Customer service lacking: Davis

Date: 25.05.2011

This year’s Smart Conference opened today in Sydney with a punchy statement from Coca Cola Amatil (CCA) CEO Terry Davis

By Anna Game-Lopata | May 25, 2011

This year’s Smart Conference has opened in Sydney today with a punchy statement from Coca Cola Amatil (CCA) CEO Terry Davis.

Davis told some 600 conference delegates that despite over 25 years in the beverage industry he still
witnesses a failure to prioritise customer service in the supply chain.

"At CCA we actively seek out investments to deliver customer service levels our competitors can’t profitably match,"
Davis says.

"One of our key investment criteria is how will any investment affect our competitive position in the market place."

Davis contends the success of CCA’s business lies in a series of well-timed and consistent capital investment programs that focus on the efficiency of the supply chain.

"The major goal of our capital works projects is to deliver the most efficient customer-centric FMCG (fast-moving consumer goods)
supply chain in the country as a general philosophy," Davis says.

"As a consequence of our improvements we’ve delivered double digit earnings growth in nine out of ten years since 2001," he says.

"When I joined the company CCA’s return on capital employed was 7.7 percent per annum. Today we generate over 25 percent return before tax."

"Our market share and financial performance demonstrably out-performed our competitors.

"Last year we captured some 95 percent of the pool of profit growth with our major competitor and in the year to date we expect that share to be higher."

"I estimate that at least half of these gains have come from efficiency derived from our capital investment projects which are largely in the area of supply chain capability and capacity."

The beverage sector in Australia has a turnover of $100 billion annually, of which CCA contributes $4.5 billion.

With major manufacturing facilities in every state and fully automated Distribution Centres (DCs) which deliver over a million cases per day of product in peak seasons, CCA is one of the country’s largest players.

Davis says CCA’s secret is having a consistent capital investment strategy even during down times such as the Global Financial Crisis (GFC).

"If your product costs and costs of doing business are greater than your competitors then it’s a slippery slope, which became very evident during the GFC."

Davis says CCA has generated total shareholder returns of over 250 percent since 2001 despite the GFC.

"We grew market share through the GFC while still making investments in capacity and operational capability when we saw many others pulling back or cancelling capital spend," Davis says.

"This means we are able to pick up production lines at the fraction of the cost we would normally pay for example, from cancelled orders.

"Each year CCA’s cost of doing business ratio is reduced through technology innovation and aggressively taking costs out of the supply chain.

"This allows us to reinvest some of those savings back with the consumer in the market place which in turn improves market share and profitability."

The most pertinent example of this strategy is CCA’s high profile Project Zero.

Accounting for $375 million this year alone, Project Zero has comprised a series of systems overhauls including an end-to-end order to cash technology platform, the automation and integration of warehouses, the automation of manufacturing with robotic pick and pack and voice command picking modules and the gradual introduction of automatic guided vehicles to replace forklifts.

"These projects have enabled us to double the number of SKUs we handle and sell in an increasingly complex manufacturing sales and distribution environment," Davis says.

"But we’ve achieved it without increasing our cost of doing business ratio or diminishing service levels. Our cost of business has gone down and our service levels up.

"Cost savings in recent years of Project Zero are close to 30 percent of Australian earnings," Davis says.

Davis argues CCA’s investments have enabled the company to realise revenue and service level increases that drive the revenue growth of its customers.

"During the GFC, 19 out of 20 customers substantially grew revenue from our products," he says.

"The concept of integrated manufacturing and distribution is now well advanced at the organisation with the remaining missing link being the move to higher levels of vertical integration for example the in-house manufacture of PET bottles."

Davis says by manufacturing in-house the company intends to reduce its dependency on suppliers and lift its capability to innovate.

"We’re already making bottles with 20 percent less resin," he says.

"Our premium brand Mount Franklin has 35 percent less PET than it did one year ago. When we are fully self sufficient this will equate to 6,000 fewer tonnes of raw material per annum."

The next step for CCA according to Davis is the manufacture of performs and bottle closures.

"This brings all the IP of bottle design and light-weighting in-house where previously it wasn’t exclusive to CCA.

"We try to avoid sharing our benefits with competitors."

Davis says while CCA has made smart investments in supply chain the company is still discontented.

"We’ve opened the eyes of customers, suppliers and our own people but there’s still a long way to go. We have made profitable progress, but were on a journey."

AUSTRALIA BEHIND ON TECHNOLOGY

Davis also argues Australia is behind the eighth ball when it comes to deploying supply chain technology.

"FMCG companies in Australia are not at the forefront of technology change, despite the fact that it is arguably one of the crucial components in determining success or failure," he says.

In particular, Davis points to the level of out of stocks at supermarkets.

"Some days these can reach between five and ten percent of single SKUs, he says.

"Whose fault is that? Is it the retailer, the supply chain into the retailer or the manufacturer? To some extent it’s all three.

"We need to have more predictive modelling. I think the biggest complaint from my suppliers is the inability to forecast properly.

"The reality is our retail customers find it difficult to forecast because they are on a day to day pricing proposition which simply can’t be predicted accurately.

"We need more intuitive, responsive systems to get product out of the warehouse quicker to condense the time frame down.

Davis argues most companies don’t have real time inventory visibility.

"It was only two years ago CCA developed the ability to realise where our forecast out of stocks would be in one or two hours time, which is very important," he says

"Even the use of GPS for customers to see where their deliveries are is very recent so we’re still in a catch up phase."

While Davis argues CCA today is a much more profitable and customer centric business than it was when he joined in 2001, he says it has taken many years of hard organisational change.

"It’s taken a long while for example to recognise the need for a greater understanding of the role of suppliers in the innovation, service and innovation pipeline," he says.

"We still have a long way to go- with last year being the first time CCA has ever held a ‘Supplier of the Year award."

Davis says CCA ensures it has a continuous three to five year pipeline of high visibility technology projects to create pressure points for its people to create higher performing projects.

"I expect our capital expenditure will peak at about $375 million this year, making CCA the largest investor in supply chain technology in Australia.

Davis points to staff continuity throughout projects as a key success factor.

"It does help to have capable people," he says.

"We’ve been able to get teams of people to stick together through each project so as to gain the key learnings at the end of each one.

"We seek a culture aggressive in planning, conservative in execution and rigorous in its post implementation review, because there’s no such thing as a project that goes along absolutely smoothly."

"When we went live with our new ERP platform not one customer order was delayed and that’s a rarity."

Davis says while 2010 was a very tough environment for retail, 2011 is shaping up to be no better.

"I haven’t seen consumer sentiment as bad for many years even during the GFC," he says.

"Higher interest rates and utility costs, the unpredictability of government policy will result in consumer spending being subdued for at least this year."

He contends there will be dark clouds ahead for companies that fail to stay ahead of the technology curve, especially with the dollar so high.

"The plus is it’s never been a better time to reinvest in old plants,’ he says.

"High tech equipment has never been cheaper. We need to invest to ensure the supply chain continues to deliver local product rather than increasingly delivering imported product.

CARBON TAX DISCRIMINATORY

Terry Davis joins the many industry players to shout down the Gillard government’s carbon tax concept.

"The carbon tax is discriminatory because it taxes local manufacturers but gives importers a free ride," Davis asserts.

"Many companies have already felt the negative effects of private labels, products which are often imported from countries with lower standards and poorer labour conditions.

"While I think it makes sense to buy Australian it’s up to consumers to make the choice between private label and branded products and for Australian manufacturers to deliver higher standards.

"We have unprecedented levels of parallel importing in Australia which has an impact on domestic manufacturers.

"If we end up with a carbon tax on local manufactured goods and we don’t have an offset, such as a tax credit or other incentive the gap will widen further.

"Where this really impacts the very small customers," he says.

"Half our customers are small businesses like fish and chip shops or kebab shops. They don’t have the scale to go into China and import product.

"If they have to rely on someone else, this will strengthen larger retailers. A healthier market would be one with a vibrant domestic manufacturing base.

"I’m concerned without urgent changes to government policy within the food and beverage
sector such as accelerated appreciation, real research and development incentives plus a level playing field on the carbon tax
such a healthy manufacturing base will be unlikely."