Chapter 4: Building Supply Chain Resilience
CPG trends like e-commerce, sustainability and DTC all place new requirements on the supply chain. Supply networks are becoming more complex and require new competencies to meet customers’ and retailers’ demands for fast shipping and environmental stewardship.
Recent events have also shown CPGs the consequences of unpredictable demand for an unprepared supply chain. Pandemic-related pantry stocking and raw materials shortages alike strained the supply chain and made stores struggle to keep products on the shelves.
The modern CPG company needs a supply chain strategy that accommodates digital and in-person retail, remains flexible and can quickly pivot amid supplier delays and shortages.
What Does the CPG Supply Chain Look Like?
The five basic steps of supply chain management in the CPG industry are Plan, Source, Make, Deliver and Return. Typically, CPG manufacturers act as supply chain leaders. They forecast future demand to plan how much product they need and where it should go, then source raw materials and produce the goods.
In the Deliver phase, CPG manufacturers supplying traditional retailers may ship their products to warehouses, distributing shipments to individual retailers. They may also work with wholesalers who sell the products in bulk to retailers. The direct-to-consumer CPG supply chain is significantly shorter, with some companies shipping to customers directly from the production plant. In any delivery model, CPGs must also manage returns of unsold or defective products.
Some critical elements of an effective CPG supply chain include:
CPGs that sell online and with retailers face added challenges with demand. Online trends tend to snowball faster and may look quite different from retail sales. There’s also a shorter timeframe to prepare for promotions with online marketplaces. Meanwhile, it takes lots of communication with retailers to understand end-customer demand accurately. Therefore CPGs need sophisticated solutions that can predict demand and prepare for significant shifts. They need many sources of data, alongside software or AI that can manage demand forecasting.
Omnichannel CPGs also need advanced warehouse operations. DTC and e-commerce strategies require personnel to pick and pack individual customer orders. Meanwhile, the infrastructure for physical retail and bulk orders may include shipping pallets and warehousing equipment like forklifts.
Some retailers have specific packaging requirements, while many CPGs may need special packaging for a retailer-exclusive offering. Both of these factors require CPG brands to repackage their goods for individual retail partners.
Omnichannel CPGs may also want to distinguish their e-commerce offerings with special packaging, both for the product and the shipping envelope or box. Orders shipping in bulk to retailers need different protective packaging than individual packages shipping to customers. Thus, omnichannel CPGs must manage packaging supplies and procedures for both inner and outer packaging for multiple sales outlets.
Supply and demand challenges in retail and e-commerce have heightened the focus on inventory management. CPG manufacturers need visibility throughout their supply chain to plan for their downstream partners’ inventory needs and communicate with their raw materials suppliers. When managing omnichannel sales, some CPGs may even choose to manage separate inventories for each channel or account for both wholesale and e-commerce sales with one global inventory count.
CPGs have distinct strategies to get their products to consumers wherever they shop. That may mean a plan for distributing through e-commerce marketplaces or retailers’ distribution systems and straight to consumers via their own distribution or carrier networks. Fulfillment and logistics operations may look different for each segment. For example, companies may rely on a specific distribution network for supplying frequent, high-quantity recurring orders from retailers and another network for delivering to home addresses.
New CPG Supply Chain Challenges Affecting the Industry
As the CPG supply chain gets more complex with the rise of DTC and e-commerce, companies face new constraints and higher expectations. Some of these new challenges include:
COVID-19 and Its Aftermath
When the COVID-19 pandemic struck, global manufacturing supply chains faced massive disruptions. From sick workers slowing production to safety restrictions shuttering entire plants, supply chains across sectors faced delays and shortages.
The CPG industry, in particular, had another challenge driving supply chain issues. Stay-at-home orders and safety guidelines started a wave of stockpiling as customers prepared to spend more time at home. Sales growth for cookie variety packs grew 20.3% in early March 2020, while salty snacks grew 14.8% and cheese snacks grew 11.5%.
Guidelines to increase cleaning and disinfection likewise caused increased sales for home cleaning products. Sales growth of cleaning products in March 2020 climbed to 385.3% for aerosol disinfectants, 180% for bath and shower wipes and 148.2% for multipurpose cleaners. Consumers bought CPG products like nonperishable snacks, cleaning supplies and paper goods in bulk, straining manufacturers and retailers’ capacities and sometimes causing severe inventory shortages and out-of-stock scenarios.
Regardless of pandemic conditions, retailers have historically seen out-of-stock rates rest at around 8%, which is a costly scenario that they rely on CPG partners to help alleviate. After facing initial shortages, CPG brands quickly adapted and emerged stronger and better able to avoid stock-outs. Now, they’re facing the new challenge of managing the supply chain while stockpiling dies down and the initial spikes in demand level out.
On-Time Delivery and Transportation Issues
The logistics of getting deliveries to retailers or directly to consumers present major challenges to many CPG brands. The transportation and trucking industry has been facing a driver shortage for years, and its ability to deliver goods directly impacts inventory levels. Delivering products on time is critical in the CPG market, as many retailers fine brands for missed delivery windows.
And while 100% of retail buyers say that on-time performance impacts a retailer’s willingness to work with a supplier, 73% say they’ve ended a relationship over delivery performance issues. Consumers also expect fast delivery speeds, with e-commerce giants like Amazon setting the tempo at two-day and one-day shipping and increasingly, two-hour shipping for groceries. All this adds to a need to meet fast-approaching deadlines, while supplier delays and carrier driver shortages make this more difficult.
Lack of Technology
The CPG industry has been historically slow to adopt new technologies. According to a survey of CPG business leaders, just 11% have access to real-time supply chain data. Supply-chain technology challenges include disparate software systems, lack of end-to-end visibility and difficulties tracking business analytics.
While scaling technological capabilities presents a significant challenge for CPG supply chain leaders, it’s also a major opportunity. Predictive planning and demand forecasting tools can help supply chains prepare for upticks and downturns in demand, which is why 56% of retailers and CPG brands plan to increase investments in this technology. Meanwhile, technology can also improve inventory management, warehouse scheduling, and supplier and retail partner communication.
CPG Supply Chain Trends to Watch
The CPG industry recognizes the need for increased supply chain resiliency, with 90% of CPG brands planning changes to their supply chain networks and 40% expecting to increase their investment in the supply chain.
With these new investments, CPG manufacturers are adopting many new strategies to keep pace, such as:
- Diversified suppliers: Many CPG manufacturers discovered unknown gaps in their supply chain as the entire manufacturing sector faced supplier shortages. Scarcity of raw materials or shipping delays can crop up unexpectedly, especially if natural disasters occur where key raw materials originate. CPG companies can reduce their risk by diversifying their suppliers and adding new backup suppliers to their networks.
- Technology upgrades: One of the most popular and successful supply chain upgrades CPG brands have invested in are predictive planning and demand forecasting solutions. Automated forecasting tools with artificial intelligence can react to micro changes that can have widespread implications on your supply chain. Using sophisticated software to forecast demand and manage their supply chain lets CPG brands average 15%-25% improvements in production output and 20%-30% increases in customer satisfaction.
- Improved supply chain visibility: The consumer demand for sustainability means that CPGs must analyze the suppliers in their networks and partner with companies that practice environmental stewardship. Food and beverage CPG companies must also verify their suppliers comply with guidelines from the U.S. Department of Agriculture (USDA) and the Food and Drug Administration (FDA). To improve supply chain resiliency and performance, CPG manufacturers also track more information about their suppliers, such as potential employee shortages. With this data, they can combat supply shortfalls.
- Increased safety stock: CPG manufacturers have learned that even the best predictions cannot account for every surprise. While most companies sought to eliminate excess supply and high holding costs before the pandemic, that inventory management philosophy is falling by the wayside. Many now keep more safety stock to bolster themselves against potential demand spikes, and retailers often do the same.
Choosing Suppliers With Expert-Level Logistics and Supply Chain Management
One way to enhance your supply chain is to work with partners that have mastered retail distribution. Creative Displays Now! keeps all our capabilities in-house, including design, prototyping, printing and manufacturing, which dramatically shortens our supply chain. We’re experts at creating custom displays on a tight timeline and have a 99% on-time delivery rate.
As an optional service, we can also pack your displays in-house, which helps you get products to your retailers quickly. If you’re interested in enhancing your retail supply chain, talk to Creative Displays Now! about your next retail display or retail packaging solution. Or, give us a call at 1-866-244-2214 to get started on your project today.