Interesting FMCG Concepts

TL;DR Several years after taking a course of SCM from the KAIST, its time to put together some practical post about logistics.

Intro

Why is your logistic manager so obssesed with that Fill Rate to be as close to 100% as human possible?

It’s all about lean customer center pull approach and the very low margins and volume required for this kind of business to work.

FMCG

FMCG stands for Fast-Moving Consumer Goods.

These are products that have a high turnover rate and are sold quickly at a relatively low cost.

Examples include food and beverages, toiletries, and cleaning supplies.

Logistics for FMCG is a specialized field that focuses on getting these products from the manufacturer to the consumer as efficiently as possible.

Nielsen is a global leader in market research, providing data and insights into consumer behavior.

The Science of whats next

Their primary clients are the very companies that make and sell FMCG products.

Based on the nature of Nielsen’s business they can provide time-series databases: The Users were likely FMCG brand managers, marketing managers, and sales leaders, as well as their internal data/BI teams.

Here’s why:

• Time-Series Data: This type of data is a sequence of data points indexed in time. For FMCG, this is absolutely crucial. It’s how you track sales trends over time, compare weekly performance, analyze the impact of a promotion, or see how a new product launch is progressing.

The data would show things like:

• Weekly sales volume of a specific brand of cereal in different retail stores.

• Daily unit sales of a new P&G shampoo in a particular region.

• Price changes and their effect on sales over time.

• Nielsen’s Business Model: Nielsen’s core product is this kind of data.

They collect point-of-sale data from retailers and turn it into actionable insights for their clients. A brand like Ferrero wants to know how their Kinder Bueno sales are doing versus a competitor’s product, day by day or week by week.

This is exactly what a time-series database is built for.

• The Clients and their Roles:

• Ferrero & Procter & Gamble: These are classic FMCG companies. The people using the data would be their brand managers and category managers. Their job is to manage the performance of a specific product line or a whole category (e.g., detergents for P&G). They need to know if their new marketing campaign is working or if they are losing market share to a competitor. The dashboards and reports this candidate created at Nielsen were the tools these managers used to make decisions.

• Puleva: A major Spanish food and dairy company. Same principle as above—they’d use the data to track sales of their milk, yogurts, and other products against their competitors in the Spanish market.

• IQVIA: This is a key detail. IQVIA is a leading provider of data and analytics for the life sciences and healthcare industry. This suggests that Nielsen was providing them with data related to health-related FMCG products (e.g., vitamins, over-the-counter medications). The users at IQVIA would be data scientists or business analysts who use the Nielsen data as a component of their larger market analysis and forecasting models.

When you developed the databases and provided the recommendations you become person who understood the raw, complex data and translated it into a user-friendly format (dashboards, KPIs) that the business users from FMCT clients could understand and act upon.

This is a classic example of a Business Analyst role: bridging the technical and business sides.

FAQ

FMCG Concepts

• High Volume, Low Margin: The business model for FMCG is based on selling a large quantity of products at a low profit per unit. This makes efficiency in the supply chain crucial for profitability.
• Short Shelf Life: Many FMCG products, especially fresh food and beverages, are perishable and have a limited time before they expire. This necessitates a fast, agile supply chain to prevent waste and loss.
• High Consumer Demand: These products are a part of people’s daily lives, leading to a constant and high demand. This requires companies to maintain a consistent supply to avoid stockouts, which can harm brand reputation.
• Brand Loyalty and Promotion: While the products themselves are often low-involvement purchases, brand loyalty is important. Companies frequently use marketing and promotions to encourage repeat purchases and build consumer trust.

Logistics Concepts

• Supply Chain Management (SCM): This is the overarching concept that includes everything from sourcing raw materials to delivering the final product to the customer. Logistics is a component of SCM.
• Inventory Management: This involves planning and controlling the stock of goods to meet customer demand without holding excessive inventory. A key metric is inventory turnover, which measures how quickly inventory is sold. FMCG companies aim for a high turnover rate.
• Warehousing and Storage: This includes all activities related to storing goods before they’re distributed. For FMCG, this requires efficient systems to manage high volumes and ensure products with a short shelf life are moved quickly.
• Transportation: The movement of goods from one point to another. In FMCG, this can involve various modes of transport (road, rail, sea, air) to move products from factories to distribution centers and then to retail stores.
• Last-Mile Delivery: This is the final leg of the delivery process, from a distribution hub to the end customer. For FMCG, especially with the rise of e-commerce and grocery delivery, this is a critical and often challenging part of the supply chain.
• Real-Time Tracking and Visibility: Modern logistics relies on technology to provide real-time information on a product’s location and status. This helps companies proactively manage potential delays and ensures accurate delivery times.
• Delivery In Full, On Time (DIFOT): A key performance indicator (KPI) that measures the percentage of deliveries that are made with the correct products and quantities, at the scheduled time. Maintaining a high DIFOT is crucial for customer satisfaction and strong relationships with retailers.
• Reverse Logistics: The process of handling returned goods, including returns from customers and unsold or expired products from retailers. This is a significant aspect of FMCG due to the high volume of products and their short shelf lives.

DRP vs MRP

That’s a great question, as it gets to the heart of how a company’s planning functions connect with its actual physical operations.

Material Requirements Planning (MRP) and Distribution Requirements Planning (DRP) are the two primary planning systems that connect the “what” and “how much” of an FMCG company with the “when” and “where” of its logistics.

They are two sides of the same coin, with MRP focused on the manufacturing side and DRP focused on the distribution side.

Here’s how they relate:

1. Material Requirements Planning (MRP)

MRP is a system used for production planning and inventory control for a company’s manufacturing activities. It answers three fundamental questions for a manufacturer:

• What materials do we need?
• How many of each do we need?
• When do we need them?

For an FMCG company, MRP takes the Master Production Schedule (MPS), which is the high-level plan for what finished goods to produce, and “explodes” it to determine the exact raw materials, components, and sub-assemblies required.

Example in FMCG:

Imagine a company that makes bottled lemonade.

The Master Production Schedule (MPS) says, “Produce 10,000 cases of bottled lemonade next week.” The MRP system then looks at the Bill of Materials (BOM) for one case of lemonade (e.g., 24 empty bottles, 24 bottle caps, a specific amount of lemon concentrate, sugar, water, etc.).

It calculates that to produce 10,000 cases, the company needs 240,000 bottles, 240,000 caps, and so on.

MRP then checks current inventory levels and automatically generates purchase or production orders for any materials that are in short supply, ensuring they arrive just in time for the manufacturing process to begin.

2. Distribution Requirements Planning (DRP)

DRP is a planning system used for managing the distribution of finished goods. It takes the sales forecast and planned orders for finished products and determines where and when to send them to meet customer demand. DRP works backward from the point of sale.

DRP answers the questions:

• What finished products do we need?
• How many of them do we need?
• Where do we need them (at which distribution center or warehouse)?
• When do we need them to arrive?

DRP considers factors like current stock levels at each distribution center, lead times for transportation, and demand forecasts for each location to create a replenishment schedule.

Example in FMCG:

Continuing with the lemonade example, the DRP system analyzes the sales forecasts for various regions.

It sees that the Northeast U.S. distribution center has a high forecasted demand for lemonade next week due to a heatwave, while the Northwest is experiencing lower demand.

The DRP system will then calculate the optimal quantity of lemonade cases to ship from the manufacturing plant to each distribution center.

It will also generate transfer orders to move cases between different warehouses if a particular location is facing a stockout.

How They Intersect and Relate

MRP and DRP are often two integrated modules within a larger Enterprise Resource Planning (ERP) system.

They work together in a powerful “push-pull” relationship:

1. Demand Signal: The entire process starts with the demand for the finished product. This demand forecast is the input for the DRP system.
2. DRP “Pulls”: The DRP system “pulls” a plan from the supply chain, figuring out the specific finished goods requirements for each distribution center. This creates a master plan for distribution.
3. MRP “Pushes”: The DRP’s plan for what finished goods are needed becomes the input for the MRP system’s Master Production Schedule (MPS). The MRP system then “pushes” the production schedule to the factory floor, ensuring all the necessary raw materials and components are ready to produce the finished goods that the DRP says are needed.

In essence, DRP and MRP create a closed loop:

• DRP determines what to distribute to meet market demand.
• MRP determines what to produce to satisfy the distribution plan.

This integrated approach is crucial for FMCG because it directly addresses the industry’s core challenges:

• Efficiency and Cost Reduction: By aligning production with distribution needs, the system minimizes overproduction (reducing waste and storage costs) and underproduction (avoiding stockouts and lost sales).
• Speed and Agility: The systems provide a framework for rapid response. If the DRP system detects a sudden surge in demand in a specific region, it can quickly signal the MRP system to adjust the production schedule to meet the new requirement.
• Inventory Optimization: Together, MRP and DRP help maintain lean inventory levels across the entire supply chain, from raw materials to finished goods, without compromising customer service.

What’s the difference between life sciences and pharma?

Life sciences is a broad, overarching field that encompasses all companies and organizations whose work is centered on living organisms and their environments. It’s about fundamental research and applied science.

Pharmaceuticals is a specific subset of the life sciences industry that focuses on the discovery, development, and commercialization of drugs and medications for therapeutic purposes.

Think of it this way: all pharmaceutical companies are part of the life sciences industry, but not all life sciences companies are pharmaceutical companies. Other parts of the life sciences sector include:

• Biotechnology: Uses living organisms or their products to develop new technologies (e.g., producing insulin with genetically modified bacteria).
• Medical Devices: Companies that make medical instruments, implants, and diagnostic tools.
• Nutraceuticals: Focuses on food and supplements that offer health benefits.

Is it possible that FMCG demand planning teams were also using such time series data to feed their modeling?

Demand Planning is all about modelling, or trying to model the future.

• Demand Planning is a Core FMCG Function: As we’ve discussed, demand planning is the process of forecasting future consumer demand to align the supply chain. Accurate forecasting is critical for an FMCG company’s profitability and efficiency.

• External Data Feeds: Internal data (e.g., historical sales, marketing promotions) is a good starting point for demand planning. However, to get a truly accurate picture of the market, companies need external data on competitor performance, market share, and overall category trends. This is exactly the kind of data that Nielsen provides through its time-series databases.

• Integrating with DRP and MRP: The demand planning team would take the Nielsen data, which shows how their products and competitors’ products are selling, and use it to refine their demand models. This refined forecast would then be the key input for their Distribution Requirements Planning (DRP) system, which tells them what finished goods need to be moved to which warehouses. That DRP plan, in turn, feeds the Material Requirements Planning (MRP) system to schedule production.

• The Power of Real-Time Insights: A time-series database allows P&G or Ferrero to see the immediate impact of a new product launch, a competitor’s price change, or a seasonal shift in consumer behavior. This real-time visibility allows them to quickly adjust their demand forecasts, helping them optimize inventory and avoid costly stockouts or oversupply.

Procurement vs Logistics

Procurement and logistics are two distinct but interconnected parts of the broader supply chain management process.

Procurement

Procurement is the strategic process of acquiring goods and services for a business. It’s not just about buying something; it’s a comprehensive, proactive process that ensures a company gets the best possible value for its money. It’s the “sourcing” part of the supply chain.

Key activities in procurement include:

• Identifying business needs: Determining what goods or services are required.
• Sourcing suppliers: Researching, evaluating, and selecting potential vendors.
• Negotiating contracts: Agreeing on pricing, terms, and delivery schedules.
• Issuing purchase orders: Formalizing the transaction.
• Supplier relationship management: Building and maintaining long-term relationships with vendors to ensure quality and reliability.

Logistics

Logistics is the process of managing the flow and storage of goods from the point of origin to the point of consumption. It’s the “movement” part of the supply chain. While procurement is about getting the items, logistics is about getting them to the right place, at the right time, in the right condition.

Key activities in logistics include:

• Transportation management: Planning and executing the movement of goods (e.g., choosing carriers, optimizing routes).
• Warehousing and storage: Managing inventory and using warehouse space efficiently.
• Inventory control: Keeping track of stock levels to prevent shortages or overstocking.
• Order fulfillment: Processing customer orders and coordinating delivery.
• Reverse logistics: Managing the return of products.

Comparison: Procurement vs. Logistics

In short, procurement is the “brain” that decides what to buy and from whom, while logistics is the “muscle” that moves the goods. They are distinct functions that must work in tandem for a supply chain to be successful.