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Tuesday, August 3, 2021

Relieving price pressures

The consumer is under pressure. A recent Kantar study indicated that 44 percent of households feel that they have been financially damaged by the events of the last 15 months. If typical recessionary behaviour follows, this will lead to a decrease in sales of branded food & beverage, unless on promotion, and an increase in private label.

The outlook, as Covid restrictions ease, is bright, with the FDF reporting that confidence in UK economic conditions is up for the remainder of 2021. Nevertheless, the major multiples continue to push to meet consumer demands on price, to retain or regain market share post-pandemic, and to absorb the eye-watering costs associated with in-store Covid measures. The imminent UK opening of Russian super-discounter Mere, only serves to support the trend for no-frills FMCG.

Financial pressure, of course, flows up the FMCG supply chain rather than down. Retailers in turn are seeking support and cost-downs from their suppliers, whose challenge is then where to look for savings? Global food prices are at a 6-year high, and there is particular pressure on wheat, corn, vegetable oils and most recently rice flour. There will be few sectors in food manufacturing that are not impacted by both rising costs and the risk of shortages, meaning it is not an ideal time to seek savings in direct procurement.

Industry research indicates that it’s not just retailers who have seen increased operating costs during the pandemic, with transport and wages being cited as key challenges. Therefore, now may be the optimum time to analyse your business’s indirect spend in more depth, digging deeper for a source of savings.

Looking beyond the obvious

Where to start? Packaging, both production and consumer, would traditionally be an area to consider. However, the increased focus of recent years on packaging reduction and improved sustainability has not come cheap and may mean that this area has already been picked to the bone. Added to this, indices for commodities such as aluminium and steel are rising at a rate of knots, driven by the perfect storm of construction activity, the adventures of lockdown DIY enthusiasts and, of course Brexit.

The supply chain, however, may reveal opportunities for optimisation of indirect spend. From production onwards, many businesses are moving to BPO (Business Process Outsourcing) models for areas like MRO and procurement. A well-negotiated deal in these areas certainly offers a higher degree of protection against the price increases referred to earlier, as well as offering potential  reductions in wages.

Most people, when faced with the words ‘supply chain’, will think ‘transport and warehousing’. Taking the first, summer 2021 may not be the best time to pursue a new transport partner in the UK. The 2020 double-act of Brexit and Covid has led to driver shortages, as many EU nationals returned home, coupled with consistently higher demand for haulage: many transport providers are simply not in a position to take on new customers, and it is most certainly a seller’s market in terms of cost.

Warehousing, considered separately from transport, may offer an opportunity for review. The rise of eCommerce, again driven sharply by the pandemic, is already causing businesses to review their inventory locations, pack sizes and routes to market. The pressure from retailers – many of whom are already maxed out on stock – for JIT deliveries and optimised packaging, is forcing many to consider future-proofed warehouse arrangements.

Delving Deeper

With so many areas of indirect spend seemingly out of scope for cost reduction, looking outside the obvious is key. This means understanding the true costs of areas with lower spend, such as MHE and pallets.

In addition to the pain being felt globally on ingredients and metal costs, timber is also seeing the sharpest rise in well over 10 years. A high quality white pallet can cost up to £20 in today’s market, driving a prohibitive increase in cost to serve. Mitigation of such increases is key, and for timber this can be achieved through careful selection of a pallet pooling partner. FEFPEB, the European Federation of Wooden Pallet & Packaging Manufacturers, reports that 70 percent of the price of a wooden pallet is comprised of timber. For pallet poolers, this proportion is far lower, so a move away from white pallets could be significant in reducing costs. A pooler will leverage far greater economies of scale than could be achieved even by a manufacturers’ buying consortium, negotiating long term deals and passing those benefits to their customers. Moreover, and stepping briefly away from the subject of cost, the sustainability benefit offered by a circular economy is significant.

An added implication of rising white pallet costs, not felt with pooled pallets, may be a compromise on quality. Whilst a pallet pooler will maintain the same standard, those purchasing white pallets may find themselves simply getting less pallet for their money: thinner boards, slimmer blocks and potentially fewer, or lower quality nails. This is a risk to the FMCG supply chain – both in terms of retailer fines and health & safety – that can again be eliminated through the right choice of provider.

Unlocking savings

Having established that pallet pooling is key to unlocking unexpected supply chain savings, the right choice of pooler is the clear next step. A simple benchmarking exercise often seems the simplest solution, but a top-down analysis of this type will not factor in bespoke solutions that your partner may provide to solve some of your pain points. A far more detailed comparison can be achieved through dialogue with your potential pooler, allowing them to understand and alleviate the less obvious costs such as quality failures and administration time.

The right pooler will work with other partners in the chain to deliver cost reductions that extend well beyond the simple price of a pallet. There is a marked recognition in 2021, from supermarkets down, that partnership and collaboration is fundamental to navigating these strange times, and your potential new supplier should bring ideas to the table during the sales process and beyond.

For example, a transporter running empty on certain routes may be able to link up with the pooler to collect or deliver pallets from or to any manufacturer or retailer. Significant benefit has been delivered through this type of 3-way agreement. Spare capacity on site can, likewise, provide an opportunity for onsite pallet management operations, potentially delivering a revenue stream as well as providing assurance around supply continuity.

LPR – the right choice

LPR, as a pallet pooler dedicated to the FMCG sector, has a unique understanding of how pallet pooling choices can influence a manufacturer’s ability to meet retailer – and ultimately, consumer – expectations. Delivering market-leading pallet quality more sustainably than white pallets is simply what we do every day. Working smarter is part of our ethos, and this means taking a deep-dive into our customers’ supply chains to identify all the potential optimisation opportunities.

To start exploring ways that we can help you to reduce your supply chain cost pressures, please call us on 01527 523311 or visit www.lpr.eu for more information.

Diane Carroll is Commercial Director at LPR

 

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