Fast-Moving Consumer Goods (FMCG) constitute the bulk of consumers’ budgets in many countries. The FMCG supply chains cover the production and distribution of products that are sold quickly, in large quantities and at relatively low cost, for example, food packaged products, drinks, toiletries, cosmetics, health and beauty care, etc.
Supply Chain Management is defined as the whole process of accepting a customer order down to the delivery of the product to the customer inclusive of supply, procurement and production of the product.
The FMCG supply chain usually consists of three levels, which are the suppliers of raw materials, the manufacturer’s production site and finally, the distribution centre, which includes the retailer’s distribution centre and the corresponding stores. Suppliers provide raw materials to manufacturers, for example, from the agriculture sector or the pharmaceutical industry.
When production has been concluded, goods are preserved in the manufacturer’s warehouse to be distributed to the retailer’s distribution centre and finally to the retail stores so as to fulfil the demand of the customer.
Need for legal considerations in Supply Chain Management
Supply Chain Management comprises several aspects which require legal considerations. Some of these include purchasing and manufacturing costs – calculations and control depend on local laws and applicable acts; stiff global competition; changes in laws from country to country; effect on delivery and transportation time considering the local and international laws, and pollution control laws and norms in different countries.
Potential risks of FMCG supply chain
The right management of a supply chain has been affected by several issues and risks which are virtually related to all levels of an organisation. Some of the general challenges faced in handling a supply chain or an entity affect the configuration and strategic orientation of the distribution network, inventory control or integration and partnering with suppliers.
Realistically speaking, the reliability of the process highly depends on the manageability of specific issues, such as challenges, doubts, disturbances and the attendant risks which threaten the enterprise; such problems or challenges may arise from both internal processes and from the external environment.
Some of the outlined risks include:
Production risk: Most of the managers in the FMCG sector state that the production risk relates to issues such as machine breakdown, shortage of production operators, limited storage space, and maintaining the quality of packaging as well as end products. Research reveals that the production risks affect the company’s internal ability to deliver good quality products to consumers.
Purchase price risk: Even though most FMCG companies get their raw materials directly from local suppliers, they are not totally free from the purchase price risk. The purchase price risk relates to the instability of prices of raw materials and also the fluctuations in foreign exchange.
These may impact negatively on the cost of production which eventually puts the companies in an uncompetitive profit margin position compared to their competitors. This risk can be mitigated if the FMCG companies agree to have an official contract specifying the quoted price when the order of the raw material was first made.
Demand risk: This is an external risk faced by any supply chain in any industry. It is commonly caused by unpredictable changes in consumer demand. Demand volatility as well as poor internal coordination and communication across functions are the two main drivers for this risk. The ability to execute forecasting processes accurately and frequent updates and communication across functions play an important role in mitigating this risk.
In addition, efficient monitoring of material flows (delivery and sales) and information flows (demand forecasts, production schedules and inventory level information) may suppress the potential occurrence of this risk.
Procurement risk: High-quality food products can be produced only from high-quality raw materials. Therefore, sustaining the quality of raw materials is one of the main risks in the food supply chain. For this reason, close cooperation and understanding between the food manufacturers, particularly the procurement department and the supplier of raw materials is a mandatory requirement. Due to the perishable nature of the raw materials, the quality of such raw materials needs to be controlled and continuously evaluated.
Navigating and mitigating legal issues in Supply Chain Management
FMCG companies face a variety of legal issues in supply chain management.
Here are some of the most common ones:
Compliance with regulations: FMCG companies must comply with a range of laws and regulations that govern their operations, including those related to product safety, labelling, and packaging, as well as environmental and labour laws. For example, some products must meet the Halal requirement which is established to provide general guidelines regarding the production, preparation, handling and storage of halal food.
The Halal certification provides assurance to Muslim consumers that the production of the food products conforms to Sharia law, while for non-Muslims, it may reflect the quality of the products because Halal-certified products need to comply with Good Manufacturing Practices (GMP) and Good Hygiene Practices (GHP).
Intellectual property protection: FMCG companies must protect their intellectual property, including trademarks, patents, and copyrights, throughout their supply chain to avoid infringement and maintain their market position. This means that the trademark must first be registered under an existing law, because only a proprietor of a trademark can sue where there has been an infringement of such a trademark.
Contractual obligations: FMCG companies rely on contracts with suppliers, distributors, and other parties throughout their supply chain. It is important that these contracts clearly specify each party’s obligations and the consequences of breaches. For example, where there is a franchise, and the franchisor specifically asks the franchisee to only sell the products of the franchisor, the franchisee will be breaching a contractual obligation where he sells the products of another manufacturer or producer.
Data privacy: FMCG companies must comply with data privacy laws and regulations, particularly when collecting and sharing consumer data throughout their supply chain. Where there is a breach of this requirement, it can be devastating for the FMCG company, as they may be fined and even banned for a period of time from selling their products.
It is imperative for FMCG companies to establish robust compliance programs, monitor their supply chain activities, and work closely with legal and regulatory experts to stay abreast of changes in laws and regulations.
Antitrust and competition law: FMCG companies must comply with antitrust and competition laws, including those related to price fixing, monopolies, and anti-competitive practices.
Environmental and social responsibility: FMCG companies are increasingly expected to prioritise environmental and social responsibility throughout their supply chain, including sustainable sourcing practices, ethical labour practices, and reducing their carbon footprint. With regard to social responsibility, FMCG companies ought to give back to their immediate community and beyond. They can do this by providing good water, schools, good roads and job employment for members of the community.
To mitigate these legal issues and risks, it is imperative for FMCG companies to establish robust compliance programs, monitor their supply chain activities, and work closely with legal and regulatory experts to stay abreast of changes in laws and regulations. The involvement of legal experts is highly fundamental. This is because of the heavy regulations trailing the FMCG industry as well as the distinctive peculiarities of different contracts to be executed at different stages. Ultimately, mitigating these risks will be a stitch in time to forestall greater losses.
Christian Aniukwu is a Partner at Stren & Blan Partners, and heads the Firm’s Intellectual Property (IP) Prosecutions and Commercial Services Practice Groups.
Stren & Blan Partners is a full-service commercial Law Firm that provides legal services to diverse local and international Clientele. The Business Counsel is a weekly column by Stren & Blan Partners dedicated to providing thought leadership insight on business and legal matters.
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