Digitalization in the consumer packaged goods industry

By ALEX TEO, Managing Director and Vice President of Siemens Digital Industries Software for Southeast Asia

The consumer packaged goods (CPG) industry, though globalized and highly competitive, has remained eternally resilient. However, emerging trends are set to significantly impact demand and potentially open new revenue streams. Shifts in consumer preferences, increased competition due to lower entry barriers, and a growing global population have significantly transformed the market.      

In Indonesia, the food and beverage (F&B) sector, which represents the largest portion of the CPG industry, now contributes 6.47% to the country’s GDP as of the first quarter of 2023, according to recent reports from BPS statistics. As such, these shifts are expected to have a profound impact on Indonesia’s economic growth.

Within the CPG industry, retailers are playing an increasingly dominant role, contributing over more than a tenth of Indonesia's GDP in 2023.  These retailers have created their own formidable brands with private label product lines, which has forced brand manufacturers to adjust their prices, putting even more strain on their profit margins.

To maintain a competitive edge, CPG companies are grappling with these market pressures while also striving to improve profit margins, comply with regulations, and meet rising consumer demands for sustainability and transparency throughout the product life cycle.

These complex challenges, along with the ever-changing landscape of the CPG industry require an evolution of processes and technologies. This is why top performers in the industry have begun digitizing their operations, as it is the only way to support growth, become more efficient and guarantee resilience as competition increases and consumers evolve.

Automated beverage bottle packaging line (Photo credit: Evgeniia Parkhomenko)

Shifting consumer demands

Indonesia is set to become the world's fourth-largest consumer market, making it highly susceptible to global trends that can significantly impact consumer demand. Digitalization has driven rapid growth in online shopping and home dining, reshaping product portfolios worldwide. For example, many Indonesian consumers now prefer cooking at home, leading to a surge in the popularity for online food deliveries and takeaways. This shift presents substantial opportunities for food producers to diversify their offerings into pre-packaged and ready-to-eat meals. Additionally, e-commerce has become the preferred shopping channel for non-food items, with an increasing number of Indonesian consumers choosing online shopping. Grocers have also noted a rise in the use of online grocery apps, emphasizing the need for expanded online distribution and partnerships with delivery platforms to adapt their product portfolios accordingly.

Amid these changing dynamics, generational differences play a significant role. Generation Z is a notoriously hard segment to retain, yet they are an important target for CPG companies as they are expected to make up a quarter of Asia Pacific’s consumer base by 2025.

Recognized for its digital nativity and strong social media presence, Gen Zs increasingly gravitate towards brands that provide not only quality products but also prioritize sustainable and innovative packaging solutions. Research shows that packaging design, environmental impact, and brand transparency significantly influence their purchasing decisions. Consequently, businesses in the consumer packaging industry must adapt their strategies to become more sustainable, transparent, and innovative to effectively engage with Gen Z.

Managing these factors will require CPG companies to accelerate their speed to market and be more responsive to consumer demands while guaranteeing shorter and increased NPI (new product introduction) cycles. To accomplish this, companies must digitally integrate the entire lifecycle to break down department silos and allow information and data to flow to all necessary stakeholders. This requires more than the adoption of a few digital tools or just digitalizing certain aspects of the process. Digitalization of the entire product development process is critical to success.  

Flexible factories for flexible production

The changing landscape of innovation, personalized products, accelerated e-commerce and trade shifts are also putting extreme pressure on factories and their manufacturing operations. CPG is a highly automated industry so it would seem well positioned to meet the changing landscape; however, most CPG companies implemented their automation systems between the 1980s and 1990s. Their main goal at the time was to produce large product batches as efficiently as possible. Forty years later, these same machines and automation systems have difficulty adapting to the continuous product changes since they are not equipped with modern technologies that aid connectivity and flexibility, such as IoT and AI.

With the latest advances in automation, older factories or manufacturing lines can be easily modernized. (Photo credit: Siemens)

Today, factories need to be able to manufacture a greater number of products and product variants. When a newly updated product recipe reaches the factory, businesses need to be able to quickly and easily update and/or reconfigure the entire manufacturing process—from line automation to machines. Manufacturers need production systems and machines that can guarantee speed and quality as well as flexibility so they can quickly adapt to market changes. Whether a company is building a brand-new factory or converting existing factories, introducing flexibility in the manufacturing ecosystem is key.

There are several ways to increase production flexibility. Leveraging digital twin technology, combined with manufacturing planning and manufacturing operations solutions early in the product lifecycle, enables companies to predict production feasibility and performance while minimizing downtimes and ensuring quality. One of the latest advances in the automation area is the use of virtual PLCs. Organizations can download virtual PLCs as edge applications and integrate them directly into the IT environment, easily modernizing older factories (or manufacturing lines).

Lines and manufacturing equipment also play significant roles in improving production flexibility. New intelligent machines often have flexible, modular designs that facilitate integration into production lines and can adapt to perform several tasks. These new technologies are applied to these machines via edge computing where they can run software at the machine level, including AI applications. IoT enabled machines can increase connectivity, easing integration and can even automate some engineering tasks.

Navigating the complexities of the supply chain

Supply chain risks remain an ever-present issue in both CPG and food and beverage. Oil price fluctuation, political crisis, and wars negatively impact traditional supply routes, forcing companies to strategically analyze their product portfolios, look for alternatives and evaluate new supply options. Often, businesses opt to nearshore, or manufacture close to the consumer to shorten the supply chains.

Additionally, obstacles can arise from weather and other climate-related occurrences which can hinder improving profit margins. Digitizing the supply chain to build a “control tower” can address these challenges. Flexible supply chain planning solutions facilitate real-time information about shipping costs, tariffs and material costs, enabling better informed decisions.

Digital control towers, however, only solve part of the supply chain challenge. Contamination, a growing concern in the industry especially in the area of food and beverage, is often caused by faults in the supply chain. A recent incident at SDN Cidadap I Elementary School in Indonesia illustrates this issue, where students fell ill after consuming Chinese LaTiao snacks. Many cases of food poisoning are caused by supply chain hiccups, with agricultural ingredients and final food products being the most susceptible.

Whether CPG companies source materials locally or overseas, the risk of interference in the supply chain will always exist. Traceability of both ingredients and final products is the only way to certify that products are safe and legitimate. In the event there is an issue of contamination, traceability makes it possible to quickly determine the source.

Blockchain technology together with IoT provides secure traceability of products across the entire supply chain. (Image credit: Siemens).

Integrated lifecycle management solutions, available today, make it possible to develop a robust digital backbone, which can provide full traceability of products. Blockchain technology, for example, immutably stores traceability and event data, providing stakeholders with a single source of truth generated from secure data that cannot be overwritten or changed. This creates a digital footprint for the verification and validation of information. Coupled with IoT, blockchain technology can provide insights “from farm to fork,” helping to eradicate human error and enhancing transparency in a complex and multi-tiered supply chain.

Preparing for tomorrow’s problems today

Many companies in the CPG industry are reluctant to enhance and digitalize their processes through software and automation. The industry fears that implementing new technology may impact downtimes and increase operational costs. While the notion of continuing to "do things the way they have always been done" may seem safe, it is increasingly impractical as the current landscape necessitates a revolution in how companies develop, manufacture, and source their products. In Indonesia, this shift is supported by the government’s Making Indonesia 4.0 Roadmap, which aims to encourage digital transformation in the industry. By 2024, the Ministry of Industry expects 400 companies to evaluate their readiness for inclusion in the Indonesia Industry 4.0 Readiness Index (INDI 4.0), with some being recognized for best practices in digitalization.

The CPG industry needs to implement fresh, flexible and scalable digital solutions to meet both its current and future goals while overcoming obstacles that are primed to become more complex as the population grows, ecosystems evolve and trends emerge. Through Indonesia's government initiatives, it is anticipated to drive investment in digital transformation among companies, allowing them to create one source of truth across the enterprise. Brands, programs and product lifecycles are combined into a single source of truth that can boost collaboration across the entire CPG ecosystem while maintaining brand equity. By integrating the entire digital lifecycle, companies can improve quality, promote brand loyalty and improve speed to market for new products, enabling them to not just survive, but thrive in today’s market.