In the consumer packaged goods (CPG) industry, shrink is a pervasive issue that can greatly impact a brand’s profitability and market presence. While spoilage and damage are well-known culprits, an often-overlooked aspect of shrink is the tendency for distributors to pull in too much inventory. This can lead to significant spoilage, waste, and financial loss throughout the supply chain. In this article, we explore the issue of excess inventory, its causes, and best practices for aligning production and shipping with a brand’s go-to-market strategy.
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Understanding Shrink: Excess Inventory and Its Impact
Shrink refers to the reduction in inventory not accounted for by sales, often due to spoilage, damage, or theft. For CPG brands, excess inventory pulled in by distributors can lead to increased shrink through spoilage and waste, disrupting the supply chain and harming profitability.
Key Areas of Shrink Due to Excess Inventory:
- Warehouse Shrink: Spoilage and damage due to overstocking.
- Distributor Shrink: Spoilage and loss at the distributor, including transportation and storage issues.
- Retailer Shrink: Spoilage and damage from overstocked products on shelves.
Warehouse Shrink: The First Line of Defense
Excess inventory often begins at your warehouse, where products are stored before distribution. Overstocking can lead to spoilage and damage, exacerbating shrink.
Causes of Warehouse Shrink:
- Overstocking: Minimum order quantities on slow moving goods can lead to an overstock situation. Ensure that the production runs are right-sized with demand.
- Poor Rotation Practices: Failure to follow FIFO (First In, First Out) leads to older stock expiring.
- Inadequate Storage Conditions: Overcrowded warehouses can result in damage and spoilage.
Solutions:
- Optimize Inventory Levels: Use data analytics to determine optimal inventory levels based on demand forecasts.
- Implement FIFO: Strictly enforce FIFO practices to ensure older products are shipped out first.
- Work with 3PL Partners who Invest in Technology: Ensure your 3PL utilizes inventory management systems to track stock levels and rotation.
Distributor Shrink: The Middleman’s Challenge
Distributors pulling in too much inventory can result in significant shrink. Overstocked products are at higher risk of languishing in the warehouse and spoiling.
Causes of Distributor Shrink:
- Excess Inventory: Distributors ordering more than needed leads to prolonged storage and increased risk of spoilage when the distributor cannot fulfill their shelf-life guarantees to the retailers they serve.
- Inadequate Handling: Excess ordering from all suppliers can lead to overcrowding and mishandling during receipt.
- Extended Transit Times: Overloaded schedules can cause receiving delays, increasing fulfillment risk.
Solutions:
- Align Orders with Demand: Work with distributors to align orders with actual demand and sales forecasts.
- Efficient Routing: Optimize logistics to reduce transit times and minimize delays.
- Temperature-Controlled Logistics: Ensure proper temperature control during transport to prevent spoilage - work with 3PLs to ensure they maintain temperature regardless of delays.
Retailer Shrink: The Final Hurdle
Excess inventory pulled in by distributors often results in short-aged product on retailer shelves, leading to spoilage and damage. This not only wastes resources but also affects the consumer experience.
Causes of Retailer Shrink:
- Overstocking at the distributor: This ripples down to the shelf as the product has been aging in the distributor's warehouse.
- Poor Shelf Management: Improper rotation and handling at the retail level.
- Inadequate Storage: Retail storage conditions may not support the excess inventory, leading to spoilage.
Solutions:
- Collaborate with Retailers: Ensure retailers are aligned with demand forecasts and inventory levels.
- Shelf Rotation Policies: Implement strict stock rotation policies to reduce spoilage.
- Regular Audits: Conduct regular audits to monitor stock levels and shelf conditions.
Best Practices for Aligning Production and Shipping with Go-to-Market Strategy
To effectively manage shrink and prevent excess inventory, CPG brands need to align their production and shipping schedules with their go-to-market strategies. Here are some best practices:
- Demand Forecasting:
- Data-Driven Insights: Use advanced analytics to forecast demand accurately.
- Collaborative Planning: Work with distributors and retailers to align forecasts and orders.
- Production Scheduling:
- Flexible Production: Implement flexible production schedules that can adapt to changes in demand.
- Batch Production: Produce in smaller, more frequent batches to reduce the risk of overstocking.
- Shipping Cadence:
- Just-In-Time Delivery: Use just-in-time delivery models to minimize inventory levels.
- Optimized Logistics: Optimize shipping routes and schedules to ensure timely delivery.
- Inventory Management:
- Real-Time Tracking: Implement real-time inventory tracking systems to monitor stock levels.
- Inventory Turnover: Focus on increasing inventory turnover rates to keep products fresh.
Conclusion: Securing Your Supply Chain from Shrink
Shrink due to excess inventory is a growing problem in the CPG industry that requires a strategic approach to mitigate. By understanding the causes of shrink and implementing best practices for aligning production and shipping with your go-to-market strategy, you can reduce losses, improve product quality, and enhance operational efficiency.
Ready to Combat Shrink in Your Supply Chain?
At Modus Planning, we specialize in helping CPG brands tackle the challenges of shrink through cross-functional planning. Contact us today to learn how we can assist you in aligning your supply chain processes and ensuring your products reach consumers in the best possible condition.