Consumer packaged goods (CPG) companies face a constant battle for market share and retail shelf space. Price points are a key weapon in this battle and, increasingly, companies rely on lean CPG logistics operations to provide a cost advantage.
How is your company responding to this challenge? With incremental improvements to existing distribution processes? Or, are you exploring logistics strategies that alter current processes and the way you work with retail
A mix of both is optimal, with new strategies offering the best potential for breakthrough gains and cost savings, particularly for mid-tier suppliers struggling to compete with much larger brands. Following are 7 strategies for CPG manufacturers to consider. Some new, some tried and true.
1) Package product in the distribution center to reduce costs and limit inventory
Retailers don’t necessarily want to sell products in the same configuration as they leave the factory. For certain markets, they may require different quantities in a pack, or different product configurations altogether.
So, where does this customization happen?
Many CPG companies still ship product from the DC to outside packaging firms only to have the product return to the same DC. This increases freight costs and causes the company to lose visibility to the product during the packaging process. You can eliminate these problems by performing packaging and other product configuration functions right at the DC.
- A leading brand of feminine hygiene products ships bulk quantities to its 3PL, where a special packaging machine creates 20-packs for sale at supermarkets and mass retailers
- A candy maker ships full gaylords of boxed candies to a DC, where product is repackaged in lots of 25 for club stores
- A leading sports-drink brand has its logistics partner create variety packs based on the exact specifications of different customers
Using this strategy, a 10%-15% savings is possible based on reductions in freight costs, inventory and damage. Additionally, product moves faster through the distribution cycle, enabling you to convert products to cash sooner.
2) Drop ship eCommerce orders on behalf of retailers
Today, your retailer customers ship eCommerce orders for your products from their current distribution network, but this VENDOR-to-RETAILER-to-CONSUMER supply chain is inefficient, with extra touches and freight runs, higher inventory, and slower cash cycle times.
Such a cost-laden CPG logistics infrastructure makes it difficult for retailers to turn a profit on eCommerce sales of low-margin CPG products. As an alternative, consider fulfilling your retail customers’ eCommerce orders directly from your distribution centers. This would increase your customer’s efficiency and just might help preserve your company’s revenue in this growing channel of distribution.
Two barriers to a drop-ship strategy – branding and systems integration – are very solvable. To maintain retailer branding, your DC can provide necessary labeling and packaging requirements to mimic the retailer’s current branding and shipping methods. Sometimes it’s as simple as placing items in your customer’s outer box. Additional systems integration work would be required, but EDI connections already exist for DC-to-DC orders. Consumer orders could be integrated using the same protocols.
3) Provide logistics input on packaging design
Today, packaging decisions at CPG companies are made upstream by sales and marketing departments, with no real involvement by logistics and packaging professionals. As a result, a CPG company’s total costs can become inflated due to inefficiencies during the final phase of assembly and delivery. For instance:
- A flashy point-of-purchase display can take a long time to assemble at the warehouse. One such display for a health and beauty product manufacturer took close to 25 hours to build.
- A slightly oversized carton can limit the amount of product that can fit on a pallet, limiting cube utilization in the warehouse and trailer.
It’s like an architect who may specify a certain brand of window for its aesthetic appeal, not its insulating capabilities. Eventually, excessive heating and cooling costs will cause building owners to revisit the initial design decision. Better to get the engineers and builders involved early.
There is no reason packaging can’t be both eye-catching and practical. But to avoid downstream inefficiency, logistics must demand a seat at the table when packaging and point-of-purchase display design is being discussed. Early involvement of logistics and packaging design engineers can pay big dividends. For example, one CPG company sat down with package design specialists at their 3PL recently to examine three point-of-purchase displays
used in supermarkets and drug stores across the country. Changes to corrugate and slight design changes saved 17%–20% on finished product costs – a $250,000 savings on these displays alone.
4) Cross dock a portion of freight
Cross docking is kind of like an HOV lane for fast-moving freight for which there is steady and predictable demand. Product hits the receiving dock and is quickly loaded onto another truck for final customer delivery, avoiding the time and costs involved in storing and handling product at the warehouse.
Cross docking is regarded primarily as a retailer strategy since retailers will permit all available inbound freight to be shipped to a retail outlet as it comes into the DC; whereas CPG manufacturers typically want specific merchandise at a specific time to fulfill inventory requirements. But many of the benefits of cross docking are available to CPG manufacturers.
By avoiding a month of storage costs and the labor to pick, pack and ship products, you can save about $9 per pallet on your CPG logistics costs. Let’s say you cross dock 10% of your freight. If you ship 50 trucks a day, you could save as much as $350,000 per year.
5) Collaborate with retailers and 3PL partners to consolidate freight
Load consolidation is a tried and true strategy to combine LTL freight from different companies moving to the same place in order to leverage lower-cost truckload rates. But this activity is ad hoc and occurs only if a 3PL or carrier recognizes consolidation opportunities.
For small- and mid-market CPG manufacturers moving to regional grocery chains, far greater cost saving opportunities are available from collaborating with retailers and 3PLs on a different process for replenishment – one based on a retailer combining its orders to multiple smaller vendors into a single purchase order.
Right now, there is little coordination among retail buyers at grocery chains. They order mustard, ketchup and pickles from a host of different vendors, who pay LTL rates to ship to retailers and whose products ride side by side on highways traveling to the exact same retail DCs. But what if those products were located at the same 3PL-operated facility? And what if 3PLs enabled the retailer to combine orders for multiple vendors in a single purchase order?
Product manufacturers would benefit by sharing storage costs and reducing outbound freight costs 20%-35%. Retailers would benefit from greater receiving efficiency, reduced time for vendor management and payment administration, and inventory optimization. To explore this strategy, look for a 3PL that handles product distribution for many brands that ship to grocery chains and mass retailers.
6) Reduce Chargeback Penalties
As CPG suppliers follow their large retailer customers into the uncharted territory of e-tailing and increasingly lean supply chain strategies, compliance with retailers’ transportation routing guides is a make-or-break element in the ongoing relationship.
Historically, CPG orders moved in efficient truckload (TL) quantities according to routing guide requirements. Today, a growing proportion is delivered by less-than-truckload (LTL) carriers. This demand for higher-cost LTL delivery disproportionately impacts mid-sized CPG manufacturers. A related issue is that retailers’ distribution facilities are often set up mostly to receive TL deliveries rather than LTL ones, leading to congestion and unloading delays. Late delivery fines and carrier detention charges accrue as a consequence.
Said one respondent in KANE-sponsored research on the logistics challenges of mid-tier retailers: “Gridlock at retailer receiving docks makes it very difficult to schedule LTL appointments and get our products received on time.”
In order to overcome these barriers, mid-size suppliers are under pressure to come up with creative CPG logistics solutions. Here are three strategies to reduce chargeback penalties:
- Choose Service Providers That Already Understand the Retailers’ Routing Guides. Because few mid-sized manufacturers have the time and internal expertise to effectively manage day-to-day delivery operations, it’s important to work with high quality transportation management providers, preferably ones that already have a relationship with the retailer customer and their increasing demand for on-time, in full deliveries. One respondent to KANE’s CPG supplier survey said: “When a category manager says that they have a preferred transportation provider, you should be dialing that number now.”
- Adopt Tactics to Alleviate Receiving-Dock Congestion. Mid-sized companies must stop treating bottlenecks as simply a necessary pain of doing business, and need to proactively propose creative solutions to retail DC traffic jams to improve driver turnaround time. Potential options include delivering goods at off-peak hours; establishing standing, scheduled appointments; using unattended unloading; and consolidating deliveries.
- Leverage 3PL Capabilities. By partnering with 3PL service providers that already have leverage with major retailers because of the combined freight volumes they ship across multiple CPG manufacturers, mid-sized CPGs gain more clout than they would have on their own.
7) Improve Trade Promotion Management
Marketing is from Mars and Logistics is from Venus -- at least when it comes to trade promotion management.
Marketing is focused on developing the promotion and maximizing sales. The more volume, the more revenue. But, too often, the executive managing the promotion fails to properly coordinate efforts across all involved functions. As a result, hundreds of thousands of dollars in profit are lost to inefficiency.
But if these extra costs are incurred in the warehouse or with freight carriers, it's possible that the marketing folks in charge don't see them. They end up reporting stellar sales numbers, while the company has actually lost money on the promotion.
Happens all the time.
If you want to maximize profit from trade promotions, a good place to start is with logistics and involving the right people early in the planning process. CPG logistics folks don't ask for much when it comes to promotions. They just want to know "What are we getting and when?"
With a little bit of information, here are some of the things you can do:
- Save warehouse space and labor. Industrial engineers can examine product volume and dimensions and develop a warehouse floor layout for storing and transforming products in the least amount of space with the fewest people.
- Reduce the number of trucks. Through load diagramming, you can load trailers to maximize cube space and use less trucks to ship the same amount of product.
- Reduce inventory carrying costs. If logistics can get accurate information on the volume and delivery time of products, labor and trucks can be scheduled in advance, so product doesn't arrive and sit.
- Reduce labor. Good data means better warehouse labor planning. Poor data or last-minute data results in overtime costs and extra shifts to deal with the volume surge.
Product promotions can be an ugly management mess. The simple solution is to involve logistics early in the planning process. The more they know, and the earlier they know it, the lower the operating costs and the greater the profit.
8) Ditch the annual freight RFP and invest in carrier relationships
You may feel obliged to do the yearly RFP dance in order to show management you’re serious about reducing freight costs, but severing the relationship and starting fresh with new carriers every year is not the best approach. When shippers develop more strategic, longer-term carrier relationships, they create transportation management advantages that have bottom line implications.
Longer-term contracts give the carrier time to mine for other customers in the area to create a more efficient network with minimal deadhead miles. A carrier that is maximizing assets is more profitable and can afford to give you better rates. A longer-term deal, say 3 years, also locks in that rate for the contract period, instead of changing – and maybe going up – every year. Oh, and you get better service, too, from a carrier you’ve committed to long-term. Hard to put a price on that, but it’s significant.
The potential savings linked to these advantages is 3-5% per year, and these savings estimates can easily double when capacity tightens.
Another advantage that is tougher to quantify is the increase in customer satisfaction that happens when a carrier’s customer service team gets to know the shipper’s business and procedures over time. More importantly, consignees appreciate seeing the same carriers and drivers regularly, since they develop an understanding of how they like to receive freight. Personal relationships often develop, which can mitigate problems at delivery. Download our eBook on Managing Freight in a Tight Capacity Market
9) Consider Intermodal
You know the historical gripes about rail. Slow service. Indirect routes. Poor visibility. Required increases in inventory levels.
Intermodal rail simply wasn't seen as a viable option for many CPG companies. But rail service has improved to the point that products that would never have seen the inside of an intermodal container are now moving across the country at a lower cost and with a reduced carbon footprint.
While intermodal rail is typically not a good option for short-haul moves, it is gaining serious steam for long-haul freight. Among the reasons: volatile fuel rates, improved service levels, and corporate mandates for green shipping solutions. The biggest driver, however, is the ability to lower costs at least 15%-20% with intermodal based primarily on fuel savings. Here’s an example.
After Ocean Spray opened up a DC in Central Florida, a 3PL noted that Tropicana was shipping fresh fruit by boxcar from Florida to a point in New Jersey very near the shipping point for Ocean Spray’s Florida-bound freight, which was being shipped in full truckloads. A collaboration led to use of Tropicana’s backhaul capacity to move Ocean Spray juice via rail to within 65 miles of the new Florida DC. That resulted in a 40% reduction in transportation costs for this lane and a 68% reduction in CO2 emissions
Rail is the most economical and sustainable mode for overland movements. As a result, retail and grocery type products are traveling on rail for the longest part of their journey to market and, in the process, delivering major freight savings and carbon footprint reduction for their manufacturers. Read more in our Viewpoint paper: "Look Who's Riding the Rails."
10) Outsource your transportation department
For smaller companies especially, freight management is not a core competency. Hiring, training and maintaining a transportation staff, and keeping up with systems requirements, can be expensive and time-consuming. Outsourcing freight management transfers the financial burden of staffing and capital expenditures and also opens the door to innovative solutions that on-the-ball carriers should be suggesting. Also, carriers will simply operate more efficiently than you because they can buy things, like fuel, in bulk.
If you own your own trucks, consider divesting and outsourcing freight management logistics to outside experts. Shippers who own their own fleet of trucks are often paying at least a 25% premium over the typical cost of outsourcing delivery needs to reputable and reliable carriers.
To reduce CPG logistics costs, make a change
For mid-tier suppliers, the biggest savings opportunities in the CPG supply chain likely require strategies that are outside your comfort zone or require significant time to develop – time you may not have.
Rather than risk failure on untried approaches, it’s tempting to delay action until someone else has figured it out. But progress typically results from bold action and a willingness to fail. Perhaps we need to examine the time we invest in doing the same things better and reinvest at least some of that time in imperfect execution of new strategies that can set us apart.