The price of CPGs

by Keith Nunes
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New retail formats like online grocery shopping have challenged manufacturers.

WASHINGTON – Greater supply chain complexity is taking a toll on many consumer packaged goods companies, according to a recent survey published by the Grocery Manufacturers Association and prepared by the Boston Consulting Group. The report, titled “Time to shift gears,” indicated strategic and operational obstacles are affecting company performance in terms of service, costs and inventories. Moreover, a majority of study participants identified transportation as a top concern. 

Daniel Triot, GMA
Daniel Triot,a senior director of the Trading Partner Alliance, a joint leadership group of the GMA and the Food Marketing Institute

“This new report shows that the supply chain leaders of CPG companies are dealing with both portfolio complexities, as companies introduce more new products and adapt to shorter product life cycles, and marketplace complexities, as they strive to serve fast-growing nontraditional channels such as convenience stores, dollar stores, and drugstores,” said Daniel Triot, a senior director of the Trading Partner Alliance, a joint leadership group of the GMA and the Food Marketing Institute. “The logistical challenges of managing expanded points of sale and changing product flows can affect company performance in service levels, costs, and inventory.”

A relatively new obstacle identified in the report is e-commerce and the on-line environment.

“The Internet has created endless aisles by multiplying the assortment of available products,” according to the report. “By leveling the playing field, the Internet is helping the Davids beat the Goliaths. Since 2009, smaller manufacturers have captured $13 billion in sales from larger CPG companies.”

The survey included executives from 40 CPG manufacturers and based on their responses four key concerns emerged, according to the GMA. First, rising freight costs are a challenge. Across all temperature modes, median freight costs rose 14 percent, from 93 cents per case to $1.03, since 2013, the last time the supply chain survey was conducted. For ambient shipments, costs rose 11 percent, from 88 cents per case to 97 cents.

Looking ahead, the report said 83 percent of respondents expect line haul rates to increase. About 60 percent of CPG companies said they are planning to increase their use of direct plant shipping in response to rising costs. But the report went on to note direct plant shipping may not be the “silver bullet” many hope.

“Although touted as a way to simplify shipping and cut mileage, DPS can actually complicate inventory management, routing and loading,” the report said.

Customer service also is suffering, according to the GMA report.

“In every key service measure, service has gotten progressively worse,” said Peter Dawe, a Boston Consulting Group partner and a co-author of the report. “In addition, the performance gap between the best and the worst performance widened.”

Service worsening chart
Service has worsened industry-wide, and most companies missed their 2014 service targets.

The steepest drop occurred in the measure of on-time delivery known as requested arrival date (RAD).
“The RAD drop is an indication of just how tight capacity has become — and reflects growing challenges to meet retailer expectations,” Dawe said.

While service is declining, inventories are growing for companies. Compared to 2013, the survey showed total inventories have increased 22 percent. For ambient companies, median days of inventory on hand rose 20 percent, from 35 days to 42 days. Temperature-controlled shippers had slightly different results, with 60 percent saying they experienced an increase in inventories, but the median declined when compared to 2013.

The report noted one reason companies shipping temperature-controlled products may not have felt the same effects as those shipping ambient products is because many temperature-controlled shippers are regional and they tend to serve a smaller pool of clients.

While forecasting accuracy has improved, the survey showed the perceived benefits of improved forecasting have not been seen in the marketplace.

“Even when inventory is in the right place at the right time, last-mile transportation issues might prevent CPG companies from getting product to retailers on time,” said Alicia Pittman, a partner with the Boston Consulting Group and co-author of the report.

Last-mile challenges that may affect results include capacity constraints, from the shortage of drivers and lack of truckload volume, to congestion and delays, both in route and at delivery points.

“Traditional best practices are no longer sufficient,” Dawe said. “Today’s challenges require greater strategic partnership between the supply chain and the business as a whole. And when that happens, the supply chain can actually enable enterprise growth.”

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