In 2021, supply chain issues caused 70% of household consumers to switch brands, with 29% never switching back . Despite the numerous measures taken by CPG firms, the rise in popularity of niche and D2C brands, the proliferation of e-commerce, and growing manufacturing costs have impacted cost lines, narrowing profits and reducing budgets to invest in future products.
CPG organizations are typically structured on a vertically integrated pipeline model, following a linear approach to managing supply chain functions: from raw material sourcing through product sales. Traditionally, CPG companies have owned the entire breadth of their supply chains, which does reduce external dependencies but inflates their Total Cost of Ownership (TCO), resulting in higher costs and increased reliance on capacity utilization for revenue generation.
Digitizing Supply Chains to Optimize Logistics Costs
Digital investments in the CPG sector are expected to grow at 31.7% this year to $30.56 billion; the industry is set to rank third behind the retail and financial sectors . With retailers leading the charge in digital adoption to gain omnichannel leadership, CPG businesses, too, will need to prioritize identifying parts of their supply chain that can undergo digital transformation, to help shed non-core asset weight, increase agility, and optimize route-to-market efforts.
From a supply chain perspective, a costing decision goes well beyond the initial purchase price of a unit. Therefore, undertaking a total cost view of supply chain expenses can help CPG leaders quantify impending costs and identify cost opportunities. Laying out the recurring costs flowing between plants and store shelves, from sourcing and manufacturing to freight and packaging, allows CPG companies to focus on the total cost of ownership rather than a traditional siloed capital allocation. Along with a total cost view, CPG businesses would also need to digitally thread their supply chains together to improve efficiency and gain a cost advantage.
Here are 3 key areas where CPG leaders can lower supply chain costs by leveraging digital capabilities:
Market unpredictability has caused unexpected oscillations in product demand and prices and, thereby, shifts in consumer preferences. Take the pandemic, for instance, that has led several companies to turn to overstocking practices to counter irregular delivery schedules . Producers and retailers have had to stockpile ‘just-in-case’ inventory, which has caused CPG businesses to incur costs associated with holding next-in-line stock at distribution centres; consumed working capital; and increased the risk of either going out of stock or having to write off perished stock.
Here, demand sensing, an extension of AI-enhanced predictive analytics, can help CPG firms spot patterns and inconsistencies in their supply chain, business operations, and distribution channels. By assessing the level of supply chain complexity, demand sensing leverages comprehensive short-term demand data to improve near-future estimates. A case in point is a major Chinese conglomerate which reduced its level of held-up inventory by 30%, utilizing IoT-enabled real-time market trends and consumer insights to achieve customized and demand-driven production . Further, supply chain leaders can leverage this approach to create targeted cost plans that achieve demonstrable results across their supply chain, reducing response times to fluctuating demand and supply.
Costs associated with issuing and handling invoices, organizing delivery, addressing consumer inquiries, and monitoring progress can all result in mounting overall costs for placing and accepting orders.
To this end, AI-powered supply chain “control towers” can help keep track of the entire breadth of activities and assess the direct/indirect costs associated with each function. Control towers can reduce network costs and improve profitability by fostering collaborative planning, forecasting, and replenishment (CPFR) between manufacturers and retailers. For instance, seamless information sharing between a shipping firm sending products and a third-party logistics provider ensuring availability on arrival can result in faster delivery times, greater cost transparency, and lower costs. This can help CPG businesses eliminate bottlenecks and redundancy in supply operations, as seen in the case of a major US-based food company that has recently integrated control towers to gain inventory transparency, predict disruptions, and build cost-effective supply chains .
Order supplying can comprise multiple processes, such as the supplier’s own delivery process, inventory reception, stock evaluation, and so on. A manned approach often finds one process disconnected from the next due to interruptions, which leads to delays and duplication of activities. For instance, manually monitoring inventory levels requires overseeing movement and performance across touchpoints and personnel, such as shipping providers, suppliers, warehouse workers, and resources at fulfilment centres, to ensure orders are supplied on time and in the right quantities.
CPG companies can optimize their engagements with multiple suppliers by implementing intelligent data capturing technologies such as RFID and Bluetooth beacons, to help optimize inventory tracking and planning. With RFID-tagged products, store managers can collect data about stock levels and enable quicker processing, resulting in lower inventory carrying costs, optimized inventory management, and lowered shrinkage levels caused by outdated inventory. On similar lines, a multinational beverage corporation leveraged RFID tagging to augment bottle traceability and bring down wastage. Their Belgium-based facility, involving five different production lines carrying multiple brands, streamlined its inventory workflow by labelling tags that grant access rights and authorizations unique to each product's parameters, such as flavour and geography; this allowed for commuted spoilage costs, reduced risk of product loss, and quicker product distribution .
Increased visibility allows supply chain managers to quickly establish contingency preparations in the case of unforeseen events, such as delayed supplier shipments, and cancel out forced expenses and price fluctuations arising due to them. Regular alerts on order movements at critical points from shipment to delivery can help decision makers identify supply delays, respond in real time, speed up fulfilment, and cut down on excess costs.
The Next Link in the Chain
With supply chain managers keen to reduce costs and enhance supply chain throughput in a price-sensitive CPG market, there is an immediate need to deploy solutions that can help improve their cost-to-benefit ratio while also reducing supply chain complexity to offer end-to-end visibility. In a real-time business context, such clarity necessitates an intelligent supply chain. Going forward, CPG businesses would need to benchmark digital capabilities against the aforementioned cost areas, offering targeted reductions and avenues to integrate savings into long-term business goals. The shift from being cost-effective to cost-efficient involves CPG organizations building agile, resilient, and digital supply chains that can turn insights from consumers, markets, and competitors into decisions and unlock new cost optimization opportunities.