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In the course of working with each of our clients, we identify a range of possible alternative options to improve its position and profitability. These options may relate to your conduct in the marketplace and may, therefore, be governed by competition or antitrust laws. Our recommendations and analyses assume action consistent with, and in no way are meant to imply that steps be taken contrary to, any applicable laws. McKinsey does not render legal advice; if you have any legal questions relating to these options or our advice, we recommend that you seek legal advice prior to taking action.

Not Just More Collaboration…

…BetterCollaboration

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What we’ve done Who we’ve spoken to*

McKinsey and the TPA have partnered to develop new insights on collaboration

▪ Surveyed 70 retailers & manufacturers and spoken with executives across supply chain, merchandising and sales/marketing functions

▪ Interviewed ~30 industry executives and experts on collaboration

▪ Incorporated insights from over 25 studies on collaboration *sample of companies

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More than three

100%

17%

29%

22%

32%

One

None

Two or three

# of collaborations last year

83%of companies engaged in collaboration efforts last year

Collaboration efforts are already widespread in the industry

SOURCE: 2011 McKinsey TPA survey, CCM survey 2010, McKinsey analysis

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hadnot met expectations

However, collaboration efforts have delivered mixed results to date

Why do many collaboration efforts fail to reach their full potential?

produced

significant results

SOURCE: 2011 McKinsey TPA survey, CCM survey 2010, McKinsey analysis

addedlittle or no value

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ManufacturersRetailers

SOURCE: 2011 McKinsey TPA survey, McKinsey analysis

Transformation in one company is challenging, let alone across multiple

Category growth

Hundreds of categories

Efficiency imperative

Product margin

Sales growth imperative

A few categories

Buying income

Brand penetration

These inherent characteristics result in different collaboration priorities

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Increase in EBIT margin for retailers

Increase in EBIT margin for manufacturers

Note: Estimate of margin increase assumes collaboration across all categories and levers of collaboration; total industry value calculated using impact of collaboration for top 25 categories, top 3 brand manufacturers in each category, and top 10 retailers in each category

Despite hurdles, the size of the prize from successful collaboration is large…

… so don’t give up trying!

$8-12 bn. EBIT valuefor industry given areas where

collaboration applies

4 p.p.

up to

up to

5 p.p.

SOURCE: McKinsey analysis, industry interviews

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We have identified six initiatives that unlock the most value: many are supply chain related

ImpactArea

Cost Reduction

RevenueGrowth

* Estimate limited to category expansion opportunities

SOURCE: McKinsey analysis, industry interviews

▪ 20-30% warehouse & inventory savings▪ Up to 50% labor savings in shelving▪ 1 - 2% sales lift from reducing OOS

Product flow from line to shelf

▪ 20 - 30% savings on inventory ▪ 30% obsolescence reduction▪ 1 - 2% profit margin improvement

Demand planning and fulfillment

▪ Up to 4% sales improvement*Merchandising and in-store layout

Category assortment and promotion strategies

▪ Up to 5% procurement savings ▪ Up to 5% packaging savings

▪ Up to 20% sales lift for NPI▪ 5% savings on raw materials and pkg.

▪ Up to 3% sales improvement*

Collaborative sourcing

Product development & packaging innovations

| 8 SOURCE: Client engagement

FY 2009

Q2 Q3

Q4

Shipments

Q2 Q3

Q4

Both parties wanted to reduce volatility

3% profit margin improvement from reducing volatilityInventory reduction of 18% for CPG, and 16% for retailer

Decrease in stock-outs by 1%

Demand volatilityAfter

Demand volatilityBefore

Consumption

Developed joint demand prediction

Optimized promo shipment flows

Monitored real-time POS data

Joint focus on critical SKUs

Planning: Leading CPG and retailer created savings in inventory through reducing volatility

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Product flow: Jointly developed retail ready packaging that drove sales and increased velocity

Designed retailready packaging

Co-developed in-store display units

Segmenteddistribution network

Coordinated inventory replenishment

Improvement in order cycle timeHours

Reduced order cycle time from 144 to 13 hoursSlashed consumer selection time from 58 to 8 secondsIncreased sales by 5-8% through reduced stock-outs

Both parties wanted to improve product flow to shelf

13

-91%

10

136

8

144

3

Manufacturer

Retailer

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What to collaborate on

Whom to collaborate with

How to collaborate

▪ Selecting partners mostly based on size

▪ Driving collaboration “top-to-top” while frontline drives day-to-day business

▪ Selecting partners based on size and strategic alignment

▪ Aligning incentives and empowering frontline to involve entire organization

▪ Dedicating limited resources to collaboration

▪ Giving up or declaring victory too quickly

▪ Consciously investing in infrastructure and people

▪ Committing to long-term actions and jointly measuring impact

▪ Collaborating in response to deficiencies

▪ Choosing only win-win opportunities

▪ Collaborating in areas where your house is in order

▪ Turning win-lose to win-win through benefit sharing models

From… To…

Effective collaboration requires a shift in mindset

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Take the first step by reviewing your collaboration efforts

What mindset shifts can you initiate to improve the odds of existing collaboration efforts?

How can you better engage your organization and your collaboration partners?

How do you assess and select the right partners for collaboration efforts?

Where can you identify the next collaboration opportunities?

What can you do tomorrow…

What can you do long term…