This guest post was written by John Geib owner of Geib Supply Chain Partners. John is an e-commerce supply chain expert who helps sellers increase profitability. At Seller Accountant, we love profitability so I hope you enjoy this article!
Over the last decade, interest rates have been historically low. In fact, rates have been so low, that many supply chain professionals have learned to ignore them. However, interest rates and other economic conditions are most definitely going to change. Are you ready? Can your e-commerce operation survive in an ecosystem where Amazon rewards supply chain efficiency and punishes sloppy operations?
Prepare to thrive in our evolving economy by implementing the right supply chain management strategy. This strategy is going to require data analytics and can be broken down into five steps:
1) Know your supplier payment terms
Terms are often negotiated and forgotten. These older terms facilitate quick payment of invoices and rob you of much-needed cash flow. Companies need an easy to understand ranking of suppliers to create a game plan for approaching suppliers for better terms. I recommend that we start with a Comprehensive Spend Analysis. We will use data analytics to summarize the volumes of data into a simple, ranked list of suppliers and terms. We will approach the largest, easy targets first. As the suppliers agree to the changes, your cash flow will quickly start to improve.
2) Get rid of excess and obsolete inventory
The cost of storage in warehouse space, including Amazon Fulfillment, is quickly rising. It is imperative that we review obsolete and excess inventories for quick elimination. Some inventory can be sold at a discount, converted into something more usable, or even returned to the supplier for credit. Selling inventory online is a great option and can be the most profitable. Unfortunately, donating or trashing inventory is sometimes the best option. Donating is the better of these options for tax advantage and disposal costs. It is important not to be sentimental in this process, but be wise if you uncover a rare nugget. Unless you have free and infinite storage, you will begin to see the savings immediately.
3) Inventory investment needs to decrease
As we reduce the amount of money invested in inventory, your cash flow is going to improve. The problem faced here is the effort and capability to review thousands of SKUs. A great tool that I recommend is the trusted 80-20 Rule. This will require some data analytics and a spreadsheet, but it will allow you to increase your focus on the important items. With a shorter of A items, we will challenge supplier lead times, reorder points, and lot sizes. As time permits, we can review the B items too. With new information from our suppliers, we can quickly recalculate new, lower reorder points and celebrate the new, lower inventory levels.
4) Negotiate with supply chain partners or find new partners
Using the Comprehensive Spend Analysis created in step one, we can also rank suppliers and categories of spending to target for price reduction. Find opportunities that haven’t been recently explored by reviewing the top 10 or 15 suppliers. Consolidation of volume through a supplier reduction initiative is often a good way to start negotiations. I like to think that our current supplier partners will work with us best. But sometimes, we must launch the Request For Quote (RFQ) process to find new suppliers that will better fill our needs. As we spend less on materials and services, our profitability will begin to improve immediately.
5) Measure supplier performance
Our strategic suppliers should be partners. In this type of partnership, we should trust but verify. I believe that we should measure the obvious things like on-time delivery, quality and price variance, but we should also measure Inventory, cost savings, and lead time. “That which gets measured gets done”. This old slogan is so true. With a quarterly Supplier Scorecard, we will reinforce the cash flow and profit improvements that we are striving for.
Example: A short story about step ladders…
Earlier this year, a national construction client allowed me to create a Comprehensive Spend Analysis for them. When I had completed the summary, I spent an additional 30 minutes reviewing the details. I found that they had bought 90 step ladders from 3 suppliers last year. The lowest price paid was $95, but the highest price paid was $210, at the same supplier. By knowing the details, we were able to negotiate their preferred brand and model for $93. This 30-minute review and a little compliance pep talk with the buyers saved them $4,000 per year, on step ladders. They were happy with that ROI.
Here’s the bottom line:
In summary, take the time to dig into your supply chain, cut the fat, negotiate everything and hold your partners accountable for their performance. Do these things and see your supply chain become a strength instead of a liability for your business. For other Seller Accountant articles about increasing your profitability check out these articles.