As a CEO, you should always be wondering how you can cut costs. While most company founders will look toward saving money on the marketing side of their business, it’s also important to understand how you can cut manufacturing costs.
The ways to cut manufacturing costs might not be as clear as your marketing costs, yet can save you more money over time. When your supply chain is the backbone of your company, it’s important to fully understand what’s going on and where your bottlenecks lie.
For any company, especially in this holiday season when everyone runs sales, getting hit with supply chain issues is daunting. If you haven’t yet, the best way to deal with these issues is to prevent them.
“to have a full grasp of your supply chain, you should know how each part is made and the cost of each one.”
Use the following 4 signs to tell if your company could optimize their supply chain.
1. You’re Working with a Wholesaler or Trading Company, Instead of a Factory. One of the easier ways to tell you can improve your supply chain is if you’re working through a wholesaler or trading company. Generally speaking, these companies will make a margin of around 30%.
If you want to save 30% of your manufacturing costs, going directly to a factory will be smart. Factories also give you more supply chain visibility. If something goes wrong in production, trading companies will often point blame to a factory and if you don’t have a direct connection to that factory, you’re probably not going to come to a reasonable solution with those stakeholders.
2. You Become Smarter Than Your Sourcing Agent. When you’re first starting a company that sells tangible products, most of the time you’re going to rely on another expert to really analyze the manufacturing capabilities of your factory. As you become bigger, this agent will play more and more of a vital role.
When you get to a certain size, it’s going to make more sense to bring this role on internally, as these sourcing agents often take their own margin. If you can bring someone on your team that manages everything your sourcing agent does, you’ll be aligning them even more with the success of your company.
3. You Don’t Understand Your Component Costs. Every product is made up of different parts. In order to have a full grasp of your supply chain, you should know how each part is made and the cost of each one. If you’re looking to cut costs, knowing this will help you understand where there is room to save some money.
Every product has component costs. As an example, for simple apparel items, your component costs would include the raw material, zipper, button, dye or printing fee, and labor cost. Analyzing each part of your product helps you get a full grasp of what makes up the total cost.
4. You Don’t Understand the Balance Between Price, Quality, and Lead Times. In the perfect world, you’d be able to produce products for the lowest price, at the highest quality, and in the fastest time. Unfortunately, as you’ve probably realized, that isn’t the case. A company’s supply chain is a balance between price, quality, and lead times.
When sorting through how to improve your supply chain, it’s important to understand this dynamic as you can’t make all three of these traits perfect. What you can do is look at your supply chain from a bird’s eye view and see how all three are correlated. By doing so, you may be able to adjust attributes like adding a two hours testing window to decrease your defect rate.
As your company grows, continuing to take some time to analyze your supply chain should always be important. You should always be looking for ways to cut costs, improve quality, and reduce lead times. When you have all this sorted, you’ll stop hemorrhaging money.