Discover how CPG procurement contracting practices have evolved in recent years, and see the tactics you can implement to strengthen your own strategy.
For nearly a decade, vendors and suppliers in the CPG market have followed fairly standard contract processes. They’ve been transactional, long-term, and have contained similar clauses year to year.
But, like many elements of procurement, events such as the pandemic, the Russia-Ukraine war, the UK energy crisis, and the earthquake in Turkey have disrupted standard terms of business. Now, both procurement teams and suppliers are approaching contracts in new ways.
To give you a clear view of exactly how purchasing contracts are evolving, and help you discover some new tactics that you can apply in your own procurement strategy, here’s an overview of the biggest changes we’ve seen recently.
Many CPG companies are embracing short term contracts and end-of-contract negotiations
One of the most significant changes we’ve seen with many CPG and FMCG companies is that they are moving to shorter, three-to-six month contracts instead of annual or multi-year contracts.
Amid high price volatility and supply chain issues, these shorter term contracts for raw materials such as caustic soda and silicones have reduced risk for many buyers. There’s less chance of overstocking during a drop in demand, and teams can regularly reassess inventory levels, the pace of their operations, and market prices as their contracts end.
It’s also becoming common for CPG companies to open contracts to tender at the end of these short-term periods to continually ensure the next contract they’re entering is at the best price possible.
In some cases, especially for packaging materials, FMCG buyers are going one step further and using just-in-time contracts – meaning they don’t have to commit to fixed inventory levels for a specific duration. For example, a major global consumer goods company recently changed its sourcing contract in the Middle East for its packaging supplier for hair care products to this model, sharing its approximate forecasts with its supplier to only order based on production schedules. This has helped the company save on inventory space and cost, and prevent any risk from a macro event, as the supplier maintains stocks only for 3-4 months and delivers only when the end client raises a requirement.
Forward-thinking procurement teams are expanding their supplier portfolios
Something that became clear during the pandemic was how valuable a diverse supplier portfolio can be at times of disruption. Now, many CPG companies are putting that learning into practice.
We’ve seen more and more CPG companies engaging with local suppliers to mitigate supply shortages in the market and reduce risk throughout their supply chains using short, fixed term, transactional contracts.
There have been benefits for both parties involved, too. For buyers, it’s created backup tier two and tier three level supplier options that help them ensure consistent supply availability, even when major events disrupt the market. And for local vendors, it’s created a significant increase in customers – creating the opportunity for them to engage with large-scale buyers they may not have previously.
Specific contract clauses are protecting companies from risk
Another way many CPG companies have been mitigating risk is by putting specific clauses or inclusions in their purchasing contracts to protect the supply of their goods, their quality, and mitigate the impact of price fluctuations.
In some cases, this has meant including detailed specifications of the exact material requirements they’re purchasing, to prevent suppliers from switching to lower-quality materials or providing substitute materials. At a granular level, some CPG companies have even started specifying details such as the colour, shape, size, and weight of the materials they’re buying.
This tactic was already being used by some major CPG companies before the pandemic, but has suddenly gained traction after the occurrence of some major macro events across the globe. For instance, an established home care brand notably released a public list of the fragrances it purchases from its suppliers in 2015 to ensure there are no hazardous fragrances used in its products, and now more CPG firms are adopting this practice.
In addition to quality protections like these, some of the world’s largest CPG companies have started to introduce additional clauses that demand vendors provide detailed cost breakdowns as part of sourcing contracts. This includes demanding suppliers meet specific KPIs, to ensure any increases in costs are related to market factors rather than decreases in operational efficiencies.
Some have even started using benchmarking clauses, which mandate periodic price reviews against industry standards and linking to relevant indices, to ensure fairness for both parties involved in the contract.
Increase in transparency and mutual investments between suppliers and CPG companies
Beyond specific changes to the contracts themselves, recent disruption has also prompted many companies to nurture more collaborative relationships with their suppliers, and increase their transparency in these relationships with open book contracts.
Now, a lot of companies are actively partnering with suppliers to manage and reconcile input costs, and in some cases jointly buying raw materials to achieve lower prices. For example, one leading US-based personal care brand has recently started using this collaborative model with its raw material vendors to obtain better prices. This has also stretched to research and development teams working together on joint innovations and mutual patents.
In other instances, as contracts come up for renewal and CPG companies seek the best prices, they’re being more transparent with their suppliers around their forecasts, goals, and operations to come up with a mutually beneficial deal. This is creating a more open discussion between buyers and suppliers, and opportunities to tweak requirements in order to lower costs where ROI doesn’t justify high expenditure.
The promising part is that the potential of these collaborative relationships will only grow as more procurement teams start to digitise their supply chain operations and embrace new tools that make it easier to share operational insights with suppliers.
Your chance to rethink your procurement contracts
While the disruptions of recent years have been difficult for many procurement teams to navigate, in many ways, they’ve forced some positive changes in supplier relationships. Now, there are more opportunities for every party involved to form contracts that best suit their goals.
If there’s one thing that’s clear throughout all these changes, it’s that communication will be key to making any of them successful. As supplier contracts become more collaborative, negotiations become more frequent, and your supplier portfolios expand, your procurement team will need to be able to strategically manage these new and existing relationships to secure the best prices and mitigate risks in the market.
Talk to our experts today
Our experts have witnessed many of the contract changes in the market first-hand in recent years, and have clear insight into the best practices in the market right now – as well as the challenges CPG companies are currently navigating.
Get in touch with us today to learn how we can help you manage your risk, understand what your competitors are doing, and create more beneficial procurement contracts.