Role of Supply Chain in the CPG Industry
The last three decades have seen a dramatic change in supply chain management (SCM). What was once a disjointed process with a focus on the delivery alone has now become an independent organizational function. While many industries are yet to adapt to the changing demands, those that have tweaked the process report lower costs, higher profits, and better service.
How the CPG Supply Chain Works
Traditionally, the supply chain in CPG was a disjointed process with each intermediary working independent of the other stakeholders. Typically, goods flowed from the factory to the distributor and from there to the retailer. Both the distributor and the retailer added their profit margin to the final price of the product. Inventory management and logistics took a backseat and consumers often returned dissatisfied.
Around the turn of the century, consumers began demanding better and faster services. Parallelly, the age of digitization brought about changes in various processes within organizations. Businesses began looking for automated solutions to cut costs and grab a larger market share. These efforts focused on the internal processes that not only sped up production but also cut costs. The focus shifted to consumer delivery after NetMarket – the first online retailer – opened shop in 1994, followed closely by Amazon and eBay in 1995. As more businesses took to selling online, consumers began demanding better and faster services and created a keen competition among suppliers. This phenomenon forced organizations to take another look at their CPG supply chain.
Challenges in Supply Chain Management
As more internet retail shops emerged, markets expanded, and the patterns of demand and supply changed. In this changing scenario, there emerged specific challenges in supply chain management.
- Conflicting targets: Different processes within organizations have different Key Performance Indicators (KPIs). For example, the chief KPI for marketing may be the sales target, while that for production may be the reject ratio, task time, or output rate. As sales personnel push to meet sales and revenue targets, production strives for lean management and cutting costs using techniques such as JIT. This creates an internal tug-of-war between production and sales. Also, to meet the sales and revenue targets, the sales team focuses on the fast-moving items, piling up stocks of slow-moving items and disrupting the supply chain. This disparity can be overcome by aligning the KPI of both production and sales to the corporate goals.
- Demand fluctuations: Demand for any single product is not constant. Certain products have a high demand in certain seasons and are consequently promoted. This leads to a slack in demand for low-priority products, which in turn leads to an inventory buildup. More demand for storage cost and writing off the unsold items that have run their shelf life inflate the costs. Cheap storage may be distant from the point of sale, giving rise to a higher cost of transportation. All these factors add to the cost and the ultimate selling price of a product, making it difficult for a business to sustain the competition.
- Transparency: Any end-to-end supply chain involves many internal as well as external stakeholders. Internal stakeholders are often from multiple management levels. As such, some undercurrents of disagreement may exist between them. External stakeholders such as the logistics company and warehouse owners have their own business objectives, which may not be aligned with the organization’s goals. Such disparity can disrupt the supply chain. Bringing about complete transparency within the supply chain can help mitigate this issue.
- Lead time and inventory ratio: Lead time is the time taken for the goods to reach the point of sale. Inventory ratio is the amount of stock a retailer maintains of any product that he sells. A retailer would not like to have a customer return empty-handed or dissatisfied. However, maintaining large stock volumes can prove expensive in terms of storage space as well as perishability and a reduced shelf life. Also, products sourced from distant geographical locations or having a long preparation (reaction) time may have a high lead time. Maintaining the delicate balance between inventory and lead time is a continuous process at every stage in the supply chain.
Monitoring and tweaking these frequently to better align them to consumer demands will help organizations cut costs and provide an efficient service.
Significance of a Better Supply Chain Management in the CPG Industry
The supply chain is an intricate network of service providers that link the producer to the end user. It involves processes such as inventory management, planning the supply, forecasting the demand, and dealing with the transport providers. The chain extends from the supplier of raw material on one end to the end consumer on the other. Even a slight delay or problem at any point can have a cascading effect. This may at best mean high production and supply costs and at worst the difference between success and failure.