Can consumer goods manufacturers meet retailers’ low-cost standards? | So Good News
The challenges of COVID-19 he forced everyone to be able to change. As the supply chain moved mountains to maintain production efficiency, suppliers reduced their support requirements, for example, extending delivery windows and suspending penalties for late or incomplete deliveries.
Now the pendulum is swinging back. A new McKinsey survey of 35 leaders at 28 companies in the North American consumer-packaged-goods (CPG) sector shows that performance expectations have already returned to pre-pandemic levels. Many large retailers are adding more requirements to their retailers.
More than half of the CPG companies in our survey said that suppliers have strengthened their on-time requirements (OTIF) by reducing delivery windows and increasing non-compliance fees. Some vendors are changing their definition of “complete” delivery by changing from case fill to order or line fill (Exhibit 1). In addition, 85 percent of those companies told us that in the last 12 months, the main customer has changed from “requested” days to “scheduled” or “committed” days.
Knowing the cost-effective methods
To maintain margins in an environment where service requirements are high and rising, procurement companies must improve two things. First, they must understand the true cost of meeting customer expectations. Second, they need to make sure their prices reflect the additional costs customers may want, such as fast shipping, clean glasses, or complex order requirements.
Our research shows that CPG players have made more progress on the first task than on the second. Every company we interviewed told us they had a payroll program, and three-quarters of respondents rated their understanding of the cost of the service as “good” or “strong.”
When it comes to getting that money back from customers, however, only 17 percent of those surveyed believe they are getting back more than 75 percent of the actual cost to use, with many saying they only get half of their money back. And only four of the ten most used are being used by more than 60 percent of the respondents (Exhibit 2).
Ensuring that prices reflect the true cost of use is important for several reasons: to protect CPG players from margin erosion, to promote fairness among vendors, and to prevent manufacturers from offering one vendor’s unusual costs behind their competitors. In the long run, more accurate pricing can also encourage supplier choices that reduce waste around the environment, improve costs and improve the environment.
The fear of alienating a strong customer base can be overwhelming. Our research shows that a focus on collaboration and the search for successful solutions is a welcome outcome of the COVID-19 response. About 80 percent of our respondents told us that they have participated in new affiliate programs and that most of the sellers are looking to launch within three to six months.
E-commerce: Sustainable, but not profitable
When it comes to e-commerce, our research paints a similar picture. CPG players have made great strides in addressing the operational challenges of direct-to-customer shipping, but it’s unclear whether they’re accounting for all the costs involved.
Respondents believe that the distribution of various online business methods is stable: sellers only sell half of their products online, direct sales accounts for one-third of buyers, and the rest is made up of products sent on behalf of sellers. Two-thirds of respondents have adopted a multi-brand approach, integrating their e-commerce systems with their brick-and-mortar supply chain. A quarter have chosen to do a different, dedicated e-commerce service, and the rest have outsourced online fulfillment to third-party service providers.
Compared to previous surveys, CPG companies have greater confidence in their ability to support e-commerce: more than 50 percent said their supply chains are ready to handle the challenges of e-commerce. On average, respondents felt that 70 percent of their products currently sold meet the packaging and security requirements required for e-commerce shipping (Exhibit 3).
CPG players may feel like they’re breaking the law in e-commerce, but many still have work to do to make those operations profitable. A separate McKinsey study found that shopping and on-premises advertising eat up the margins of products sold through online channels versus brick-and-mortar stores. Handling costs are particularly high for companies selling through large online retailers, who tend to place small, anonymous orders while offering stiff penalties for late or non-delivery.
The margins of the CPG segment are under inflation on one hand and growing customer base on the other. In this environment, it is important for companies to understand the true cost of serving those customers and what drives those costs. This is a great time to connect with vendors and work together to complete an end-to-end project.