The dizzying growth in e-commerce has wreaked havoc on CPG supply chains. Here’s how companies can tackle channel proliferation and meet customers’ rising expectations.
E-commerce grew an astounding 35% during the COVID-19 pandemic, and that growth shows no signs of slowing. In the six months ending January 31, 2021, online sales of home goods surpassed physical sales for the first time. Apparel and electronics also saw step-change increases, and laggard categories like pet care, household care, and groceries reached online penetration of 10% or more—a tipping point in e-commerce growth.
Yet many of the largest brands have been unprepared for the rapid shift to digital sales. Makers of consumer packaged goods are now scrambling to supply the proliferation of channels, as retailer and consumer expectations regarding product choice, availability, and delivery times have escalated. All of this is taking place against a backdrop of demand volatility, inflation, and labor shortages.
As CPGs begin to capitalize on this unprecedented acceleration in growth, many are confronting the sobering reality of their supply chain limitations—limitations that have quickly become a barrier to profitable growth. More than a logistical problem, these constraints highlight the competitive significance that supply chain management has taken on in the digital era.
The Big Squeeze
The expectation that consumers will receive their products faster no matter how and where they get them has risen dramatically over the past decade. (See Exhibit 1.) Long before COVID, CPGs were already facing a triple whammy of increasing costs, fatter inventories, and declining service levels, according to a BCG study. Those trends prompted companies to double down on cost efficiencies. Indeed, it was the push for scale and efficiency rather than differentiated assets and flows that fueled distribution and network consolidation in recent years. Then, when COVID triggered the explosion in e-commerce growth, CPGs were structurally unprepared to serve the proliferation of distribution points that arose, especially at the speed and scale that retailers and consumers demanded.
As major brick-and-mortar retailers try to fend off Amazon, they are imposing increasingly complex requirements on CPGs.
For decades, CPGs designed their retail supply chains for full trucks and full pallets. Goods left their distribution centers, destined first for the retailer’s distribution center and then for retail stores. Today, the last mile is the responsibility of the retailer, the peer-to-peer delivery startup, or even the CPG. Thus, in a relatively short period, companies have gone from a few deliveries per week to a handful of retailer distribution centers to almost daily deliveries to hundreds of fulfillment centers and dark stores. (See Exhibit 2.)
While many major online retailers and category-specific entities (such as Wayfair and Chewy.com) venture into other channels, CPGs are likewise aggressively pursuing online growth beyond omnichannel retailers, including marketplaces such as Amazon (as both first-party and third-party purveyors) and their own direct-to-consumer channels.
Is it possible to compete in all channels without sacrificing market share or profitability—and if not, how do you prioritize? Should you aim to score A+ on some and B+ or even B- on others? Or shoot for a B on all? How to decide appropriate delivery speed times—knowing that, with algorithms monitoring stockouts and dictating page placement, “slow” could be too late?
Even with the advent of new tools and technologies, most CPG supply chains still fall short because they were wired for brick and mortar, not for the labyrinthine complexities of omnichannel e-commerce. Rather than follow a monolithic approach, a CPG’s e-commerce supply chain needs to be segmented into several distinct supply chains. CPGs must balance assortment tradeoffs, lead times (for order fulfillment and transit), and their delivery capabilities against the need to maintain market presence. (See Exhibit 3.)
Four Key Design Moves
The complexity of the e-commerce supply chain can be mind-boggling. We’ve distilled four design moves that are helping leading CPGs rein in complexity.
1. Align the Commercial and Supply Chain Functions
Companies have traditionally focused on the demand side, expecting the supply chain to dutifully keep up. But that legacy relationship no longer serves CPGs well. Managing today’s complex requirements calls for a more interactive, integrated relationship between the commercial and the supply chain functions. In both short- and long-term network and capacity planning, information flows, assumptions, and projections must be transparent and each side’s needs and resources clearly and regularly communicated.
As a first step, the commercial side needs to articulate its strategic aims and choices—that is, its omnichannel customer promise and growth aspirations—to the supply chain side. Commercial then needs to incorporate those choices into the retail customer promise by channel, product category, and region. In turn, the supply chain side must clarify its capabilities and requirements to the commercial side.
Once these requirements are defined, CPGs need to translate the customer promise into strategic supply chain requirements that will govern future fulfillment choices. The supply chain side should prioritize and spell out each fulfillment choice, weighing the following factors: the inventory strategy; the changes necessitated in physical assets (such as distribution centers); the changes in processes (such as moving to an agile, three-day sales and operations execution planning cycle); and the digital and organizational capability gaps that must be filled. Then the supply chain can weigh in on the feasibility and the total cost economics of the various fulfillment choices—and iterate with commercial on the strategic requirements until they are aligned. We think of this approach as “sales and operational dynamics.”
2. Understand the Business Case Economics Across Fulfillment Choices
Next, CPGs need to develop a rigorous, holistic model to map supply chain strategy scenarios to concrete business outcomes on an ongoing basis. This will help them analyze such questions as: How will fulfillment design choices affect year-over-year case or unit-cost fulfillment trends? How will they affect working capital and capex investment needs? What are the tradeoffs between cost and customer promise within and across the channels? As costs rise, how are consumers and customers adjusting their buying choices? CPGs need to formulate a way to link supply chain business case outcomes to the annual financial business-planning process. Such a linkage will allow a P&L-level view, which, in turn, can inform, align, and validate the overall fulfillment strategy.
3. Reconfigure Your Distribution Design
CPS must ask themselves: How much capacity do we need (in throughput and space), and how distributed is our network? Is our physical network configured in a way that can support future capacity growth while supporting each channel’s distinct pick-and-pack and flow path requirements? Meeting a one- or two-day lead time for replenishment at a retailer’s upstream consolidation mixing center requires an entirely different kind of setup than the one needed for building mixed totes to replenish a customer’s dark stores or for delivering directly to the retailer’s e-commerce fulfillment centers. So to design a robust, flexible network, CPGs need to understand how their key retailer customers are transforming their fulfillment models.
4. Build No-Regrets Capabilities
Developments since COVID struck have unfolded so quickly that companies have hardly had the chance to gain any historical perspective. Still, it’s important to not wait too long to shore up supply chain strengths. If your biggest customer rolls out a new program and your competitors are already onboard, don’t assume the retailer will give you time to catch up. Still, it’s inadvisable to move precipitously, without sufficient analysis and evaluation. Course corrections can be costly, as some high-profile brands have learned the hard way.
Forward-looking companies from across CPG sectors are pursuing four no-regrets moves, integrated through the central supply chain system. (See Exhibit 4.)
Improving demand-forecasting capability. Many companies are implementing automated systems that capture and leverage multiple demand signals. Leaders are increasingly able to combine macro trend data with trade data to drive improved store- and SKU-level forecasting. This enables them to deploy products more efficiently at the omnichannel retailer’s shelf to boost sales and enhance consumer’s experience.
Optimizing inventory-planning systems. The complexity of serving many retail customers with their many requirements calls for strong inventory-planning capabilities. The ability to analyze forecasting inputs and optimize inventory levels and update the results in real time.
Streamlining order management. In addition to having systems connected with retailers to continuously provide and receive demand and inventory information. CPGs can boost order management efficiency through analytics. Analytics can do a lot. They improve the approach to replenishment (segmenting by customer as well as by product). They also help companies make more informed decisions—for example, in weighing the tradeoffs between speed and efficiency (truckload size) in getting at-risk products (such as those out of stock on the store shelf) to the customer.
Developing an advanced distribution network model. A multi-echelon model (such as having centralized warehouses as a fallback to support spoke warehouses closer to the end customer) helps CPGs get the most out of their end-to-end spending. It also allows them to regularly evaluate and fine-tune network performance based on different demand and lead time scenarios.
The COVID-19 pandemic sparked a meteoric shift to online shopping. This is creating unprecedented opportunities for CPGs to build market share and grow. Get supply chain right, and it will become a powerful revenue enabler.
The above is an abbreviated version of our BCG article. Read the full length article here