Managing consumer packaged goods inventory is challenging at the best of times, and it can be debilitating during times of local or international disruption. Manufacturers, distributors, retailers, and other companies that deal with household products, cosmetics and toiletries, office supplies, paints and accessories, and other consumer packaged goods need to understand the timing, quantity, location, and total costs of their goods as well as the supply chain agility and flexibility needed to deal with fluctuations in supply and demand.
An advanced inventory planning and optimization solution allows these companies to set and maintain precise stock targets across a global network. This guide explains the inherent challenges within this industry, and it looks at how consumer packaged goods (CPG) companies can leverage an inventory optimization solution to reduce waste, improve efficiency, and ultimately safeguard their bottom line.
Reductions in Profit Growth
With an annual value of $2 trillion, the CPG industry is one of the largest in the world. Between 1968 and 2008, the CPG industry generated the second-highest returns for shareholders of any other industry, but this 40-year trend of intense success has faltered over the last decade.
Between 2000 and 2009, the average profit for this industry grew by over 10% year on year, but over the next decade, annual profit growth fell to just 3.2%. Analysts say this is because the industry can no longer rely on the success models of the past. The practices that catapulted this industry to success are no longer working, and companies that want to be successful need to innovate, adapt, and overcome modern-day challenges.
The number one disrupter to the industry’s success is digital ubiquity. Brands that don’t use advanced technology for marketing, sales, and operations are missing out on opportunities for success. They must embrace intelligent supply chains, integrated planning processes, automation, and more efficient resource allocation.
Challenges in the CPG Industry
Traditionally, the biggest challenge to the CPG industry is forecasting demand. This is felt at every step of the supply chain, from farmers to retailers. The COVID-19 pandemic amplified this challenge by showing just how precarious forecasting can be when a pandemic leads to panic shopping.
Consumer packaged goods inventory always has complex demand patterns and seasonal trends. This high level of variability causes longer lead times and poor responsiveness up the supply chain when manufacturers and distributors don’t have enough supply to meet demand. When demand exceeds supply, they struggle with low product turnover, excess inventory, and increased wastage.
Companies lacking the ability to track inventory and demand patterns effectively end up impacting customer service levels, and are likely to see their profits dwindle.
Solutions for Managing Consumer Packaged Goods Inventory
To deal with these challenges, businesses need to move away from individual planning silos. They must optimize the capabilities of their entire enterprise by tracking point of sale data and demand signals from retailers, while at the same time setting inventory levels for each product to reduce the risk of the bullwhip effect causing a build-up of excess inventory.
The bullwhip effect describes what can happen as suppliers react to increased demand. As you go further up the supply chain, the demand distortion increases, and companies lacking the essential visibility to identify risk are likely to end up with excess inventory. An optimized inventory planning solution helps companies manage consumer packaged goods inventory to strike the right balance.
Robust Inventory Management
An advanced inventory planning and optimization solution optimizes the planning and replenishment processes of CPG companies so they can improve customer service, strengthen cash flow, and boost their product margins. These systems offer capabilities such as:
- Demand forecasting and demand sensing
- Inventory management
- Data analytics to gather insights on seasonal behaviors and demand volatility
- Safety stock calculations based on simulations of multi-level service options
- Reporting for policy planning
- Optimal inventory determinations
- Assessment of inventory reduction opportunities
- Real-time analytics to guide optimal inventory levels based on demand variations, supplier lead times, and batch sizes.
Multi-Phased Approach to Inventory Optimization
Optimizing your inventory requires a multi-phased approach. Businesses should start by analyzing the strengths, challenges, and return on investment (ROI) of their current inventory environment. Then, they should look at how they can streamline their inventory policies. Finally, they should develop a central monitoring and governance process.
The Importance of Automation for Optimizing Inventory
Automation is critical for consumer packaged goods inventory optimization. Without automation, companies are forced to spend time finding and fixing manual capture errors. They often rely on employees’ knowledge for product locations, increasing the risk of products being lost or overlooked.
Companies without automation tend to neglect slow-moving inventory, which wastes time and space. They must also make frequent adjustments to their databases as they deal with constant discrepancies between stock counts.
Integrating an automated solution saves time on physical inventory counts. It also means CPG companies don’t have to shut down or incur extra labor costs to do manual stock takes. They can even automate tasks such as picker planning, and the right technology gives management the ability to set up orders remotely and dispatch them to mobile devices for workers.
There are also digital solutions that can deal with location levels — a dashboard lets a manager look at the inventory levels in multiple locations and transfer goods as needed.
In short, automation improves inventory visibility, eliminates manual errors, and improves the accuracy of inventory data in real time. It also helps to reduce shipping errors, customer complaints, and wastage.
Contact Logility for help with consumer packaged goods inventory management
Do you have the ability to accurately forecast what your customers are going to want to buy? Are you cost-effectively meeting service level growth? If you’re not answering yes to these questions, you are missing out on opportunities for the growth and success of your CPG company.
Vice President, Product Marketing
Lachelle Buchanan is the vice president of product marketing at Logility, where she leverages over 15 years of experience in unifying the expertise of product development teams with the market insight of sales teams for successful new product introductions. After spending half her career in marketing and the other half in supply chain, Lachelle is most passionate about bringing teams together to solve complex supply chain challenges and delivering value for customers. Owing to a passion for advanced Sales & Operations Planning, Lachelle has Oliver Wight certifications in Integrated Business Planning (Advanced S&OP), Demand Management, Integrated Supply Chain Management and Product & Portfolio Management.