While the concept of demand-driven supply chains is relevant to all industries, the methods to get there can be quite different for different industries, with varying degrees of emphasis placed on demand-side and supply-side initiatives. Despite such a variation, there are many commonalities in the core IT and operational capabilities these companies need to develop.
DDSC in Consumer Packaged Goods
CPG companies strive to achieve very high service levels—consumers typically do not wait if their preferred product is not on the shelf; they instead go elsewhere or choose a competitor’s product. Furthermore, CPG companies are typically not supply constrained—they determine what inventory levels they need, and they set capacity and/or prebuild stocks in order to have the required inventory. Therefore, it is not surprising that we see an emphasis in CPG on demand-side strategies, although this is starting to change.
Traditionally, CPG companies have forecast demand based on distribution center (DC) shipments to retailers/wholesalers. These processes mask actual consumer behavior, and add days if not weeks of latency to the information flow. There have been a number of initiatives that have been adopted by the industry to remedy this:
• The most common demand-side initiative, which has been in use for over two decades, is a customer collaboration replenishment strategy. This includes techniques such as vendor-managed inventory (VMI) and collaborative planning, forecasting and replenishment (CPFR). Such techniques allow CPG manufacturers to get closer to the demand signal by gaining visibility to retailer inventory, forecasts and shipments from DCs to stores. Such initiatives have and continue to deliver significant value in terms of reducing inventory and enhancing service.
• Over the past 10-20 years, CPG companies have started to go a step further. By tapping into point-of-sale (POS) data directly from the retailer, CPG companies can get clear visibility into actual demand, rather than using distribution center shipments as a proxy. Such clear visibility allows CPG manufacturers to see what consumers are actually buying, with minimum latency, allowing them to adjust their supply plans quickly and accurately.
• Furthermore, by modeling demand characteristics such as order volume over time, and correlations of what products sell together, CPG companies are able to understand demand patterns to enhance short term forecasts (demand sensing). In these demand sensing applications, the emphasis is on separating and analyzing both the normal demand flow, as well as any incremental promotional lift. Demand modeling also allows CPG manufacturers to work with retailers to optimize merchandising strategies
• Access to POS data is also used by CPG marketing teams to better understand the correlation between promotional strategies they deployed and resulting change in sales volume. These activities provide them the insights they need to increase the effectiveness of their promotions and pricing actions. Armed with actual impact on sales from promotional pricing, CPG companies are better equipped to deploy demand shaping strategies that work.
• Point-of-sale information capture also allows CPG companies to gain better visibility into where the downstream inventory is: at the retailer’s DC, in the store back room, or on the shelf, and allows them to infer out-of-stock conditions. Such information is not only useful as a real-time alert to trigger replenishment, but also allows them to collaborate with retailers in measuring and improving sales execution.
In CPG, on the supply side, the emphasis has been historically on fast and frequent replenishment processes, either based on VMI or using deployment algorithms leveraging the enhanced demand signals described above. Fast replenishment is especially critical during promotional periods, when out-of-stock situations not only result in lost sales, but in potential impact to customer loyalty.
Trends are now emerging which are putting further pressure on CPG manufacturers to adopt more advanced supply-side initiatives. In many markets, retailers are also optimizing their own supply networks and expecting more from CPG manufacturers. Penalties are imposed on manufacturers who do not meet fulfillment targets and these penalties have grown substantially across the industry. In many markets, CPG companies are receiving ever growing percentages of orders (via EDI) that require same-day shipment. Lastly, in certain CPG segments (such as cosmetics), high-margin products with short lifecycles are becoming more common.
To adapt to these trends, we are seeing CGP companies striving to speed up/postpone their planning and fulfillment processes, shorten lead times, wait longer to capture the same-day demand before pulling the replanning/replenishment trigger.
