How CPG Companies Can Survive the Inflation Shock
- Record inflation has forced many consumer goods companies to increase prices
- To avoid passing on increased costs to consumers, CPG companies must move beyond traditional cost models that aren’t dynamic enough'
- They should leverage AI-powered should-cost modeling tools that can update data with changing market conditions
March 25, 2022 | Procurement Software
Soaring inflation is set to compound the problems for consumer-packaged goods (CPG) companies already struggling to manage supply chain disruptions, excess demand and the impact of the Russia-Ukraine war.
Annual inflation in the U.S. was 7.9% in February -- the highest in 40 years -- while in both the E.U. and the U.K., it rose to 6.2% in February.
Many CPG companies have not witnessed such situations before and now face new business dilemmas amid unprecedented rise in input costs of raw material and energy prices.
Top CPG brands such as Clorox, Hershey, Mondelez and Procter & Gamble have announced plans to increase prices. Some brands are pulling back on offering discounts.
Increasing CPG prices are bound to change purchasing behavior and dampen demand. 90% of consumers, in a Numerator survey from 2021, said they would change their shopping behavior if prices increased further.
Colgate expects its sales volumes to fall as prices rise.
According to IRI’s CPG Market Review and Outlook, ‘price will drive growth in 2022’ amid increased mobility and lower at-home consumption volume due to inflation.
Are there any levers that CPG companies can pull to ease the cost pressures and keep the input costs under control?
It’s all about cost visibility
To effectively manage inflation, it’s important for CPG companies to get complete visibility into all costs across their product categories.
Effective cost modeling can provide a breakdown of the total cost including raw material, labor, equipment, freight, overhead and profit.
Why real-time cost updates matter
To have accurate cost estimates, CPG companies cannot continue to rely on traditional cost models that are not dynamic enough to update with changing market conditions.
Instead, they must leverage a tech-enabled should-cost model that can update costs on an ongoing basis.
Cost modeling helps to arrive at the most effective way to produce or purchase a product or service in the marketplace.
Digital platforms with cost modeling capabilities help procurement teams counter cost pressures in their supply chain.
Cost models can also be developed at supplier levels. Such a model can drive better negotiation and help companies benchmark their suppliers vis-à-vis their operational efficiencies. It can also identify suppliers with structural cost advantages and help in improving volume allocation.
How to achieve granular cost visibility
Advanced procurement and supply chain technology provides a powerful, unified platform with built-in cost modeling and forecasting capabilities, supported by artificial intelligence and advanced analytics.
The platform provides comprehensive spend visibility and analytical reporting with detailed breakdown of total product costs.
Learn more about how GEP can help in should cost modeling and cost control.
