With the CPG industry being hyper-competitive, CPG supply chain optimization has become a battleground where success is vital. After the horrors of the pandemic, with all the CPG supply chains collapsing overnight, it’s no wonder that the industry has begun an intense effort to ensure history is not repeated.
Everyone is now keenly aware of how fragile the CPG supply chain is. The optimization of the CPG supply chain is not merely for future-proofing against catastrophes like the pandemic. Instead, it also aims to cut costs and boost existing performance.
As it stands, with inflation in 2024, there is not much choice left for CPG businesses. They must either downsize operations or find areas where there are excess costs and trim them away. The CPG supply chain network is one of the foremost functions where this effort to cut costs materializes.
After all, it is the business function with the most moving parts and variables. This means there is a much higher likelihood that some part of the process can be optimized to fit the budget better.
This blog will review key points in the typical CPG supply chain and highlight cost optimization measures. Our goal is to empower you to mold our suggestions to fit your needs. Let’s jump right into it!
Table of Contents
4 CPG Supply Chain Optimization Strategies to Reduce Costs
Leverage and Optimize Demand Planning and Supply Planning
One of the biggest cost sinks in the supply chain comes in the planning phase.
Inventory management is key to optimization in a supply chain. Overstocking or stockout situations adversely affect not only your revenue but also your expenses. For example, if you overstock, you have paid for inventory that you are unable to sell outside of detrimental discounts. This means you either sell the inventory at a loss or pay up the storage and holding costs for it. Either way, you lose money.
The same is true of stockouts. If your demand and supply planning is off the mark or non-existent, you end up with no stock amid lots of demand. Now, you are compelled to spend extra to procure stock as soon as possible and are also losing money to competitors all the while.
There are different ways to tackle this problem. Firstly, you can hire a supply chain management expert who has proven experience in the CPG sector. This option is a bit costly, as such a professional does come at a premium, but it is worth the savings you can achieve long-term.
You could opt for an outsourced supply chain management service to handle this task, which should be less costly.
Demand and supply planning is no joke. It requires not only data collection and analysis skills but also a sharp, strategic mind to be able to use that data to enact positive change. You could try and research and educate yourself as an entrepreneur in these matters, but frankly speaking, why spend your time on such activities when hiring someone to do it not only offers you much better results but also saves you time and allows you to focus on better things?
Keep Up with Technology
Technology is evolving at an incredible pace, and the 2020s is the decade of AI and automation in business. The dam has burst open, and the technology is available for mass use.
While we did mention that supply chain management, demand planning, supply planning, etc., are tasks best left to human hands, these human hands can work a lot better with technological assistance.
Technological integration need not just be AI or automation. It can be something as simple as an ERP system, that allows you to watch your business’ every move as it happens.
An ERP solution can monitor and manage everything from finance to supply chain. Technological implementation can also be as simple as data collection and organization tools, with an analyst using said data to assist with CPG operations.
Whatever the specific technological solution may be, the point is that resisting technology is futile. CPG business owners must implement technology to complement their existing CPG operations and try to get a competitive edge.
Optimize Logistics
CPG logistics are a hassle and a half to manage. Hundreds and thousands of shipments are going around the world every day, and all need tracking and management. Quality control is also paramount in logistics, as shipping a product poorly can drastically impact customer relations.
But how can you optimize CPG logistics?
Well, the answer is not that complicated. Firstly, CPG businesses need to see whether their current logistics operation is working even close to optimally. Can lead times be shortened and costs incurred reduced?
The primary way to reduce costs on the logistics end is to strike good deals with 3rd Party Logistics (3PL) companies.
Many CPG companies have their own logistics divisions to handle their shipping, but there is quite a massive cost associated with maintaining such a division. Either way, the fastest way to cheaper yet quality shipping is to find the right logistics support provider.
3PL providers like FedEx, DHL, UPS, and the like are the first ones that spring to mind. Companies can negotiate deals for discounted shipping costs with them. These companies already have the infrastructure to manage vast amounts of deliveries, with GPS tracking to boot. Should things go awry, you can also seek recourse from these companies.
Transport route optimization is also a facet of CPG logistics optimization. Whether by truck, plane, or ship, you want your goods coming and going as fast as possible. By using software to analyze routes and compare various routes, you can find the most cost-efficient transit method.
There is also room to save money by trying out green transport options. This not only brings savings but also sends the message that you care about the environment and are playing your part in making the world greener.
Focus on Supplier Relation Management (SRM)
One of the easiest measures to cut costs is simply communication and negotiation. Suppliers are people like you. Just as you are the seller to your customers, they are the seller to you. This means that they are amenable to negotiation and, for lack of a better word, haggling.
Suppliers offer very lucrative discounts and other deals in exchange for assurance of patronage, for example. You could contract a supplier as your official supplier for the year, and that guarantees that they have secured a year’s revenue. In exchange, they can lower the prices of goods and maybe even throw in something extra to sweeten the deal.
Whatever the deal may turn out to be, the example was just to illustrate that there is room to optimize in the supplier selection department. Do not just agree to whatever prices a supplier puts up. But also, do not expect them to lower prices or offer discounts without asking for something in return.
Make a position of power for yourself on the negotiating table. Make a chart for your negotiating offers, starting with the most lucrative one for yourself to the minimum you would demand to strike a deal.
In the meeting, start with the most favorable offer to yourself, and see how far down the chart you go until they agree with something. Never go in without a plan, and especially not without a proper picture of your CPG operations and finances.
The art of negotiating itself is something philosophers have written many treatises on, so naturally, it is not something to be learned in a day. But what entrepreneurs can do is leverage their supply chain management expert to deal with this.
Conclusion
These four strategies are key to reducing supply chain costs in the CPG sector, but more than that, they highlight the areas where you will find room to optimize. Planning, logistics, supplier relations, and technology are the core areas where much work can be done to cut costs.
The first strategy we provided is frankly foundational to any CPG supply chain optimization. A dependable pro at your side can make the best use of any technological tools and has negotiating experience. They are also well-versed in logistics management and can best optimize the business’ existing CPG operations. Essentially, any optimization you can do on your own is likely to be sub-par in comparison to an expert’s touch. And sub-par optimization may as well be the same as no optimization.
Whether you choose to enlist the aid of professional or outsourced supply chain management services or do it yourself, we wish you the best of luck on your journey toward a better CPG supply chain. Cheers!