Resources  /  Blog  /  How Strategic Sourcing Can Help the CPG Industry
Sourcing Education

How Strategic Sourcing Can Help the CPG Industry

January 12, 2021

The typical person may not know offhand what CPGs are (consumer packaged goods), but you can bet they interact with them every day. The CPG industry produces everyday items. These are the products you find in grocery stores, big-box stores, hardware stores, and convenience stores. People increasingly buy them online.

The CPG industry creates the type of products that people use every day and constantly replace as they run out. They are everything from food items like cereal, candy, frozen foods, and soda to household products such as toilet paper and even pre-packaged clothing like socks.

CPGs tend to be the sort of everyday household items you find stocked on store shelves and even vending machines. Something like a car or refrigerator is a big-ticket, durable product—these don’t fall under the CPG umbrella.

The CPG industry covers a vast market that encompasses many of the products we buy and use daily. How vast? According to data published by the U.S. Department of Commerce, the American CPG market is the world’s largest. In 2019, it was valued at $635 billion.

How to Remain Profitable in the CPG Industry

With a market that large and with so many retail partners, the CPG industry is a highly complex one.

Producing consumer packaged goods can be profitable—you wouldn’t have so many multinational companies growing out of the industry if that wasn’t the case—but it can be challenging.

Many CPGs are highly perishable.

      • The battle for prominent shelf space in stores is fierce and expensive.
      • Marketing is costly.
      • Shipping and distribution is a major undertaking that’s greatly complicated by the short shelf life of many products and the vast network of omni-channel retailers. These can be located across the country (and across the globe, for that matter) and range in size from superstores to neighborhood bodegas.
      • The raw materials for CPGs are often sourced globally, so securing supplies in sufficient quantities and getting them safely to production facilities takes considerable effort and coordination.

All of these challenges are on the production and retail client side. End customers—consumers—are another part of the equation. They need to be convinced to pick a specific brand over the competition. Unfortunately, consumers are easily persuaded to switch brands due to factors like lower pricing or an effective ad campaign. Many retailers have taken advantage of this lack of brand loyalty by releasing their own white-label (or no-name) versions of popular CPGs.

On the plus side, consumers are unlikely to change their spending allotment on CPGs during a recession or tough economic times. When someone loses their job, they’re probably going to hold off on buying a new TV. However, they’ll continue to buy milk and bread.

How do companies carve out a niche for themselves and then become a big player in the highly competitive consumer packaged goods industry? How do they remain profitable? Marketing executives would make the case that spending big on advertising campaigns is critical. Brand awareness brings customers, and they are willing to pay more for a product they recognize and perceive to be better than the alternatives.

That logic is sound enough, but there is a critical functional unit within all CPG companies that has a considerable influence on profitability: procurement. When you think about it, the sourcing team for any of these CPG companies has an impact on everything from the quality of the product, to the break-even price, to the availability. The actual production of the finished product is just the final step that starts with a supply chain. Marketing boils down to the promotion of that finished product. Procurement is like the 90% of an iceberg that’s out of sight, below the water.

If you ask the sourcing team at a CPG company, they know this. Chances are, they are under incredible stress because of it. The only way to manage this huge degree of responsibility is through strategic sourcing. And the key to strategic sourcing is software that works. That software is designed for the procurement industry by the procurement industry, not off-the-shelf software that’s used because it’s better than nothing.

Strategic sourcing means companies develop relationships with their suppliers. Negotiation isn’t based solely on price; it takes a much more nuanced approach, including factors like the various suppliers’ reputation for quality, their record for meeting deadlines, plus variables like currency fluctuations and supply shortages. Strategic sourcing accounts for requirements like food handling safety regulations. It ensures that all communications between the procurement team, company representatives placing orders, and suppliers are all accessible. It offers the transparency to be able to quickly and easily trace every step in the supply chain—from bidding to delivery at the production facility. It offers the opportunity for collaboration.

Ultimately, strategic sourcing saves money, making CPG companies more profitable and giving the maneuvering room to reduce prices if needed to build market share.

However, without software designed specifically to support and enable all these critical elements of strategic sourcing, the procurement team at any CPG company is going to be under constant stress and unable to maximize their contribution—that’s where Arkestro comes in.

Strategic Sourcing and Predictive Procurement: The Key to Procurement Success

That logic is sound enough, but there is a critical functional unit within all CPG companies that has a considerable influence on profitability: procurement. When you think about it, the sourcing team for any of these companies has an impact on everything from the quality of the product, to the break-even price, to the availability. The actual production of the finished product is just the final step that starts with a supply chain. Marketing boils down to the promotion of that finished product. Procurement is like the 90% of an iceberg that’s out of sight, below the water.

If you ask the sourcing team at a CPG company, they know this. Chances are, they are under incredible stress because of it. The only way to manage this huge degree of responsibility is through strategic sourcing. And the key to strategic sourcing is using a platform that works.

Strategic sourcing and predictive procurement means companies develop relationships with their suppliers. Negotiation isn’t based solely on price; it takes a much more nuanced approach, including factors like the various suppliers’ reputation for quality, their record for meeting deadlines, plus variables like currency fluctuations and supply shortages. Strategic sourcing accounts for requirements like food handling safety regulations. It ensures that all communications between the procurement team, company representatives placing orders, and suppliers are all accessible. It offers the transparency to be able to quickly and easily trace every step in the supply chain—from bidding to delivery at the production facility. It offers the opportunity for collaboration.

Ultimately, strategic sourcing and predictive procurement save money, making CPG companies more profitable and giving the maneuvering room to reduce prices if needed to build market share.

However, without software designed specifically to support and enable all these critical elements of strategic sourcing, the procurement team at any CPG company is going to be under constant stress and unable to maximize their contribution—that’s where Arkestro comes in.

What’s the Competitive Advantage of Predictive Procurement Orchestration?

It’s one thing to read about the advantages of strategic sourcing software in the CPG industry. It’s another thing to see it in action. Once you’ve seen the comprehensive supplier management and AI-powered Intelligent First Offers in action, you’re never going to want to go back to general-purpose solutions again. Milk and bread are always going to be necessary, and as we have seen, toilet paper may periodically be hoarded.

Arkestro is a Predictive Procurement Orchestration Platform that can help break down the nuances of sourcing CPGs and the vast CPG market. Book your Arkestro demo today to start getting better quotes faster.