All the Ways Your Supply Chain Is Trying to Kill Your Small Business
Your supply chain is necessary, not a necessary evil.
Your supply chain is necessary, not a necessary evil. Your supply chain costs you money, sucks your time and befuddles you. But you need it. Without your supply chain, you wouldn't have those items to sell. I.e. you wouldn't have much of a small business.
But if left unchecked, your supply chain has the power to kill your small business. Don't let your supply chain go unchecked. Check it right now.
The ways your supply chain is trying to kill your small business include the following supply chain areas of concern:
- Cost of Goods
- Lead Times
Let's take a look at each area of concern in more detail:
Cost of Goods
In supply chain — and in business — item costs are described as either cost of goods sold (COGS) or cost of goods manufactured (COGM). For the sake of simplicity, let's go with the cost of goods sold as the discussion topic for this article. That is, for every item you sell — there is an associated item cost.
The cost of goods sold is how you measure the direct financial temperature of how well your small business is doing. And the cost of goods sold is the first way your supply chain is trying to kill your small business.
You've thought this through, I know. You figured out that it costs you $10 to make Item A (which is your cost of goods sold) and you sell Item A for $15, so your profit for Item A is $5.
But that's not necessarily accurate. With that $5, you need to pay your bills, your employees and maybe even yourself. Is there enough room in that $5 to do that? No? Well, you can do one of two things:
- Raise your selling price on Item A
- Lower your cost of goods for Item A
Depending on what the market, competitive, and economic landscapes are vis-a-vis Item A, you may feel like you're not able to raise the selling price to your customers.
That leaves you with one realistic option, lower your cost of goods.
You can lower your cost of goods several ways, including:
Sourcing is "shopping around" or "comparison shopping". By looking for other suppliers to help you make Item A, you can work to lower your cost of goods.
Is there a way to make Item A less expensively than you currently make it? Can you relax the tolerances so that factories don't have as much scrap or can spend less time producing it? Are there less expensive materials to use? Maybe figuring out a less expensive way to make Item A is the best way to reduce its cost of goods.
A sourcing exercise can also lead to innovations that allow for re-engineering solutions to break through. For example, if you show Item A to suppliers that you currently don't use — or if your current suppliers know you're shopping Item A around — those suppliers may offer cost of goods reduction options that you may not have considered before.
Lowering cost of goods can also come down to straight negotiations. You have been spending $10 on Item A forever and now you need to drive your cost of goods down. Step up to the negotiating table with your supplier.
Oftentimes, savings in the cost of goods can be found that benefit both you and your supplier. For example, your supplier might need forecasts or blanket orders so that they can acquire larger volumes of raw materials at cheaper prices. Or optimize production runs by making larger lot sizes.
The next area in which your supply chain is trying to kill your supply chain is inventory. Inventory is a tricky balancing act — since you need inventory in order to sell products to your customers, but inventory costs money. So if you have too much inventory, you've probably spent too much money — which means you don't have that money to spend elsewhere.
How do you know if you have too little inventory, too much inventory or just the right amount of inventory? Only you can realistically answer that, but here are a few guidelines that might help.
Look at your customer backlog (at backlog is not a bad thing). A backlog is simply a number of orders that your customers have placed that you haven't shipped yet. Do you have enough inventory to cover the backlog? I mean, can you ship your customers what they want, when they want it? If not, you may not have enough inventory.
Now, take a look at your accounts payable register. Have you paid your suppliers for all of the inventory that they have provided? If so, how has that impacted your balance sheet? Do you still have enough in the bank to pay your rent, your insurance, and other bills? If not, you probably have way too much inventory.
Inventory costs you, not just when you buy it, but also to hold it. Inventory carrying costs are real (warehouse or storage rent, insurance, security, for example).
If you have the luxury of building inventory as your customers order it, then you're in a good place to manage your inventory and make sure its costs aren't killing you. And if you're not, you probably need to get focused on...
One of the hardest questions for a supply chain pro to answer is "what is your lead time?" That isn't because we don't know what our lead times are, it's because we know too much about our lead times. We know how long it takes to make a product, inspect a product, ship a product and the dozen other mini lead times within a supply chain lead time.
If you've got that kind of robust understanding of your lead times, then you probably know how long it would take you to make and deliver Item A to your customer, if you waited until your customer ordered it to make it. If your customer can live with that, that will help keep your inventory costs down.
If not, then lead time management is an area you need to double click on. Without you really understanding your lead times, your supply chain might just be killing your small business.
Without knowing how long it takes your suppliers to acquire raw materials and then to produce your products and then ship those products to you... And without really knowing how long it takes your small business to receive, inspect, produce and then package and ship... And without really knowing the costs of overnight, express, next day, two day and standard shipping... there's a good chance that the $10 you're spending on Item A is costing you much more.
Expedite fees, express shipping and overtime are supply chain's silent small business killers.
Your suppliers are a very critical link in your supply chain. Many small businesses feel beholden to their suppliers because those suppliers have been a part of their team since the early days.
If your suppliers are any good at what they do (and let's assume they are) that means that they've been working hard over the years to figure out how to optimize their manufacturing. Which means that it used to cost them $7 to make Item A for you (so they sold it to you for $10) but now they can make Item A for $5. Did they pass along those savings? Or at least split the difference with you?
You have the right to ask.
And if your suppliers have not been able to get their costs down from $7 to $5 — then I refer back to the Sourcing section of this article.
Audit your suppliers, to help drive the cost of goods savings. Because if you're not driving savings from the cost of goods with your suppliers — your small business is in danger of being killed off by your supply chain.