Retail and Consumer Product Goods

Executive Summary

The retail and consumer product goods (CPG) supply chain is a complex world divided between large retailers establishing integrated supply chain practices with manufacturers and wholesalers, and smaller specialized retailers emphasizing customized or unique products and services delivered in a  Just-In-Time (JIT) manner to their customers.

The desire to react more rapidly to an ever-more demanding and less loyal customer, ever shortening profit and product life cycles, global sourcing to low cost countries and the need to avoid even smaller gross margins across the CPG supply chain are the key factors for developing logistics and supply chain management (SCM) collaboration models.

Measurement of logistics and SCM key performance indicators (KPI) is an essential part of the global supply chain CPG collaboration concept. The two most preferred KPI measured by North American (NA) CPG lean manufacturers are logistics and SCM JIT related (on-time delivery and inventory turns) while traditional lean floor plant measures, such as cost per unit and manufacturing cycle time, are far behind⁴.

It is estimated that 37 percent of NA firms that put in place corporate wide measurement of logistics and SCM KPI achieved a decrease of 15 percent or more in shipment delays compared to only 7 percent of firms that do not measure those KPI consistently¹.

While inventory turns is the main KPI for evaluating supply chain agility, logistics cost KPI allow firms to evaluate the efficiency of their logistics and SCM operations. The combination of supply chain agility and efficient SCM practices is key to long term competitiveness and prosperity of Canadian firms in a global supply chain (GSC) context.

Inventory Turns

Between 1999 and 2003, Canada was behind its U.S. neighbour in a proportion of 30 percent to 40 percent in terms of inventory turns. This is a major productivity gap between the two countries.

Inventory turns remained at the same level in the retail sector, both in Canada and in the United States, between 1999 and 2003, like in the wholesale sector. The Manufacturing sector increased its inventory turns by more than 20 percent between 1992 and 2005 while wholesale and retail inventory turns were stable. This means that the inventory was not moved from the wholesalers to the retailers, and that a real productivity increase occurred in the Manufacturing-Wholesale-Retail supply chain⁹.

It is important to note that 63 percent of NA CPG firms that are part of supply chain collaborative initiatives do not measure the value of these initiatives at all³. The lack of measurement and understanding of the benefits of collaborative KPI, such as sales increase, stock-out ratios and inventory management across the CPG value chain, can have an important impact on the innovation and productivity of the Retail and CPG sector.

Logistics Costs

Canada has total and internal logistics costs in Retail that are, respectively, 16 percent  and 19 percent higher than in the U.S.. On the other hand, the U.S. Retail sector outsources more logistics activity, by a ratio of three times, than the Canadian Retail sector¹³.

For the third cost component, Canada’'s retail sector has a larger inventory carrying cost than the U.S. by 31 percent. This is explained by the fact that Canadian firms have lower inventory turns compared to their U.S. counterparts¹³.

Technology and Investment

SCM technology adoption is still at an infancy stage in Canada; only 14-19 percent of Canadian CPG Manufacturers implemented new logistics and SCM processes between 2002 and 2004²¹. In order for CPG firms to achieve the benefits of their respective logistics and SCM collaboration drivers, the adoption of logistics and SCM technology and processes across the supply chains is a key component for developing efficient collaboration networks.

The risk level of investing in logistics and SCM technology and processes is still limited and firms do achieve concrete improvements from them. More than 65 percent of NA initiatives to reduce inventory and assets required, or to improve supply chain flexibility, either met or exceeded initial expectations (only 3 percent of them failed) while 80 percent of NA CPG and Retail sectors that implemented a Lean logistics strategy  saw a decrease as per or above expectations in SCM costs⁴.

Although the logistics and SCM technology investment level has been low in Canada, the Retail sector is starting to respond to the increase in complexity of logistics and SCM by increasing their investment into value added distribution centers and freight terminal infrastructure. Canadian retail investments in warehousing and freight terminals increased by more than 222 percent from 2001 to 2003⁷.

In order to benefit from the productivity of logistics and SCM, individual firms must develop their own personal roadmap. It would consist of documenting the long-term perspective into specific action items linked to deliverables, performance indicators objectives, returns on investment and a project time frame.