Activity-Based Costing: CPG Manufacturers Lead The Way In Reducing Supply Chain Costs By Jack Haedicke, Arena Consulting Group

To remain competitive in the grocery, retail and consumer packaged goods (CPG) industry, retailers and wholesalers seek to offer more value to consumers. The most successful merchants provide quality goods at low prices by removing costs from the supply chain. Leading manufacturers have responded by implementing trading practices that benefit the retailer as well as themselves.

Manufacturers like Kraft, Coca-Cola, and Procter & Gamble lead the industry with some of the most attractive and efficient trading programs. For the manufacturer, these programs ensure that customer profitability thresholds are met. For the retailer, these programs enable the merchant to control supply chain costs. The success of these programs requires trust that is built on transparency into each cost component of the supply chain. Inaccurate costing is generally the root cause of a failed program. Successful programs inevitably rely on successful implementations of activity based costing (ABC). To many companies, successful ABC might be a dichotomy. This paper will address why ABC will work today, when it failed so often in the 1990s. It discusses successful implementations and capabilities it has provided to companies that have used this information to optimize operations across value chain partners and significantly reduce supply chain costs.

Note that for purposes of this discussion, suppliers and vendors of consumer products— such as Kraft Foods and Coca-Cola—will be referred to as "manufacturers." Merchants that buy these products from manufacturers and then sell them to consumers—such as Wal-Mart and Safeway—will usually be referred to as "retailers," though the category includes SuperValu and other distributors.