Why Network Optimization Is the Key to Consumer Packaged Goods Supply Chain Resiliency
It has been a few years since the onset of the pandemic exposed the tragic consequences of supply chain fragility within the consumer packaged goods (CPG) industry. Now that just enough progress has been made to rebuild and strengthen these operations, a sense of “normalcy” has been restored consumer access of desirable products. However, we might not be out of the weeds just yet.
Declaring “mission accomplished” is still too premature, based on research from the Organisation for Economic Co-operation and Development. Although inflation has eased in many countries over the past summer, CPG prices are still rising faster than real wages and showing no signs of leveling off in 2024. In addition, a considerable portion of freight transportation expenses continues to soar as diesel fuel costs surge by 20% year over year.
To gain control over their costs and pricing, supply chain leaders must capitalize on the recent stabilization of production capacity and inventory levels. This includes continuously adjusting the supply chain network design to reflect changes in demand, costs, capabilities, and corporate objectives. In doing so, organizations will reduce costs, optimize operational efficiency, promote sustainable practices, and ultimately contribute to bottom-line improvements.
The strategic importance of network optimization
The quality of a supply chain network’s design directly influences everything from operational efficiency and consumer satisfaction to the ability to remain competitive and adapt to evolving market conditions. Yet, many supply chain leaders are caught between the need to pivot operations within shorter timeframes and decades-old modeling systems. They simply cannot keep pace with business dynamics.
Swift, factual, and actionable decision-making is essential when optimizing a network design to increase supply chain resiliency, profitability, and sustainability. Resulting outcomes not only yield cost reductions and safeguard revenue streams, but also provide the confidence to navigate crucial goals such as the following:
1) Alleviate cost pressures while expanding margins
The design of a supply chain network plays a central role in the cost structure of producing, storing, and distributing products. Through meticulous optimization, consumer packaged goods companies can curtail transportation expenses, minimize inventory holding costs, and reduce operational expenses. Achieving these cost efficiencies improves profitability and elevates long-term competitiveness.
2) Address demand patterns responsively
Consumer preferences, market demands, and competitive landscapes are in constant flux. An agile network empowers supply chain leaders, employees, and suppliers to swiftly adapt their operations to every change. In return, companies are better positioned to stay ahead of the curve and meet evolving consumer needs – whether launching new products, entering new markets, or adjusting production volumes.
3) Mitigate risk and respond to supply constraints
In a world prone to disruptions, the financial and reputational consequences of supply chain hiccups can be severe. An effective network design considers risk mitigation strategies – including redundancy, diversification of suppliers, and comprehensive disaster recovery plans – that ensure business continuity even in the face of unforeseen challenges.
4) Manage inventory and service times to maximize consumer satisfaction
Strategically locating distribution centers and storage facilities helps minimize excess inventory and reduce carrying costs while ensuring products are readily available to consumers. By reducing stockouts, shortening delivery times, and ensuring product availability where and when needed, this approach accelerates the delivery of exceptional services that delight consumers and earn their loyalty.
Across these four use cases for network optimization, it’s clear that the convergence of continuous modifications and planning fosters seamless coordination and decision-making across the supply chain. For example, inventory levels can be right-sized to outsmart unpredictable demand so that all consumers’ needs are fully met without the burden of excess carrying costs. By embracing these principles, supply chain leaders can turn supply chain network optimization into a powerful force that propels their company forward in a rapidly changing market.
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Forward-looking insight and control calm the chaos
With the right technology, network optimization becomes the key to plotting a well-defined, yet flexible, course for supply chain management. CPG companies can lengthen or shorten their supply chain to pivot operations in ways that optimize the balance between safety stock values, supply continuity, and cost efficiency.
According to the Gartner report, “Market Guide for Supply Chain Network Design Tools,” “All network design tools must be able to answer the question of how many facilities should I have and where should they be to meet required service levels and optimize cost. This is in addition to the ability to run many what-if scenarios to determine the impact of constraints and costs on the network.”
Suppose a CPG brand decides to shift its manufacturing capacity from Rhode Island to a higher-cost, yet more-sustainable, alternative in Colorado. Adding an adaptive consumer packaged goods network optimization solution to the digital supply chain management platform, empowers the business to model any number of potential supply chain designs and close in on an optimum based on business goals and realities.
This real-time analysis evaluates trade-offs and guides data-driven decisions that reduce latency in modeling and executing the optimal product flow through planning systems. As a result, the CPG brand chooses a conservative plan that minimizes future risks. This decision resulted in tens of millions in savings, including a multimillion-dollar reduction in service times.
While more substantial savings are possible, this network optimization analysis proved that prioritizing the lower-risk and more-sustainable option is the best choice in the long run. This result plays out repeatedly for many companies as supply chain challenges grow more complex, particularly in mature product lines.
Moreover, leveraging a network optimization solution allows companies to undertake regular analysis and re-optimization of their supply chain every two to six months to address evolving factors proactively. Doing so enables decision-makers to anticipate challenges rather than firefighting in crisis mode.
A linchpin of agility and effectiveness
The significance of consumer packaged goods network optimization cannot be emphasized enough. In this fluid and unpredictable environment, the ability to anticipate and control future outcomes helps steer businesses toward a resilient and prosperous future.
With the right technology and a steadfast commitment to continuous analysis, the approach empowers brands to effectively mitigate risks early, address supply constraints strategically, and enhance consumer satisfaction innovatively. But more importantly, challenges can be turned into opportunities and operational order can be established to compete effectively in an increasingly chaotic world.
SVP Industry Principal
Steve Johanson is the SVP Industry Principal for network optimization at Logility, where he draws on 25 years of helping clients optimize their supply chains. Steve works with the Logility team to bring new and innovative solutions to the greater supply chain community and to help the client base build skills and knowledge to sustain competitive advantage.