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

1. 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.

2. McKinsey and the TPA have partnered to develop new insights on collaboration Who we’ve spoken to* What we’ve done • Surveyed 70retailers & manufacturers and spoken with executives across supply chain, merchandising and sales/marketing functions • Interviewed ~30industry executives and experts on collaboration • Incorporated insights from over 25 studies on collaboration *sample of companies

3. Collaboration efforts are already widespread in the industry of companies engaged in collaboration efforts last year 83% # of collaborations last year 100% More than three 32% Two or three 22% One 29% % None 17% SOURCE: 2011 McKinsey TPA survey, CCM survey 2010, McKinsey analysis

4. 20 50 30 ~ ~ ~ % % % However, collaboration efforts have delivered mixed results to date added little or no value had not met expectations produced significant results Why do many collaboration efforts fail to reach their full potential? SOURCE: 2011 McKinsey TPA survey, CCM survey 2010, McKinsey analysis

5. Transformation in one company is challenging, let alone across multiple Retailers Manufacturers Category growth Buying income Brand penetration Product margin Hundreds of categories Efficiency imperative A few categories Sales growth imperative These inherent characteristics result in different collaboration priorities SOURCE: 2011 McKinsey TPA survey, McKinsey analysis

6. Despite hurdles, the size of the prize from successful collaboration is large… $8-12 bn. EBIT value for industry given areas where collaboration applies up to 4 p.p. Increase in EBIT margin for retailers up to 5 p.p. Increase in EBIT margin for manufacturers … so don’t give up trying! 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 SOURCE: McKinsey analysis, industry interviews

7. We have identified six initiatives that unlock the most value: many are supply chain related Area Impact • Up to 3% sales improvement* Category assortment and promotion strategies Revenue Growth • Up to 4% sales improvement* Merchandising and in-store layout Product development & packaging innovations • Up to 20% sales lift for NPI • 5% savings on raw materials and pkg. • 20 - 30% savings on inventory • 30% obsolescence reduction • 1 - 2% profit margin improvement Demand planning and fulfillment • Up to 5% procurement savings • Up to 5% packaging savings Collaborative sourcing • 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 Cost Reduction * Estimate limited to category expansion opportunities SOURCE: McKinsey analysis, industry interviews

8. Planning: Leading CPG and retailer created savings in inventory through reducing volatility Both parties wanted to reduce volatility Demand volatility Before Demand volatility After Developed joint demand prediction Optimized promo shipment flows Shipments Monitored real-time POS data Joint focus on critical SKUs Consumption Q2 Q3 Q4 Q2 Q3 Q4 FY 2009 • 3% profit margin improvement from reducing volatility • Inventory reduction of 18% for CPG, and 16% for retailer • Decrease in stock-outs by 1% SOURCE: Client engagement

9. Product flow: Jointly developed retail ready packaging that drove sales and increased velocity Both parties wanted to improve product flow to shelf Improvement in order cycle time Hours Designed retailready packaging Co-developed in-store display units Segmenteddistribution network Coordinated inventory replenishment Retailer 144 Manufacturer 8 -91% 13 3 136 10 Reduced order cycle time from 144 to 13 hours Slashed consumer selection time from 58 to 8 seconds Increased sales by 5-8% through reduced stock-outs SOURCE: Client engagement

10. Effective collaboration requires a shift in mindset From… To… What to collaborate on • 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 Whom to collaborate with • 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 How to collaborate • Consciously investing in infrastructure and people • Committing to long-term actions and jointly measuring impact • Dedicating limited resources to collaboration • Giving up or declaring victory too quickly

11. Take the first step by reviewing your collaboration efforts What can you do tomorrow… 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? What can you do long term… How do you assess and select the right partners for collaboration efforts? Where can you identify the next collaboration opportunities?