How Covid-19 has sparked calls to rethink the CPG supply chain
The way the Covid-19 pandemic shook up industry supply chains has set off calls, in the US at least, for changes to the way suppliers and retailers think about the whole system, as Victor Martino reports.
ovid-19 has put supply chains in the spotlight, both in the consumer-goods industry and with US consumers.
For the first time since World War II, consumer-goods supply chains in the US started to break down, as the pandemic and resultant economic shutdown of numerous away-from-home food venues – restaurants, cafes, schools, and the like.
These, prior to 2020, accounted for a greater share of consumer food spending than food-at-home did – putting an unprecedented demand on grocery stores and their suppliers.
To put this demand in perspective, US packaged food and beverage sales through the retail channel grew by a whopping 12% in 2020, according to Stacey Hass, a partner at consulting firm McKinsey & Company, which recently did an analysis of industry sales during the pandemic year.
That’s more absolute growth than the sector saw in the four-year period from 2016 to 2019, according to new data from CPG industry market research firm Nielsen.
What a difference a year without food-way-from-home venues makes.
Welcome to the network
CPG companies and retailers were obviously taken by surprise by the degree – and duration of that degree – of consumer demand for packaged food and beverage products.
The result, in some categories, was sparse grocery store shelves for many months (the supply chain still isn’t fully back to normal yet), causing turmoil as manufacturers scrambled to meet the increased demand for products, while at the same time searching for ways to increase the agility and resilience of their severely disrupted supply chains.
Overall, food companies responded fairly well to the unexpected and unprecedented supply chain disruption, but the imbalance between demand and supply resulted in months of lost sales and consumer dissatisfaction, which are two things that individual companies and the industry as a whole say they are determined to avoid in the future.
After all, the pandemic is far from over, and epidemiologists tell us the probability of future pandemics will always be with us.
Chains are more linear, more prone to disruption at the link level. Networks are more resilient.
Recognising this reality and the need to rethink and reinvent the concept of the supply chain, US trade body The Consumer Brands Association, in partnership with consultants Accenture and Coyote Logistics, are calling for a paradigm shift.
The organization seek a movement away from the concept and practice of supply chains to a new, more agile, robust and resilient system that it calls supply networks.
“Such a change [from supply chain to supply network] is not just semantic,” according to Tom Madrecki, vice president of supply chain and logistics for the Consumer Brands Association.
“Chains are more linear, more prone to disruption at the link level. Networks are more resilient, with built in replication, workarounds, and the complexity to adapt and withstand the unexpected.
"This mindset shift cannot be underestimated, nor can a pervading view of supply chains not just eking out efficiency, but as the basis for market differentiation and growth.”
The supply network paradigm is gaining traction in the CPG industry following the release last month of a major study, 'Breaking the Chain: Supply Networks Not Chains Will Power the Growth in CPG', conducted by The Consumer Brands Association, Accenture, and Coyote Logistics.
Madrecki says that the study included interviews and surveys with CPG executives to assess the future of supply chains and the technologies and trends shaping that future, along with additional research conducted by Accenture and Coyote Logistics.
“The pandemic accelerated conversations that at the time were much more forward-thinking,” Madrecki explains.
“How do you build resilience? How do you adapt to ecommerce grocery growth in every iteration of it?
"How do you leverage big data, end-to-end visibility tools, autonomy and other technologies to source, make, and deliver low-margin products that consumers actually want in a hyper-competitive environment?
"All this with growing sustainability and responsibility expectations, while accounting for shrinking transportation capacity, evolving workforce dynamics and challenges of retailer-manufacturer collaboration?”
Building up resilience with tech
Technology underpins the entire supply network concept, according to the researchers. In the report, they emphasise the synergistic role that technology plays with other key factors like human labour and talent.
“Technology and data underpin so much of this future supply network, but it does not replace labour,” the report says. “A strong foundation of technology is complementary and works to enable more seamless production and movement of goods and services.
“Examples of game-changing technologies include process automation, autonomous vehicles, robotics, drones, artificial intelligence (AI), blockchain, demand planning tools, consumer data sharing platforms, control towers, and other integration platforms across the CPG ecosystem.
"Keeping pace globally will hinge on how well companies incorporate and use new technology, integrating it with irreplaceable human talents.”
While technology is key to improving the supply chain, or network, as The Consumer Brands Association research points out, so too are people and process, which the study also emphasises and which Dr. Kurt Jetta, president and chief analytics officer at US software company Blacksmith Applications agrees with.
Technology and data underpin so much of this future supply network, but it does not replace labour.
Jetta, a 30-plus year CPG and grocery industry analytics veteran, argues that the primary supply chain failure or oversight among CPG companies during the pandemic has been a lack of good demand planning.
This is in addition to not properly using existing data from past disasters to build an adequate enough forecasting regime to better account for spikes in demand like those that have occurred over the last year.
“It all starts with understanding demand and good demand forecasting,” Jetta says. “Technologies like machine learning and AI can be valuable aids in this process but CPG companies need to start at the most parsimonious level with process and capacity.
"Over the years, CPG companies have become a bit lackadaisical when it comes to demand planning, perhaps because CPG has historically been a fairly predictable business from an inventory perspective.”
Consequences of complacency
Jetta suggests that consumer goods companies put a renewed focus on demand planning as part of their supply chain or network revamp efforts, starting with the use of existing analytical procedures available and, if cost-effective, incorporating the new technologies of machine learning and AI into the process.
“The product shortages during the height of the pandemic weren’t a good day for many consumer packaged goods companies in a number of categories,” Jetta says. “We should have been able to better predict the increased demand and acted more rapidly to improve conditions.”
Jetta says that he believes that manufacturers have become too constrained on capacity because of profit margin concerns and need to loosen up from an inventory perspective.
He says that this can be cost-effective with better demand planning, including the use of the appropriate technologies, along with easing a little the focus on just-in-time inventory practices.
Bain & Company agrees with Jetta’s sentiments in this regard. In a recent research paper, Bain consultants Olaf Schatteman, Drew Woodhouse, and Joe Terino call for a return to supply chain resilience, arguing that flexible supply networks help companies minimise the risk of disruption in times of stress.
Over the years, CPG companies have become a bit lackadaisical when it comes to demand planning.
Their findings suggest that investments in supply chain resilience can deliver a 15%-25% improvement in plant output and a 20%-30% rise in customer satisfaction. Further, they advocate a renewed emphasis on using advanced analytics, which they say can improve supply forecast accuracy – demand planning – by 20%-60%.
Many CPG companies are pivoting when it comes to how they view and operate their supply chains in the wake of the Covid-19 pandemic. This is important because, as Bain points out in its study, supply chain disruptions are costly and disasters aren’t going away.
A host of new technologies like those noted in the research from the Consumer Brands Association and its partners offer the opportunity to help CPG companies to get it right – or at least do better – next time around.
Jetta points out that things are close to returning to pre-Covid-19 levels in terms of supply meeting demand in the CPG industry but cautions a major new outbreak of the virus, or another major disaster, could upend things overnight, which is why he advocates the need to elevate demand planning to the top of the list for C-suite executives.