CGN Edge Blog

Inventory Management and Its Essential Role in CPG Success

April 29, 2019 Posted by: Nandika Gogineni

Understanding CPG and Its Trends

Consumer packaged goods (CPG) are relatively fast moving, requiring routine replacement or replenishment, such as food, beverages, clothes, tobacco, makeup, and household products. The CPG industry is one of the largest industries in North America, with an average annual value exceeding $2 trillion (Investopedia). Some key statistics of the CPG sector today, according to the consumer products investor report, are as follows:

  • 50% increase in the number of SKUs, over the past 7 years
  • 10% average increase in annual return for shareholders at US CPG companies, over the past 25 years
  • 18% of recent industry growth that can be attributed to China, India and Indonesia, 30% market share is expected by 2020

The consumer goods industry is in a period of rapid change, as a result of four mega-trends:

  • Technology Dominance: Universal Omnichannel, Accessibility of IOT, AI, Machine learning
  • New Consumption Patterns: Sharing economy, Health & wellness, Hybrid consumer
  • Relationship with media: Consumer engagement, Social media influences, Viral marketing
  • Socioeconomic Shifts: Hyper urbanization, rise of millennials, rising income inequality

These trends have led companies to produce more SKUs with shorter product lifecycle for the digital-savvy consumer, which in-turn has led to disruptions in their supply chains and increased inventory costs.

Typical Challenges in CPG Inventory Management

Generally, high variability is observed in CPG’s supply chain downstream, mostly due to complex demand patterns, dictated by customer buying behavior and seasonality trends in the market. This leads to ripples in the upstream supply chain resulting in longer lead times, stockouts, and poor responsiveness. The conventional inventory planning strategy for most of the industry is built on local planning practices. This type of inventory planning leads to the following challenges:

  • Low product turnover
  • Excess Inventory
  • Failure to keep track of stock
  • Poor service levels
  • Difficulty identifying demand patterns
  • Lack of visibility, no real-time data on inventory statuses

To overcome these challenges, individual planning islands should be replaced by enterprise optimization capabilities that look at demand signals coming from retailers or point-of-sale data; and set the inventory levels for each product to help CPG mitigate the risk of excess inventory resulting from the “bullwhip effect”.

Orchestrating Dynamic Inventory Management: A Requirement for CPG Success

Fast paced nature of the CPG supply chain coupled with demand volatility calls for a Dynamic Inventory Management (DIM) solution, which is aimed at improving the planning and replenishment of the supply chain inventory to meet customer service, improve cash flow, and profit margin.

A DIM solution can be designed to augment existing ERP, legacy systems by:

  • Combining demand forecasting, demand sensing, and inventory planning/management
  • Incorporate data and operational analytics to observe seasonality behaviors and capture right variations
  • Conducting simulations for multiple service level options when calculating safety stock
  • Utilize reporting options, to track progress of service levels, and simulation graphs in policy planning sessions
  • Assess inventory reduction opportunities by determining the optimal inventory at the end-item (finished good) level
  • Real-time analytics determining optimal service levels, demand variation, supplier lead times, batch size

This design will help manage inventory at optimal levels — providing the potential to reduce carrying and logistical costs, while improving asset utilization and inventory performance.

Inventory Management: A Phased Approach

CGN assists CPG companies in their inventory management and planning challenges. Our framework is designed to improve the inventory planning process and fill rates, leading to reduced inventory holding costs.

Our Framework for CPG Inventory Management