Consumer packaged goods businesses are being faced with several opportunities at the moment. The rise of private label brands, the growth of e-commerce, and a fall in inflation from 2022-23 levels are just some of the reasons forecasters are predicting this market will flourish beyond expectations over the coming years.
However, for smaller companies producing consumer packaged goods, there are pressures that come with these opportunities for growth. Making and moving these items in bulk often creates unexpected overheads and other costs—whether they choose to distribute goods independently or through a third party. In this article, we’ll discuss how SMEs in the consumer packaged goods sector are best placed to keep costs down and boost business growth when it comes to logistics.
What are Consumer Packaged Goods?
Goods used by the average consumer on a daily basis that are routinely replenished or re-purchased, such as food, drinks, clothing, makeup, household cleaning products etc., are known as consumer packaged goods, or CPG for short. These types of products are defined by their frequent use and low cost.
CPGs have short lifespans and limited shelf-lives, unlike more durable goods, e.g: vehicles, consumer electronics, medical equipment, and furniture. Producers of these goods are themselves often referred to simply as ‘CPGs’.
Demand for these products tends to stay constant in most economic situations. But the CPG sector is a competitive one. The market is saturated with CPGs and the customer base is characterized by low switching costs between different providers. Brand loyalty to CPG products also tends to be very limited.
What is CPG Distribution?
Since CPG products are relatively cheap and frequently bought, producers seek to access as wide a customer base as they can. They often do so by distributing to large retailers (e.g. supermarkets) who also have the incentive to provide customers with a diverse range of products.
CPG distribution also involves storage, handling inventory, managing orders and deliveries, as well as returns and product recalls where necessary. Companies in this sector typically choose from three types of distribution channel: direct, indirect, and hybrid.
The manufacturer sells products straight to consumers through their own brick-and-mortar retail store, e-commerce platform, or other means.
The manufacturer uses a third-party ‘middle-man’ at any stage of the supply chain. For instance, retailers buying goods from producers and selling them on to their customers. This could be a supermarket, local convenience store, or even an exclusive grocery store provider.
These use elements of both direct and indirect distribution channels together.
Why is CPG Logistics Important?
Moving products from point A to point B is vital to the delivery of CPG goods, which are repeatedly ordered throughout the business cycle. Logistics, therefore, is one of the key ways in which companies within the industry attempt to cut costs and boost growth.
In a highly competitive market, standing out in a crowded field means CPG companies need to be as efficient as possible. This requires paying close attention to where distribution processes can be optimized.
How Can CPG Businesses Improve Distribution Finances?
For CPG businesses trying to cut costs and boost revenues, there are significant opportunities in their supply chain logistics. But these demand strategies that take time and may feel uncomfortable at first.
McKinsey suggests that the most successful CPG businesses manage their channels effectively by creating a “smaller network” of distribution partners that enables them to “reduce complexity.” It may be that companies will need to experiment with the following methods before they can settle on a sound strategy.
Here are some other tips on how to manage distribution costs and cash flow:
1. Cash Flow Forecasting
Before a CPG company develops or changes its distribution strategy, it can use cash flow forecasting to identify performance, predict future revenues, and establish where there may be cash flow shortages originating throughout the supply chain. From there, the company can see whether to focus on transportation costs, warehousing, inventory planning—or indeed all three, plus other factors.
What’s in a cash flow forecast?
Opening balance: The money a business has at the beginning of a specific period
Cash inflows: The breakdown of receipts by category e.g., revenue, investments, loans, or other cash receipts
Cash outflows: The breakdown of payments by category e.g., materials, rent, utilities, inventory purchases, taxes, or other cash outgoings
Net movement: The subtraction of total outflows from total inflows
Closing balance: The net movement added to the opening balance, calculating total cash remaining at the end of the forecast period
2. Purchase Order Financing
CPG companies often deal with high levels of demand, even in an oversaturated market. In the US, the market was worth $361.7 million in 2022. But to scale logistics and production to meet demand often requires upfront investment, which may not be possible for a small, growing CPG business.
Purchase order (PO) financing has been used by many CPG companies to fund growth. Specifically, this provides business with capital upfront to pay supplier partners for each purchase order. This covers the upfront cost of production, allowing the company to repay the finance provider at a later stage. For instance, when they have received payment from the end-customer.
PO financing therefore frees up additional working capital for CPG companies in the short-term, which they can then use to invest in making distribution operations more efficient.
3. Factory Direct Shipping
Earlier, we discussed direct distribution for CPGs. An example is factory direct shipping, where consumers buy goods straight from the manufacturer. This allows companies to cut costs by using smaller stock-keeping units (SKUs) for various products. When quantities of goods are smaller, they can be more easily shipped directly to the customer, and do not need to be sent to an external distribution center (DC).
However, in order to deploy this strategy, the companies need enough space in their HQs or factories that can store large quantities of these products, even though they are smaller. It also means using effective systems, such as inventory management software, to match demand with available supply. As soon as additional space is required due to high demand, it offsets the savings that companies make from factory direct shipping by avoiding charges from further receiving, storage, and processing costs.
4. Fourth-Party Logistics
CPG companies have long used third-party logistics providers (3PLs) to optimize distribution. This falls under ‘indirect’ distribution, but it has historically presented opportunities to save money by letting producers coordinate with retailers. However, a more recent trend is the use of fourth-party logistics (4PL) services. These providers organize the supply chain through a network of 3PLs.
The benefits of 4PL include faster fulfillment, operational efficiencies and reduced costs. They let CPG companies cut back on overheads by bundling services, such as reverse logistics, warehousing, and inventory management. The key drawback of this approach is that it gives the producers only a small fraction of control of the CPG logistics process.
Also known as onshoring, inshoring, or backshoring, reshoring is the reverse of offshoring. CPG companies (both large and small) who outsource manufacturing overseas in an attempt to reduce the cost of production can instead reduce the size of the supply network. From there they can bring each link of the supply chain much closer to where they are.
This allows the business to speed up the movement of products. It also has the advantage of helping to boost customer satisfaction: delivery times are shorter and returns are processed and fixed faster. Customers may then be more likely to stay loyal, especially if they see that the goods they are buying are locally-sourced.
Get flexible financial support from Setscale
Setscale’s non-dilutive PO financing can support small and growing CPG businesses trying to keep their momentum. Our solution finances individual purchase orders and enables CPG companies to better manage cash flow and working capital, which can help these companies to make a big impact on the cost of distribution. Plus, we don’t get paid until you do.