How demand planners optimize CPG COGS for margin growth

Key takeaways

• Margin protection: Demand planners can be the first line of defense in CPG COGS optimization, ensuring sales volume does not come at the expense of production efficiency.

• Preventing out-of-stocks: Effective demand planners prevent margin erosion by ensuring promotional lift does not trigger expensive emergency production or expedited freight.

• Profitable promotions: Retail COGS transformation requires moving from rinse-and-repeat promos to real-time pro forma P&L visibility for data-driven planning.

• The TELUS advantage: TELUS Trade Promotion Management provides a single source of truth that bridges the gap between sales and finance, allowing manufacturers to lower COGS through synchronized planning and automated deduction validation.

Executive summary

Explore how managing the relationship between demand planning and production is the most effective way to achieve CPG COGS optimization. Managing profit in the consumer packaged goods industry requires more than just high sales volume. Demand planners can be the front line of defense against rising costs. According to PwC, industry leaders achieve up to 50% cost reductions by using AI to automate the back end of trade and promotions. By using trade promotion management solutions, manufacturers can ensure that every promotion is planned against a realistic cost structure.

Protect your brand margins

Explore our solution

How does CPG COGS optimization impact trade planning?

What is CPG COGS optimization?

CPG COGS optimization is the strategic management of production and distribution costs to maximize gross profit. For demand planners, this means planning promotions that use existing inventory efficiently rather than creating costly supply chain spikes.

Why is COGS important for profitability?

COGS is the largest expense for most manufacturers. Even a 1% reduction in retail COGS can lead to a significant boost in net income. According to Deloitte, 70% of retailers are expanding their value priced assortments to protect margins. This shift makes CPG COGS transformation a priority for manufacturers to keep production costs low. If a demand planner ignores COGS when planning a deep discount, they risk a promotion where the cost to make and move the product exceeds the revenue.

What drives COGS in consumer goods?

• Ingredients: Raw materials used in the product.

• Direct labor: Workforce required for manufacturing.

• Overhead: Fixed costs like factory rent and utilities.

• Packaging: Materials used to wrap and ship the goods.

Demand forecasting and its impact on COGS

How does demand forecasting impact COGS?

Demand forecasting predicts what shoppers will buy based on past data and future promotions. If a forecast is too low, manufacturers face high COGS due to rush shipping and overtime labor. If it is too high, capital is tied up in inventory that may expire.

What are techniques for accurate demand forecasting?

Modern manufacturers use trade promotion management software to blend historical base sales with incremental promotional lift. This creates a unified forecast that production teams can use to schedule runs more efficiently, providing a roadmap for how to reduce COGS through better planning.

What are the benefits of demand forecasting?

• Accurate inventory levels: Prevents the cost of storing excess goods.

• Financial predictability: Allows finance teams to accurately accrue for the production costs associated with high volume periods.

Pricing strategies for CPGs

How do pricing strategies affect COGS and margins?

Pricing must be set with a clear understanding of the current COGS. If ingredient prices rise, the sales or account manager must adjust the promotional price point to protect the margin and ensure lower COGS relative to revenue.

Comparison of pricing strategies 

What is competitive pricing?

Value-based pricing looks at what the consumer is willing to pay. This allows manufacturers to justify a higher price that covers premium COGS without losing market share.

What are dynamic pricing and profit margins?

Using data to adjust prices during specific windows helps manufacturers maintain a steady profit margin even when production costs are volatile.

Profitability analysis

How do demand planners analyze cost structures?

Every trade deal should start with a pro forma P&L. By subtracting COGS from the gross invoice price, demand planners can see the true starting margin before any discounts are applied.

How demand planners can use KPIs for performance measurement

KPIs like gross margin after trade are essential. If COGS increases but trade spend remains the same, the promotion may no longer be viable. Trade promotion management tools track these metrics in real time.

Margin optimization strategies

What are effective trade strategies for improving gross margins in CPG?

• Packaging redesign: Testing if smaller or more efficient packaging formats are accepted by consumers before a full rollout.

• Promotional mix optimization: Focus your trade budget on high margin SKUs to offset the costs of lower margin items in your portfolio.

• Understanding contribution margins: This measures how much each unit sold contributes to covering fixed costs after all variable COGS and trade fees are paid.

• Inventory utilization: Aligning promotion dates with expiring stock to reduce waste and lower COGS.

How TELUS Agriculture & Consumer Goods helps demand planners with COGS strategy and optimization

Protecting your profit requires a single source of truth. TELUS Agriculture & Consumer Goods provides the software needed to bridge the gap between sales and production. Our Trade Promotion Management software ensures your plans are financially sound before they are sent to the retailer. By providing visibility into current production costs, we help you understand how to reduce COGS through better planning and volume management.