Launching a Counterattack on Rising Commodity Costs

In the current commodity bull market, consumer products companies face increasing margin pressure. Consumers are demanding value — increasing competition from private label and restricting manufacturers’ ability to pass along rising raw materials costs.

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In the current commodity bull market, consumer products companies face increasing margin pressure. Consumers are demanding value — increasing competition from private label and restricting manufacturers’ ability to pass along rising raw materials costs. At the same time, consumers are seeking new products that offer greater nutrition, more convenience, fast fixes and far more customization. For many consumer product (CP) companies, meeting consumer expecta­tions to hold prices steady while investing in developing innovative products is putting continued pressure on profits.

According to a recent Consumer Goods Technology (CGT) study, while some are forging the way with price increases or reductions in product size, many are still cautious about the potential success and sustainability of these measures. In fact, the study revealed that while most hesitate to impact attributes visible to consumers, a new focus on non-product-related costs is emerging.

In most consumer products organizations, non-product spend represents upwards of one quarter of revenue. CP leaders are now discovering that posi­tively impacting just one percent of this spend — which has historically gone “under the radar” due to highly fragmented ownership across business units, geographies and other budget areas — can unlock millions of dollars in capital for reinvestment into the business.

26.9% of CPG company revenues go to non-product purchases such as:

  • Marketing Services
  • Logistics
  • IT/Telecom
  • HR Services
  • Construction & Capital Equipment
  • Secondary Packaging
  • Rent/Real Estate/Banking
  • Professional Services
  • Utilities
  • Facility Services
  • MRO
  • Travel

The Challenge: Capturing the Value

The challenge for many consumer products companies is in how to capture this op­portunity. According to the same CGT study, 51 percent of consumer products companies have fewer than 20 people in their procurement departments. With most of these resources focused on raw materials, companies typically lack a robust infrastruc­ture — made up of specialized and dedicated people, processes, technology and market intelligence — to fully capture the savings potential across each of the major non-product categories. Building such an infrastructure can be time consuming and significantly delay results, and often requires more investment than a company can rationalize for a non-core area of the business. As a result, the study found that more than half of the companies surveyed rely on each functional department to reduce their own costs. According to The Hackett Group, this approach typically results in less competitive agreements and missed savings due to the absence of sourcing best practices.

Accelerating Results

To achieve speed to savings, CP leaders such as Kimberly-Clark, Elizabeth Arden and Pinnacle Foods are instead turning to an outside specialist to put the needed focus and expertise on the problem and drive maximum savings, while staying focused on the core business. Such specialists have invested heavily in building and continually innovating a specialized infrastructure that would be difficult, if not impossible, to replicate internally. To date, more than 20 percent of top-30 global CP companies have embraced comprehensive procurement solutions, making it one of the leading indus­try segments in terms of adoption of procurement solutions (based on analysis of the Consumer Goods Technology Top 100 Consumer Goods Registry, December 2012).

Taking Action

To win the ongoing battle for margin, CP executives must continue to identify and deploy new strategies that will deliver sustainable cost savings. Non-product spend represents a key opportunity to transform your cost structure and drive up to a margin point or more in savings that can enable investment in continued growth and innovation.

In order to determine the best approach for your business, the first step is to complete a comprehensive spend assessment to estimate the potential savings opportunity. Critical in this assessment is access to and comparison of company-specific cost data against current and accurate supply market data.

Thomas Bornemann is the Global Consumer Products Practice Leader at Procurian, the leading specialist in comprehensive procurement solutions. Forward-thinking business leaders partner with Procurian to transform procurement and drive sustainable changes to their cost structures. Procurian’s built-out Specialized Procurement Infrastructure™ integrates with businesses to optimize spending and deliver real savings that equal a margin point or more. For more information, visit www.procurian.com.

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