Geography, Tax Complexity, and Demand Volatility Turn Supply Chain Rules Upside Down in this Top Ten Consumer Market, Says a New Report by the Boston Consulting Group
SÃO PAULO—Brazil’s vast geography, complex tax system, and end-of-the-month demand spikes create major challenges for consumer packaged goods (CPG) companies—challenges that require unconventional approaches to supply chain management, according to a new report by The Boston Consulting Group (BCG). The report, titled Six Strategies for Beating Brazil’s Supply Chain Complexities, is being released today.
The reort, based on a study of the 17 leading CPG companies in Brazil—local entities as well as multinational corporations—found that those that bucked conventional practices were most successful at managing inventory, containing warehousing and transportation costs, minimizing customer cycle times, and achieving high case-fill rates.
The differences between the top- and bottom-quartile performers were significant: inventory levels varied by a factor of 14; transportation costs, by a factor of 34; and warehousing costs, by a factor of 40, for example.
“In Brazil, the standard supply chain tradeoffs—like sacrificing service for economies of scale or paying more for transportation for direct store delivery—don’t always apply,” said Flávio Magalhães, a BCG partner and coauthor of the report. “Companies have to be creative and resourceful if they want to capture market share profitably.”
Three Major Hurdles
Brazil’s sheer size and far-flung population create a high degree of channel fragmentation. For example, 26% of all beauty and personal care products are sold via direct sales, a far greater percentage than in most other leading markets, such as the US, China, and India. Food and beverage products are sold predominantly by independent retailers, which account for about 40% of total revenue, unlike in other major markets, where large retailers predominate. “CPG companies that sell mostly through direct sales or direct store delivery face higher costs and inventory levels. Between the highly fragmented sales channels and the vast geographic areas to be covered, it’s hard to achieve economies of scale,” said Flávia Takey, a BCG principal and coauthor of the report.
Tax regimes throughout Brazil’s 26 states vary greatly and are complex. Rates depend not only on the category of goods but also on origin and destination. Moreover, tax rates change frequently, in part because taxes on the movement of goods are a critical revenue source for state governments. For example, a company in São Paulo shipping its product to Rio de Janeiro would pay about 12% in value-added tax, but if the destination state was Goiás, the tax would be only 7%. For CPG companies, taxes represent a much higher share of costs than logistics does. As a result, they have a greater-than-usual impact on network optimization in Brazil, creating inefficiencies and requiring frequent redesign efforts.
Demand for products is highly concentrated at the end of the month, largely because of sales incentives that CPG sales teams offer their customers to meet monthly targets. This concentration of demand commonly causes excess inventory, big fluctuations in warehouse utilization, and high transportation costs.
Six Winning Strategies
Drawing on the resourceful tactics of the top-performing companies, along with BCG’s client experience, the report outlines six holistic strategies for overcoming Brazil’s supply chain hurdles.
Across the total sample—including even the top performers—the authors identified potential savings of up to 20% in total supply chain costs and up to 20% in inventory reduction that could result from these strategies.
Any individual strategy will deliver improvements, the report states, but sustainable success calls for applying these strategies in combination. CPG companies of any size can achieve greater service levels without hurting profitability.
“That’s even more critical today, as the country continues to grapple with an ailing economy and political turbulence,” said Magalhães. “Any company that can weather these difficult times and take action beyond simple cost-cutting measures will be better positioned to win over the long run.”
A copy of the report can be downloaded here.
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