CPG brands faced supply chain challenges throughout much of the past year. Costs rose and performance dropped for the largest enterprises in the industry. But despite the widespread issues, the disruption provided a template for retail logistics success. Read what strategies brands can use to ace their retail relationships.
To succeed in the food and beverage industry, brands must focus on optimizing their supply chains to meet the standards set by their most important customers.
A retail optimized supply chain is not only an effective way to eliminate costly chargebacks that undercut profitability, but it is also a dependable source of competitive differentiation for brands.
The lessons consumer goods organizations learned from the COVID-19 pandemic should be used to create the blueprint for success in the new retail reality.
CPG brands faced four quarters unlike any other during the past year. Despite early uncertainty, unprecedented demand drove increased sales for nearly the entire sector.
Goods from food and beverage products to home improvement items saw a significant consumption bump as buyers, sidelined by pandemic restrictions, diverted their purchasing habits from experiences to consumer goods.
As a result, CPG enterprises faced a dichotomous four quarters and could see more of the same looking forward. On the one hand, sales, buoyed by the pandemic, provided welcomed growth for brands. On the other, supply chain disruption and the challenge of keeping up with demand caused issues in the logistics realm.
A new report from the Food Marketing Institute and Boston Consulting Group highlights the pandemic’s effects on CPG supply chain cost and performance. The group surveyed some of the largest food and beverage organizations in the marketplace, detailing their OTIF (on-time in-full) performance and average logistics costs.
The report captures the challenges faced by food and beverage brands over the past year and effectively demonstrates the need for performance-based supply chain strategies going forward.
How Was the CPG Supply Chain Impacted?
The fallout from the pandemic strained production functions and increased the need for trucking services, which led to falling performance metrics that rippled across organizations.
According to the survey results, the largest brands in North America reported an 8% decline in OTIF delivery performance at retail customers throughout 2020—CPGs in the survey hovered at an OTIF rate of 77%.
This drop coincided with the rapid, widespread increase in demand that followed the onset of the pandemic. But even as the marketplace adjusted, these service levels never fully recovered.
This performance decrease also came as shippers faced dramatically rising transportation costs. Because of the increased need for capacity and notable shortage of drivers, carriers dramatically increased freight rates, and brands paid the price.
Since the first quarter of 2020, CPG logistics costs have risen by 37% to an average of $1.71 cost per case.
However, despite this year of price increases, many of the country’s largest CPGs were met with what was previously below-market-average logistics performance.
Why Does Supply Chain Performance Matter for CPGs?
In a year partially defined by out-of-stocks, supply chain performance, specifically transportation, acted as a primary driver of these struggles.
According to a recent CBA study, “transportation accounts for the largest share of order cycle time variability in most supply chains, thus affecting inventory levels, stock-out costs, and on-time delivery.”
That majority share is reflective of the need for CPG brands to source capacity effectively. A significant contributing factor to order cycle variability comes from utilizing logistics partners not built to handle retail delivery.
In the face of widespread service level decreases from CPGs and data suggesting transportation is primarily responsible for late deliveries, retailers did not attempt to reduce the stringency of their chargeback programs. In the late third quarter of last year, Walmart increased its OTIF threshold to 98% for all suppliers across all modes.
When applied to performance data for food and beverage brands last year, the new threshold would spell issues for even the largest shippers.
The average enterprise organization would have been penalized for 21% of their Walmart orders at 3% of the cost of goods sold. That is a substantial figure and can add up to consequential chargeback costs, difficult for any sized brand to absorb.
Although significant, this monetary penalty of non-compliant OTIF orders is not the only thing that looms large for CPG brands. The consequences for missing retailer delivery standards can be even more costly.
In a survey of retail buyers, 100% of respondents said that a vendor’s ability to deliver product on time impacted their willingness to work with them. Furthermore, 73% of those surveyed indicated that they had ended a relationship with a brand over non-compliant delivery.
These stats demonstrate why it will continue to be essential for CPGs to handle faltering performance metrics, especially with analysts’ predictions for the remainder of 2021 and beyond.
According to the CBA, “the annual rate of purchases still is expected to grow by 7.4% to 8.5% compared with 2019,” and the first four months of data from 2021 suggests this prediction is ringing true. Retail sales, including food services, increased 9.8% sequentially in March. That figure was again matched in April as numbers stayed consistent. Demand is not going to dry up anytime soon, which means CPGs will need to optimize their supply chains to meet consumers’ and retailers’ needs.
What Can Brands Do to Maximize their Retail Logistics Performance?
With current consumption demands, disruptions, challenges, and pressure from retailers, some see the current landscape as disadvantageous to brands.
But those enterprises best positioned to succeed in the long-term are the ones flipping the script on what’s happening in the industry. Forward-thinking enterprises are leveraging their retail-optimized supply chains as a competitive differentiator and a dependable way to secure additional shelf space.
Logistics should no longer be viewed simply as an expense. Instead, organizations that aim to solve the challenges that plague suppliers need to look at it as an investment. Enterprises can get ahead of their peers by delivering to critical retail customers on time and focusing on performance instead of solely using cost as a decision driver.
Zipline Logistics works exclusively with CPG brands on a consultative level to ensure their supply chains are equipped to deal with current retail trends. For more information on the value-added benefits of Zipline, check out company president and co-founder Andrew Lynch’s interview with Taste Radio.