“Reduction”: Impacts, challenges and opportunities for the supply chain

Due to events that cause disruptions in the supply chain, such as the war in Eastern Europe and the COVID-19 pandemic, which required massive injections of resources to keep people safer, the world is currently seeing levels of inflation above those observed in recent years. In Brazil, the IPCA, the indicator most used to measure the effect, has been showing rates above 10% in the annual accumulated for some months. Naturally, currency devaluation has adverse effects on the purchasing power of the population, which often has difficulty keeping up with price increases.

A measure widely adopted by the productive sectors to maintain consumption in scenarios like this is to reverse the direction of the adjustment and, instead of increasing the price of the product, reduce the quantity contained in each unit, thus generating a higher price per gram or liter, however, without impact on the total price of the item, a factor considered more sensitive by most consumers. You may have already noticed this practice, which was called “reduction”, applied to several products. This is a subject that always brings some controversy when it is more present in everyday life, with certain questions about the ethics and level of transparency of the act in relation to consumers, but the main objective of the text is to remind logistics professionals about some of the challenges that can accompany changes in the portfolio.

Figure 1 – Examples of products that suffered content reductions to avoid price increases – Source: Istoé Magazine (20/05/2022) – Companies reduce the size of packages, but keep prices high

Changing the SKU profile can have impacts on demand that need to be evaluated and planned for efficient supply chain management. If the logic of reducing the unitary weight is to maintain monetary income, a reduction in the physical volume to be produced, stored, transported, etc. is expected, which may reduce the use of assets, which in turn could be allocated to other purposes; reduce the consumption of raw materials, which can be overstocked, among other impacts. In general, it is necessary to study how consumers will react to the new product, understanding whether some will buy more units to take the same net amount, whether they will maintain consumption in terms of individual items or will stop buying because they perceive less added value in each SKU, aggregating the information correctly to the planning.

Another important point is the reduction of packaging, which can be very positive, but also bring challenges. Logically, occupying less space for each SKU has beneficial impacts on transport and storage operations, and a McKinsey study also identifies possible increases in product availability, with more items being able to occupy the same space on shelves. However, moving down to a smaller size can lead to difficulties in terms of supplies, requiring changes in supplier contracts or the search for completely new partners. Production lines may also have to undergo costly adaptations to adapt the new product, and if they have to be stopped for this purpose, it is necessary to plan a lung stock to avoid shortages. Finally, it is necessary to evaluate the increase in the environmental impact caused by the business, since each liquid product sold will generate proportionally greater packaging waste.

If you want to learn more about the impacts that disruptions in the supply chain cause to logistics operations, be sure to check out the track “Supply Chain Flow Managing Ruptures and Uncertainties” by 28th International Supply Chain Forum, which takes place in October in São Paulo and online. Registration is now open.

References:

– IBGE – Inflation

– IG (11/08/2022) – Redflation: smaller packages do not curb high prices

– McKinsey & Company (26/04/2022) – Skinny design: Smaller is better

– ILOS (18/02/206) – transporting air

– Istoé Magazine (20/05/2022) – Companies reduce the size of packages, but keep prices high