The world is changing. Technology, primarily the advancement in mobile technology has made the world a place where almost anything is accessible from people’s fingertips anytime, anywhere. Social media and the internet and the like have changed how people communicate, interact with each other socially and how people shop for their day to day consumer goods. The value chain for CPG products has expanded. Consumers can purchase products from more places. They do not have to rely on limited supplies from their local department or specialty stores. This has especially helped consumers in remote and rural locations and smaller towns. Social media connects more people and in doing so, people are exposed to trends in fashion and personal goods. Social media connects people with businesses and they can now shop using on-line buying. The two factors that have led to this revolution are:
- Accessibility to more information
- Accessibility to the world market
Access to More Information for the Supply Chain
Consumers can get more information on what products are popular. They can see the current fads and trends as they happen. They can also shop anywhere from anywhere. Someone in rural America can buy the latest fashion handbag from Italy without going near an airport. They can also, customize it and get it the next day.
This has revolutionized the consumer products marketplace both from the retail venue to the manufacturer. Brick and mortar stores are losing customers to internet buying and they need innovation to lure the consumer into the store. Many retail companies are offering in-store only coupons to have customers come into their stores. Promotions are at a record high. Another change is that consumers are treating retail shops differently. They are using stores now as boutiques and as a testing place to physically see an item and try it on. If they like a product, they use their mobile phone to buy it online, customized at a cheaper price.
What are the Supply Chain Challenges for CPG Industry
In addition to retailers, it is impacting the consumer goods (CPG) manufacturer. This has caused a number of challenges throughout all areas of the business.
- Less predictable demand
- Complex distribution networks
- Product customizations
- Shorter manufacturing runs
- Shorter product lifecycles
- Need for promotions
The most significant impact of these challenges has been to the supply chain. The effects go from the top of the supply chain (final distribution point) to the bottom (material suppliers). The most significant impact is to profits. Managing a supply chain is complex and costly and directly impacts the bottom line. The reality is that these costs are incurred because supply chains are disconnected and companies are using ineffective, unsophisticated tools, and methodologies.
Customer fill rates can drop and costs increase throughout the organization and supply chain. Roughly 50 – 70% of a consumer goods manufacturer’s profits are consumed by supply chain and logistics costs. This is staggering. In addition, these numbers do not include the impact to manufacturing operations that have more changeovers and smaller production runs due to more and customized products.
CPG manufacturer’s focus on meeting service levels, but a service level that satisfies customers is just a part of achieving Supply Chain effectiveness. Companies focus on having accurate forecasts to attain 100% order fill rates. But a 100% fill rate drives costs, reduces profits, and inventory costs soar from finished goods all the way through to raw materials. This increases costs due to expediting parts and disrupts production schedules. If production costs rise and manufacturing efficiencies drop while overspending on parts and excess inventory levels, your profitability will disappear and processes and employees will not be synchronized. Having satisfied customers won’t matter if you can’t afford to stay in business.
How to Manage Supply Chain Issues in the CPG Market
Companies with Integrated Business Planning Processes combined with sophisticated demand and supply chain planning tools typically average well above 80% in forecast accuracy whereas companies with disconnected processes and outdated tools average below 60% in forecast accuracy. A target customer service level to maintain profit margins in the Consumer Products industry is typically between 95 and 98%. This in turn improves inventory accuracy and reduces inventory carrying costs.
The result on the bottom line can be eye-opening. Integrating business planning through a Sales and Operations Planning process that breaks down the silos and incorporates sophisticated planning tools allows companies to make sharper financial decisions.
Profit margins can increase significantly and teams in all areas of the planning process will be more effective. You can now be more proactive rather than reactive which will improve collaboration, communication, and overall supply chain effectiveness. Having an effective Demand and Supply Planning process with sophisticated tools and methods will help you become the effective enterprise.
Learn more about how CPG manufacturers can compete after a COVID-19 Crisis.