process management
(common baseline models and sets of ingredients Revised internal processes—including those for
upon which to build several products, for example). new product development—are necessary to
This approach can reduce costs and changeover manage complexity. This is far from a one-time
McK Consumer packaged goods 2020
times associated with product variation. effort; it requires commitment to an ongoing
Consumer complexity
Exhibit 3 of 4
Exhibit 3
Winners assess broader portfolio impact, including supply-chain
complexity, when deciding to add or eliminate SKUs.
Criteria used for SKU changes, % of respondents
Winners Others
Factors in adding SKUs Factors in eliminating SKUs
Baseline impact (revenue, 93 80
volume, margin) 87 67
100 40
Incrementality
85 54
80 100
Velocity
38 69
100 80
Supply chain complexity
38 62
100 0
Customer request
92 23
Source: 2018 NA Commercial Excellence Benchmarking (CEB) Survey – Survey: Which of the following criteria are used when adding or
eliminating SKUs?
Harnessing the power of simplicity in a complex consumer-product environment 5series of reviews to ensure collaboration across the can bring welcome clarity to an otherwise opaque
business, support strategy, and provide structure challenge. Research conducted in the development
in decision making. Recent McKinsey research of our “complexity quotient” has allowed us to
found that 40 percent of “winners”³ conducted identify five common archetypes, which are
a SKU evaluation at least once every quarter, distinguished by complexity-driven behaviors or
compared with 23 percent of other companies attributes.
(Exhibit 4). In addition, research indicates that 100
percent of winners take supply-chain complexity History-led organizations
into account when adding SKUs, and 80 percent These companies tend to rely on what has
use it as a criterion when eliminating SKUs. traditionally worked and take a one-size-fits-all
approach to the market, applying a single core
The challenge for any organization is that each product model to different market situations. While
lever can take substantial time, skill, and resources this tends to simplify decision making, it can also
to execute effectively. Unless leaders know the cause an organization to miss opportunities to tailor
core drivers of complexity, they cannot be sure strategy to changing channel or market dynamics.
which one will generate the most value. History-led organizations could benefit from
applying assortment optimization and DTV to tailor
their approach to more-segmented customer groups.
Five archetypes
McK Consumer packaged
Since a company’s goods
specific sources2020
of complexity Common behaviors observed: Limited price
will dictate
Consumer complexity which remedies it deploys, a diagnostic tiers and line pricing, low level of customization
Exhibit 3 of 4
3
“Winners” are defined by their advantages across a number of metrics, including growth, pricing strength, sales expenses, and online sales.
Exhibit 4
Winners perform SKU evaluations quarterly.
Frequency of SKU evaluation, % of respondents
Winners Others
40
Every quarter
23 40
20
Every six months
23
20
Every year
15
Less than once 20
a year 15
0
As needed 23
Source: 2018 NA CEB Survey
6 Harnessing the power of simplicity in a complex consumer-product environmentfor customers and consumers, and minimal operating in these categories often leads to strong
breakthrough innovation. customer and consumer relationships, these
companies sometimes have difficulty managing
Gut feelers at-shelf, promotion, or margin landscapes due to
These companies, having made limited investments the level of complexity their categories demand.
in data and insights, instead use a broad set of They can benefit from assortment optimization and
people who rely on experience and instinct to make simplification to corral their SKU complexity.
decisions. If led by visionary senior executives, such
organizations may thrive through quick thinking and Common behaviors observed: Lack of common
breakthrough innovation, despite their lack of data- chassis and ingredient bases for product
based visibility into the complex business landscape. development, extensive margin variation across
Gut feelers’ performance, however, tends to suffer product lines and business units, and a high
as their competitors harness an increasingly rich percentage of volume occurring on promotions.
data environment and advanced analytics to
optimize processes across the value chain. Gut Independent operators
feelers can use assortment optimization, advanced Independent operators often have a clear
analytics, and process management to develop a understanding of how to win in the market and can
better structure around their portfolio. communicate effectively with their sales teams.
But other departments in these organizations
Common behaviors observed: Limited often don’t communicate regularly, resulting
consumer testing involved in setting price points, in misalignment among consumer demand,
incrementality rarely used in portfolio decisions, and manufacturing operations, and internal processes.
no clear rules or thresholds for SKU additions or This can lead to suboptimal supply chains and
subtractions. vendor contracts, and difficulty coordinating
operations with portfolio strategy. Independent
Overthinkers operators can benefit from internal process
These organizations tend to make “the great” the optimization to drive communication throughout
enemy of “the good.” They are thorough and the organization.
methodical in their decision making, and their
analytics provide them with a good understanding Common behaviors observed: Lack of consumer
of their consumers and customers, which can insights into product development, minimal
lead to well-thought-out decisions. This approach, formal contracts with vendors, and potentially
however, can also lead to overengineered solutions, inflexible supply networks and systems that can
inflexible processes, and unnecessary complexity in make communication between commercial and
marketing and operations. This tends to introduce operational functions even more critical.
friction into a system and impede decision making.
Overthinkers can benefit from process management
to streamline decision making throughout the Taming complexity: Two cases
organization. Regardless of a company’s archetype, its leaders
have opportunities to improve gross margin by
Common behaviors observed: Internal managing complexity. A look at two real-world
misalignments on promotional activity, limited examples demonstrates the application of specific
consensus on price and pack architecture, and many levers and their impact.
products with secondary and tertiary packaging.
One food company had a complex product line that
Category navigators was putting pressure on margins, constraining
These organizations operate in complex and employee capacity, and creating service-level
challenging categories that often demand a high issues. As a category navigator, this company’s
level of product complexity. While successfully
Harnessing the power of simplicity in a complex consumer-product environment 7portfolio was largely shaped by a highly competitive per SKU and a 10 percent reduction in margin. To
category that valued innovation, seasonality, and address this, the firm undertook a simplification
promotions. program that involved portfolio optimization,
product design, and commercial network
The company embarked on a combination of alignment. By harnessing analytics that factored
initiatives to control complexity in the near term: it in revenue-growth targets and operational
optimized product assortment by limiting SKUs and constraints, the company reduced its product
implementing higher thresholds for introducing new portfolio by 25 percent while improving gross
products to minimize portfolio creep. In addition, profit by 3 percent.
the company increased distribution of higher-
margin SKUs, simplified packaging of similar SKUs,
and simplified product design by using product
chassis and a design-to-value approach. These Tackling complexity isn’t a one-time fix; the pace
simplification initiatives, which affected more than of change in consumer goods requires companies
half of the product portfolio, identified opportunities to make it an ongoing effort through continued
to improve top-line revenues through increased process optimization. Doing so can also enable
distribution and to reduce costs by 3 to 5 percent. companies to get ahead of changes that may
otherwise be forced on them by economic,
Another company, a gut feeler, had focused environmental, consumer, or retailer changes.
on increasing revenue—but at the expense of With this foundation in place, consumer goods
profitability. Over a three-year period, it had companies will be better equipped to keep
increased the SKUs it offered by 66 percent, which complexity in check.
corresponded with a 40 percent decrease in sales
Christina Adams is a partner in McKinsey’s New York office; Raphael Buck is a senior partner in the Zurich office; Gary
Herzberg is a consultant in the New Jersey office; Janine Mandel is a consultant in the Denver office; and Curt Mueller
is a senior partner in the Chicago office.
The authors wish to thank Lu Liu and Nancy Volker for their contributions to this article.
Copyright © 2020 McKinsey & Company. All rights reserved.
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