How to make your supply chain more profitable
How you source, produce and ship your company’s wares can have a significant impact on its profitability, yet many small and medium-sized enterprises (SMEs) underestimate the value of a finely-tuned supply chain.
Identifying the parts of it that are ripe for profit is critical; a supply chain saving of just half a penny per unit can have an “enormous” impact on a business over the course of a year, explains Chris Trump, head of supply chain operations and development at London-based drinks manufacturer, Wow.
He adds that a profitable supply chain is a flexible one. Small businesses rarely have the volume to unlock significant value in a chain, but flexibility, partnerships and “truly understanding every cost in your operation” is key, he says. “Breaking down every cost of transforming fresh fruits, vegetables and chia seeds to bottled juices was the first step that we took.”
This involved reviewing everything from raw ingredients, packaging, labour, warehousing, transport, insurance to even the support services of IT, adds Mr Trump. “This enables you to quickly identify which costs are fixed and varied; which ones you can make savings on; and what percentage of your overall costs that represents.”
A flexible supply chain can also adapt quickly to changes in the market. Wow, which exports to Germany and Austria, had to adapt its logistics when its biggest customer relocated from Germany to Austria.
“Our biggest cost was transport, so we changed warehouse location quickly to hold our products near the Austrian border and close to our customer,” says Mr Trump. “This increased our costs to other German customers, but halved our delivery costs to our big customer, making a net saving for that market.”
Make a forecast for what will sell
Understanding your costs is vital for supply chain profitability, agrees Lee White, founder and director of Cubbies, which designs and manufacturers personalised plush toys.
“Many small companies are given a full-service unit price and don’t necessarily understand how that has been made up, which is a barrier to profitability,” he says. “This is particularly difficult as your business grows, because you’re unable to disentangle how much of that price is materials and how much is the suppliers’ own margin, which makes it hard to negotiate better pricing as volumes grow.”
For an SME buying in small quantities, failure to accurately predict popular products can be a costly problem. “It can mean that you’re either sitting on stock that isn’t moving or you sell out and can’t replenish quickly enough, resulting in customers going elsewhere – and possibly never returning,” explains Mr White.
To combat this, he advises developing a system to forecast what will sell and when. “Ideally, this should be done using past sales, but if it’s a new line with no history, look at the sell through rate of similar lines,” he explains. “A simple, regularly updated spreadsheet is sufficient to start with, although there are software packages to help you control inventory as you grow.”
Small order volumes can also make you a low priority to your factory, hampering your supply chain efficiency. “If you know that you’re regularly ‘bumped’ for bigger customers, factor this into your lead time by placing purchase orders earlier than necessary – and look into whether certain fabrics or components can be bought and held in stock to reduce lead times,” recommends Mr White.
He also recommends buying materials yourself and delivering them to the factory, but this takes time and means that you’re taking on the responsibility of sourcing, so it’s not practical for all small businesses.
He adds: “If your infrastructure can support the extra work load, it can result in a significant uplift in profitability.”
Split logistics costs
When it comes to logistics and warehousing costs, much of the profit within your supply chain can be unlocked through piggybacking on the scale of larger businesses.
“Transport is a great example, because if you’re shipping empty space, your cost per unit goes up,” explains Mr Trump. “Our first task when we launched into the UK with Waitrose in 2016 was to find out who was delivering into it on the same type of service, and for our volume to fill that empty capacity. This saved us about 20pc of delivery cost.”
He adds: “Market challengers, being new, often have capacity that they’re eager to fill and are more willing to negotiate and more flexible in how they work, so find out who these businesses are and look to work together for mutual growth.”
Procurement and sourcing are also key factors in developing a profitable supply chain, according to Mark Brownrigg and Deborah Newbury of artisan chocolate business, Urban Village Chocolates, which exports its signature single-origin tasting collections to Ireland and Switzerland.
The co-founders say that building a small manufacturing business alongside working with a “difficult and volatile product” can be testing. “A major challenge, particularly in the past year, has been the cost increases caused by the fall in the value of the pound, which has pushed up the cost of our raw materials and other equipment – in some cases substantially.”
The present lack of clarity regarding future trading with the company’s closest potential export markets is also of concern. The duo advise preparing “as best one can” for the inevitable complications of Brexit and trying to be positive given the current challenges.