The COVID-19 pandemic has changed how we live, work and, most notably for consumer goods manufacturers, the way we shop. And it has forced brands and retailers alike to adapt their business models and supply chain practices.
Shoppers showed that they were largely ready to make the switch to online consumer packaged goods (CPG) purchasing last spring. Research from McKinsey & Company found that most categories of consumer products saw 10% growth in their online customer base, with no sign of retreating after the pandemic dissipates.
Even digitally laggard sectors such as grocery expanded their online presence for shoppers. The industry previously reported that roughly 3% of transactions occurred online pre-pandemic, but witnessed a massive 76.2% growth in 2020.
Retailers have received that message. The space's largest stores have begun touting impressive omnichannel options, meeting end customers through their preferred purchasing method. Whether that be click-and-pick options, direct customer delivery, or strictly in-store purchases, the most forward-thinking retailers are determined to have product on hand however their customers choose to shop.
To support these goals, retail outlets have increased their expectations for suppliers. Chargebacks didn’t relax in 2020, and in some cases were dialed up. As a result, the supply chain strategies that spurred growth for CPG brands will no longer provide the same revenue support that they once did.
Out-of-Stocks Raise Stakes
The driving motive behind changing supplier fulfillment expectations is the hopeful elimination of out-of-stocks. The phenomenon has historically hovered around 8%, and costs retailers somewhere in the neighborhood of $1 trillion per year in lost revenue. And while there hasn’t been any large-scale study conducted in the last couple of years, we can confidently assume that those figures have only increased during COVID-19.
Retailers aim to reduce the risk of out-of-stocks by transferring the fulfillment burden to their CPG supplier partners, through fines for missed appointment times or short orders. But suppliers are also feeling the pinch from out-of-stocks during the time of COVID-19. Organizations in that sector are now noticing that this is a problem worth addressing.
The Consumer Brands Association, in conjunction with the Council of Supply Chain Management Professionals and Iowa State University, released a report focusing on the challenges affecting the CPG supply chain. Among other issues, it found that truck transportation makes up the largest share of order cycle time variability, directly affecting inventory levels, out-of-stock costs, and on-time delivery. This report’s authors conclude that the changing nature of commerce requires strict attention to out-of-stocks and their effects on customers.
The fight for shelf space has been simmering in the CPG sector for the better part of the last decade, with disrupters continually emerging, and venture-capital interest propelling up-and-comers to the forefront. Again, the pandemic has only served to exacerbate this trend.
Retailers are continuing to tighten SKU counts to ensure that the most popular products remain in stock, further narrowing the competitive window for suppliers. And as more consumers shift to online options, retailers have signaled that they don’t intend to lose revenue on transactions, causing product substitutions to become commonplace. These product swaps create an environment in which anytime a CPG brand's product isn’t in stock, it can be swapped out for that of a competitor.
Importance of On-Time Delivery
The combination of numerous factors, such the attention paid to out-of-stocks and increasingly intense industry competition, has dramatically raised the stakes for CPG brands working with retail customers. Timely delivery is no longer just an aspiration; it’s a necessity for growth in today's world of commerce. Not only does on-time delivery eliminate penalties for non-compliant deliveries, such as Walmart's fine of 3% of the cost of goods sold, but it’s also become a clear differentiator for CPG brands.
Companies can gain a serious advantage over their competitors just by being in stock and on the shelf. Delivering orders on time saves suppliers' bottom line from costly replacement transactions, and builds brand loyalty from end customers. But potentially more importantly, it sets up brands to succeed in their retail relationships.
Retailers have demonstrated that they want to work with reliable brands. In a world where out-of-stocks have entered the mainstream conversation, big box outlets don’t want to work with companies that fail to effectively handle their retail logistics function.
In a survey of retail buyers, 100% of respondents stated that a supplier's ability to deliver products on time impacted their willingness to work with them. Furthermore, 73% of respondents in that same survey explained that they had ended a relationship over delivery issues.
As previously mentioned, transportation represents a disproportionate share of the reason for late delivery. It also accounts for the largest single share of supply chain costs, at approximately 40%.
It’s an expense that will be a part of budgets in perpetuity, so it’s time for all parties involved to start viewing it differently. If an organization aims to succeed in the consumer goods sector, logistics should be considered an investment, not just an expense. After all, it can be wielded as a strategic differentiator that separates a brand from its fiercest competitors, to pay dividends down the road.
Retail delivery is a complex undertaking, with strict appointment times and rigid receiving hours. Entrusting your most valuable shipments to just any carrier isn’t the winning formula for keeping up with your most important customers. With so much on the line for CPG brands, they must optimize their supply chain function to meet their retail partners' needs.
Andrew Lynch is cofounder and president of Zipline Logistics.
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