What is Procurement and How Does it Benefit CPGs? 

In this article, learn about:  

• What procurement is, and the different types of procurement 

• Common challenges that CPGs face  

• Procurement best practices for CPG companies 

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Consumer Packaged Goods (CPG) companies face many challenges. Procurement is a common process within the supply chain that can greatly benefit CPGs. 

Procurement is defined as the process of a CPG identifying its needs, strategically finding suppliers and negotiating contracts to fulfill those needs, purchasing goods and services, and managing supplier relationships.  

There are four primary types of procurement:  

• Indirect Procurement: Indirect procurement refers to the purchase of goods and/or services that support day-to-day operations. These goods are not directly part of the finished product. For CPGs, this could include the purchase of office supplies, third-party services, equipment maintenance, logistics, or software. 

• Direct Procurement: Direct procurement refers to the purchase of raw materials, components, or goods, all of which are necessary to produce the final product. For CPGs, this means purchasing ingredients, packaging materials, or pre-made goods for sale. 

• Goods Procurement: Goods procurement is the process of purchasing tangible items for sale. For CPGs this would involve the purchase of boxes, cleaning supplies, and display fixtures. 

• Services Procurement: Services procurement is the purchase of people-based or professional services. For CPGs, this process involves outsourcing logistics, manufacturing, quality audits, or consulting services. 

In addition to the different types of procurement, there are also 3 stages within each procurement type: 

• Sourcing: This stage of procurement is when CPGs assess their needs and review suppliers and vendors to fill those needs. 

• Purchasing: This stage involves the process of CPGs purchasing products or services from suppliers and vendors to sell. This also includes contract negotiation. 

• Payment: The final stage of procurement involves receipt, review, and payment of invoices. 

Why Procurement Matters for CPGs 

CPGs can benefit from procurement in many ways because of the many challenges within the supply chain industry. Most notably: 

• Global Competition: Expanding into new and established markets requires efficient sourcing and supplier alignment across regions. 

• Demand: CPGs must respond quickly to consumer trends, which requires real-time data and demand-driven sourcing. 

• Tight Margins: Rising costs, expanding product lines, and shifting demographics make it harder to maintain profitability. 

• Omnichannel Complexity: Serving both online and retail channels requires flexible and responsive sourcing and logistics. 

• Pricing Changes: Fluctuations in the cost of ingredients and packaging can impact forecasting and budgeting. 

• Regulations and Safety: Increased oversight, particularly around health, labeling, and product authenticity, raises sourcing complexity. 

• Sustainability and Social Responsibility: Consumers increasingly expect brands to source from ethical, environmentally responsible suppliers. 

• Taxation and Compliance: Regulations, taxes, or environmental levies require cost controls and sourcing agility. 

Data-driven procurement can help CPGs overcome challenges, specifically through:  

• Crafting new sources of income 

• Driving value-based competition 

• Increasing volumes and prices 

Data mismanagement can cause issues for CPGs, but the efficient use of data, practical knowledge, research, and analysis can address CPGs' procurement needs. 

CPGs depend on real-time data of the costs of goods that comprise direct classifications like flour, fats, sugars, dairy, colors, emulsifiers, and flavors. This information helps CPGs become category managers with total transparency about price perspectives, supplier risk, supply versus demand, new developments, industry updates, cost contributions, and their effects. 

Though the CPG sector provides procurement teams with a lot of information, CPGs still require real-time, workable data and in-depth knowledge to help inform critical decisions and overcome competition. CPG companies face many obstacles, but a well-managed procurement strategy can help stabilize their processes. 

Procurement Best Practices 

 These best practices can help reduce costs, improve process efficiency, and positively impact the cost-to-revenue ratio: 

Automation, AI, and Advanced Analytics 

Digital solutions reduce recurring operational labor and allow for more focus on strategy. High-performing organizations worldwide are already leading the race in digital procurement practices.  

Additionally, machine learning and artificial intelligence can advance procurement initiatives through better purchasing choices and enlightened financial and protective strategies, helping CPGs achieve their targets. 

Automation and digitization in procurement can help streamline many processes, including:  

• Supplier Management: Digital tools help CPGs onboard and manage manufacturers and suppliers efficiently across multiple regions. 

• Invoice Approval: Automated invoicing speeds up payment cycles, reduces errors, and supports better relationships with suppliers.  

• Spend Analytics: Real-time analytics tools can uncover trends in retailer demand, which enables smarter sourcing decisions for CPGs. 

• Integrations: Combining procurement with other financial software systems, demand planning, and logistics systems can provide visibility into both spending and performance.  

• Purchase Requests: Digitized purchase workflows ensure timely approvals and tracking for raw materials, packaging, and production-related purchases. 

Spend Transparency and Compliance 

Transparency in procurement functions can unlock considerable potential savings and achieve operational excellence without hurdles. Spending transparency can ensure more accountability and minimize fraudulent activity during procurement. 

CPGs seeking to implement spending transparency during procurement should: 

• Provide a clear definition for properly implementing the procurement policies 

• Review and note every step in the procurement process 

• Identify and manage all approved suppliers 

• Create clear, in-depth procurement contracts 

• Perform regular audits to ensure accuracy 

By automating data analytics, organizations can eliminate the risk of dark purchasing or eccentric spending and keep the procurement process transparent. 

Inventory Optimization and Real-Time Data 

Profit margins are not constant. CPGs that witness a slump in their profits must look for ways to control their spending and get back on track as soon as possible. Focusing on procurement can help profitability. Procurement teams must track their current inventory. 

The actual cost of maintaining inventory can be greater than the cost of procuring it. If omitted, consumable products and even slow-moving consumable goods like clothing or electronics can expire. Poor planning and not predicting usage can lead to such situations.  

All of these losses are avoidable by using data-driven procurement insights, such as: 

• Operating inventory ratios in terms of replenishment, safety, and surplus stock 

• Tendencies to over-purchase or under-purchase products for inventory 

• Purchasing frequency and trends 

• Inventory levels and how they fare against requisitions and orders 

Contract and Supplier Management 

While procurement teams focus on savings during the sourcing stage itself, an organized contract management process can provide additional value. One way to organize processes is to employ contract lifecycle management software (CLM). 

Transferring the contract management process to the cloud can help curtail issues by centralizing data, leveraging spending, and reducing costs. 

Automating contract management can help organizations: 

• Make documents such as riders and amendments accessible from anywhere via the cloud 

• Utilize a customizable interface to meet business requirements 

• Trigger automated alerts for contract milestones, renewals, and more 

• Track the different aspects of a product, such as its delivery time, quality, pricing changes, adherence to policies, etc. 

Supplier Scorecards and Engagement 

Every CPG works with suppliers for materials, services, regular maintenance, and one-time tasks such as repairs. Though it may not be a problem to call a supplier for an item or service, selecting the best supplier for the task isn’t necessarily simple. 

Identifying the best supplier, onboarding, invoicing, and issuing payment takes time. Supplier management tools help deal with these tasks better and enhance engagement. Procurement technology for these tasks includes: 

• Comprehensive vendor dashboards 

• Contract templates 

• Digital procurement procedures 

• Accounting management system integration 

In general, a CPG can enhance its supplier engagement by: 

• Treating suppliers as integral strategic partners and winning their trust 

• Monitoring their performance through specific KPIs 

• Enabling efficient communication with all vendors 

Procurement and Marketing in the CPG Industry 

Additionally, procurement processes can work with marketing initiatives to help take CPGs even further.  

When procurement and marketing teams collaborate, CPGs can drive greater impact across cost, innovation, and brand value. Together, they can: 

• Align on Goals: Procurement can support marketing objectives like brand visibility, market share, and cost efficiency by establishing shared performance metrics. 

• Drive Innovation: Early collaboration helps procurement source creative partners and materials that support marketing campaigns and product launches. 

• Enhance Value Delivery: Joint planning ensures that marketing initiatives are grounded in cost-effective, scalable solutions. 

This cross-functional alignment helps CPGs unlock new revenue streams, compete on value, not just price, and stay agile in a fast-changing market. 

Benefits of Procurement for CPGs 

Supply chain procurement can help keep costs in check without affecting profits through effective cost management mechanisms. 

Value-based procurement relies more on value creation than cost savings and efficiency, while purchasing is more of a strategic contribution that adds value to the organization. 

The role of purchasing keeps evolving within a supply chain, increasing its strategic importance for the organization. This function also broadens the scope of purchasing, as it is vital for the economic and tangible aspects of the supply chain. 

A procurement process helps add more value to the product in terms of the funds invested, communication, and the costs incurred by different departments. 

Procurement further helps reduce transaction costs through effective inventory management, reducing holding costs, and negotiation management. It also improves the quality of inputs and outputs and eliminates waste in the supply chain. 

A smooth procurement process benefits both CPGs and their suppliers. By utilizing these procurement best practices, CPGs can streamline their supply chain, increase their productivity, and get paid. 

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