Indonesia: Overcoming challenges and advancing through digitalization

Indonesia is on the road to becoming a global economic powerhouse, with 2045 the year this is predicted to come to fruition. Looking forward to a robust performance in 2024, the government expects about 5.2% economic growth rate in the coming years. The encouraging outlook is buoyed by progress in key non-oil and gas manufacturing industries, the largest of which is food & beverage.  The F&B sector which accounts for the greater share of the CPG industry, accounted for 6.47% (USD20.78 billion) of GDP in the first quarter of 2023, the highest contributor based on recent reports from BPS Statistics.

The government’s reforms to move the CPG industry forward have attracted local and foreign manufacturers to expand and set up their production hubs in Indonesia. More local brands are gaining market share across the region. But as any company knows, challenges remain in sight.

To gain new perspective on this ever-growing industry, Ringier and Siemens recently collaborated on a market study titled Indonesia’s CPG Trends and Challenges. This study highlights the primary issues affecting production and manufacturing, and the appropriate solutions, as disclosed by 180 executives surveyed from the Top 500 companies. Additionally, the study delineates the decision-making process involved in embracing advanced technology and digitalization.

Top three trends executives are focused on

The key consumer trends influencing the CPG industry vary and touch all elements of product design, marketing, and customer experiences. Executives are strategically addressing these trends to enhance their market positioning and meet evolving consumer demands.

A significant 23.2% of executives are focused on product functionality, ensuring their offerings provide enhanced features and benefits that directly improve the user experience. Product functionality aligns with the focus on superior performance and convenience.

Creating product variants also becomes a focal point for 20.3% of executives. Different versions of their products allow them to cater to a wider range of consumer preferences and specific needs, broadening their market appeal and boosting sales and brand reputation.

Closely behind, 18.1% of the surveyed executives are committed to sustainability. These companies integrate eco-friendly materials, ethical sourcing practices, and environmentally conscious processes into their production, meeting the rising consumer demand for responsible consumption.

Challenges in the CPG industry

1. New product development

2. Optimize production - increase productivity and efficiency

3. Cost control

While creating product variants is one of the most significant trends, developing entirely new products is the greatest challenge. Why? Variants are a good way to maintain brand reputation while boosting sales. Comparatively, new product design is a substantial undertaking. Ingredient sourcing, testing, and combinations can be slow and expensive. This complexity can disrupt operational efficiencies, delay product launches, and upset cost control—another critical issue for executives.

The expenses associated with research and development, ingredient procurement, and quality testing are significant. Optimizing production to increase productivity and efficiency is a focus and a key to helping executives face the pressing challenges of the CPG industry.

CPG company functions prioritized for improvement

1. Optimising production capability

2. Product quality control

3. Product Safety

In connection with key trends and challenges, respondents were asked to rank which functions in their company were the priority to focus their improvement.

Of the options mentioned in the chart above, optimizing production capability came at the top of the list. These companies aim to produce and maintain the highest level of output based on the machinery, manpower, and production period. Product safety followed closely, especially for food and beverage manufacturing, where the safety and quality of raw materials up to finished goods are highly monitored to standards.

Online marketplaces are also of increasing interest. B2B e-commerce marketplaces connect suppliers, manufacturers, and other businesses in a single platform. According to a report offered by Research and Markets, the market value of these marketplaces was USD 8,523.3 billion in 2021 and is anticipated to reach USD 18,771.4 billion by 2027. The main attraction of an e-commerce platform is the efficiency it offers buyers and sellers.

Solutions being implemented

Continual improvement keeps companies competitive and meets the growing demands of their domestic and international markets. Embracing innovation is a necessity for maintaining efficiency, ensuring product quality, and overcoming the myriad challenges faced in the dynamic landscape of CPG manufacturing.

In the market study, respondents agree that digitalization plays a critical, if not the principal, role in managing many of the concerns and challenges they have identified. It also reveals that companies are increasingly investing in software solutions to address these issues, with Enterprise Resource Planning (ERP) systems leading the way, used by 57% of the respondents.

Manufacturing Execution Systems (MES) are also becoming a focal point in Indonesia’s future of CPG manufacturing. Unlike ERP systems, MES operates closer to the production line, providing real-time data that helps manufacturers optimize production, reduce downtime, and ensure product quality. However, the data reveal a potential industry-wide misunderstanding regarding MES. While 9% of companies believe they are currently implementing an MES, there seems to be confusion about what an MES is. Only 1% work with a vendor to properly integrate these systems, suggesting that many companies may not fully grasp the scope and capabilities of MES or how to effectively utilise it within their operations.

In their factories, manufacturers are leveraging digital solutions to ensure seamless connectivity across departments, suppliers, logistics, and distributors. These technologies enable them to adapt to changing requirements, such as commissioning and simulating machines for their production lines. By reconfiguring production lines to match varying demands, including product customization, they can use resources more efficiently, reduce waste, and maximize the utilization of their equipment, Siemens explained.

While 9 out of 10 companies are investing in new digital solutions, those who aren’t cite several reasons for their hesitation. These include the high cost of implementation, concerns about market competitiveness, and the complexities of sustainable manufacturing.

Seeking transformation: Primary barriers for manufacturers

Although the benefits are clear, more than half of respondents in the market study identified cost as the main barrier to implementing advanced technology. This is not surprising given that the investment requires continuous allocation of resources — time, money, and effort. Of course, companies understand the investment is necessary to exist competitively, but each has its own set of obstacles to digital transformation.

Many manufacturers still operate on outdated systems and infrastructure, which are increasingly incompatible with modern technologies. On the other hand, some organizations eager to embrace digital transformation lack the necessary strategies and skills to effectively integrate these systems into their operations.

This results in a frustrating gap between expectations and outcomes. None of these efforts succeeds without first adopting a proper digital mindset, defined as “a set of attitudes and behaviors that enable people and organizations to see how data, algorithms, and AI open up new possibilities and to chart a path for success in an increasingly technology-intensive world.”

Manufacturers must nurture the right approach to address their unique challenges. They need to overcome their teams’ resistance to change and continuously develop relevant skills. Additionally, they must move beyond organizational silos that fragment decision-making.

Delaying the digital process risks losing growth opportunities, according to technology experts. This issue is linked to another primary concern affecting 53% of surveyed companies: increasing market competitiveness.

Digitally shaping the future of Indonesia’s CPG sector

The production challenges identified in the market study can be partially addressed by the continuing adoption of digital tools, such as ERP, APS systems, and quality management software, to run processes cost-effectively. With the rapid pace of digital technology design, manufacturers can expect even more tools for their advancement.

In Indonesia, digital transformation aligns with the government’s agenda under the Making Indonesia 4.0 Roadmap. 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. Such initiatives are expected to drive investment in digital transformation among companies that aim to raise their competitiveness and business resiliency.

On sustainable manufacturing, CPG manufacturers are increasingly taking action to minimize their environmental impact. They are expected to be aware of their carbon footprint, reduce waste, manage resources efficiently, and keep pace with green manufacturing trends, all of which can be enhanced through digital operations.

Companies that participated in the market study acknowledge the role digitalization plays in raising their overall performance, having fully prepared themselves to adopt technologies that help them manage unique challenges and attain growth aspirations. The implications revealed by the market study, and their significance especially to companies undertaking digital transformation for the first time, are examined in greater detail in the full report at https://www.industrysourcing.com/whitepapers/info/375161.