With the rate of e-commerce increasing annually and more consumers purchasing goods online, it’s no surprise that supply chains are stretched beyond their limits. However, to thrive in this challenging market environment, you need to know how to manage your supply chain to ensure you can meet the demands of your customers and ensure profitability for your business. Here are four secrets that will help you do exactly that.
Logistics and supply chain management
Logistics and supply chain management is the ugly stepchild of marketing. I know many marketing professors who skip these chapters in the Principles of Marketing textbook. And, supply chain is one of the 4 Ps of marketing. It’s the Place P, along with product, promotion, and price so ignoring this key marketing function does a disservice to students.
Supply chain management is often seen as an engineering function instead of marketing, maybe since marketing ignores this marketing function. So, let’s take a look at how supply chain management impacts your profits and success.
Costs effective management
Logistics and supply chains represent a big cost for e-commerce businesses. Logistics, the physical movement and storage of goods, accounted for 11% of the selling price for goods in the US e-commerce arena. Supply chain management involves all the processes involved in making products and getting them to consumers, adding up to another 20% to the price of the goods sold by a business. Let’s take a look at what makes up these costs.
- Logistics costs
- Storage costs
- Transportation costs
- Risks such as loss, theft, and obsolescence that occur until the product reaches the end consumer
- Warehouse management costs involved in picking, sorting, and packing products for shipment
- Supply chain management costs
- Investment in warehouses, materials handling equipment, manufacturing facilities, etc
- Transportation costs, to accurately assess total costs, be aware that this means you count transportation as either a logistics or supply chain cost
- Cost to procure needed inputs from your suppliers such as raw materials, subassemblies, or even finished goods you’ll later sell to customers
- Production costs to transform materials into finished goods
- Quality control costs
In addition to tangible costs, these processes involve opportunity costs. For instance, a mismatch between supply and demand means stockouts when customers go to the store for wanted items, which may result in product switching that encourages your customers to lose product loyalty. Such mismatches also may result in dissatisfaction for customers who must wait beyond the promised delivery date. Both situations damage your reputation and may spread negative attitudes beyond existing customers.
Overproduction also results in negative consequences as you incur additional costs forcing a price reduction to get rid of excess product. Soon customers lower their attitude toward your product because they view the new price as reflecting a cheap product. Similarly, some products have a limited shelf life requiring the firm to reduce the price to get rid of old inventory. Customers accustomed to the inevitability of a future price drop might hold off on purchasing at full price. iPhone is a good example where consumers know the price for the current model drops significantly once the new model becomes available and may delay purchase so they pay less. In other cases, the quality of the product near its expiration date isn’t as good, leading to negative attitudes toward the product. To avoid this, some perishable products, like chips, use company employees to stock grocery shelves with instructions to move older products to the front of the shelf to encourage purchase before the expiration date (which is why I always choose a product from the back) and, once the expiration date is reached, the remove the product for disposal.
Increase profits from better management
Our supply chains were never meant to handle the onesies and twosies we see as the form of e-commerce today. Our systems were set up to deliver a truckload of shirts to the local retailer not a single shirt to your home. That means transportation costs as a percentage of the selling price are even higher than those discussed earlier. Hence, we need to optimize logistics and supply chains to squeeze out a profit.
Given that the costs of these physical processes represent a significant part of the sales price and, thus, the revenue earned by the business, reducing these costs transfers directly to the bottom line of your organization. This makes managing supply chain and logistics costs the most beneficial way to increase profitability. For instance, lowering advertising costs means you likely decrease sales, which dampens the increased profitability expected from this move. The same is true for most other cost-cutting options in that a portion of the savings doesn’t materialize as it gets absorbed by other inefficiencies and related costs.
Below are some ways to streamline your logistics and supply chain management to increase revenue.
Optimize asset management
Idle assets are a cost you can’t afford so optimization is the name of the game. For instance, using an efficient picking strategy where employees pick multiple orders during a single pass through your warehouse reduces the inefficiencies involved in picking a single order at one time. Think of your own progress through a grocery store to see how must more efficient it is to do the grocery shopping for you and some neighbors all at the same time, picking goods for multiple neighbors as you pass each aisle.
Cross dock facilities, like the one below, limit the amount of time materials stay in your warehouse, which reduces the size needed.
Use technology to maximize route efficiency.
In the logistics industry, time is money. So, if you can increase the efficiency of your routes, you save money on fuel, maintenance, driver salaries, and more. While you can’t physically speed up the rate at which your drivers travel, you can use technology to optimize their routes. One example of this is GIS route optimization. This feature allows you to analyze your route in real-time and optimize it based on specific parameters such as weather predictions and unexpected traffic. You can analyze your route to see how long it takes and how many miles are covered. You can also see the average speed, which helps you determine if your team is driving at an appropriate rate or wasting time with too many personal stops.
Another great technology is RFID (radio frequency id). Originally developed by the military to efficiently handle materials in war zones, RFID embeds a chip within each container that identifies the contents. When you want to unpack a shipment of X, you enter the code and every container containing X will light up and emit a sound. This allows you to optimize your warehouse space rather than sorting each product into its own area, which wastes space with the inventory of a particular product is low.
In retail operations, monitoring inventory on a continuous basis as products flow over digital scanners means you can reorder inventory sold each day immediately to avoid stockouts. In grocery retailers, we call this ECR for efficient consumer response.
EDI or electronic data interchange lies at the heart of JIT (just in time) manufacturing by connecting multiple members of the supply chain. When a company receives an order, the system calculates the materials needed to satisfy the order and then transmits an electronic order to suppliers for delivery of these materials. When the order ships, suppliers send documentation and an invoice to the manufacturer, which is then paid electronically once the order is received.
Assess loads and delivery routes
As you grow your business, you might encounter a situation that’s just as bad as having too few customers. However, you don’t want to sign up for more work than you can handle effectively. Most logistics and supply chain costs are fixed costs (ie. warehouses, conveyor systems, trucks, etc). Adding a few new customers strains your ability to deliver goods on the promised schedule. You need a lot more customers to justify purchasing the facilities necessary to meet customer needs, which can damage your reputation and lead to poor customer service. One effective way to avoid this is to assess and expand your capacity efficiently. This allows you to determine if you can effectively handle new customers based on the following criteria:
- Weight: You don’t want to overload or underload your trucks, so check how much total capacity is available
- Destination: If the load travels a long distance, you may find transportation isn’t financially feasible; however, using load boards can help you increase your load to justify the route.
- Volume or dimensions: If the load dimensions are too large, they may not fit in your trailer, requiring additional trucks.
Outsourcing is a great way to expand delivery capacity without the high initial costs associated with managing logistics on your own. For instance, you might deliver product en mass to a central location, such as a UPS depot. UPS then manages order fulfillment from its own facility, thus reducing your costs and expanding your ability to handle orders.
Continuously optimize your operations.
As you grow your business and accept more loads, you will likely experience some growing pains. That’s because as your business grows, so do the number of things that need to be managed. While you can’t completely eliminate the growing pains of a more significant business, you can ease the stress by continuously optimizing your operations. Doing so allows you to manage your growing business more efficiently and respond to the changing needs of your customers more quickly and effectively. One way to continuously optimize your operations is by implementing a management dashboard. Here are a few industry-specific examples:
- Transportation management software helps you create and manage your freight company more efficiently.
- Logistics software helps you optimize compliance with regulatory agencies and control the flow of goods through your company.
- Warehouse management software helps you manage your inventory more effectively so you don’t overstock or understock your shelves.
As you can see, maximizing profit in your company is easier said than done. You must ensure you maximize your routes’ efficiency, assess the loads and delivery routes, adjust costs where possible, and continuously optimize your operations. However, if you follow these tips, you can be sure to maximize profit in your company.
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