How to Find Money in Your Ecommerce Supply Chain
If you ask the fastest growing ecommerce business owners about their supply chain when they first began, they’re likely to say they had no clue what they were doing. It required trial by fire and reinventing the entire wheel. No surprises here. Sourcing and manufacturing are intimidating (especially if you don’t have any prior experience), and many resort to figuring it out as they go.
In the earlier stages of business, this isn’t the end of the world. For many, simply having a product in stock that delivers on its promise and being able to sell it is a success. However, as you grow, this uninformed process can lead to major inefficiencies and high costs. You could end up with tens of thousands of one type of product that isn’t selling, while your best seller is sold out and six weeks backordered. Talk about a stressful situation.
There is a better way
Is money actually hiding in your supply chain? Absolutely. For even the largest global brands, there is almost always room for greater efficiencies in the pieces of the supply chain puzzle. But the businesses that stand to benefit the most in finding these are the high-growth brands. If your business has just crossed a key growth stage there is a lot of money hiding in that supply chain. It could even be the Achilles heel to your future growth.
What are the key areas to look at when optimizing your supply chain?
The first element you need to have in place are great supplier and factory relationships. This is not a simple task. Without great relationships, your costs are high, you get effectively no flexibility in terms, and you are susceptible to poor quality which can damage you and your brand in unrecoverable ways. You need someone you can trust, so hiring a sourcing consultant to help here is a great route to go.
2. Learn Your Data
The next step is to start paying attention to your data. The goal is to acquire a large enough sample size to allow you to predict your needs. It may be complex, but it’s so valuable! You will use your data to predict your order velocity and the rate at which certain products are selling. This will become more and more accurate over time as you accumulate data from hundreds of thousands of orders.
Order velocity is crucial because it informs you about how much inventory is needed and how much you’ll sell during each season of the year. You can use this information to backtrack and determine when to place orders from your manufacturer, taking manufacturing and shipping times into account. When you have this down, you will order far enough in advance to operate off of standard shipping times instead of using rush shipping to get your products in time. This is where the money saving comes into play! Seasonality is the key to ecommerce, and it quite literally pays off to be prepped in advance.
Make sure to also take your promotional calendar and other variables over the year into consideration. If you’re running new or different promotions than you have in previous years, make sure to increase your orders from suppliers to avoid out-of-stock issues.
This is a biggie. In fact, if you do any sort of volume this is likely your highest ROI area to optimize. Get this right and you have the right items in stock in the right quantities with very little money tied up in sitting inventory. Get this wrong and you will literally go out of business, and may even have a large tax bill at your door.
When you first started your business, ordering was an educated guess at best. That makes sense, because you had no sales history. But it’s important to start being strategic with what you order. If you’re currently cash flowing from sales, you may want to seek investment at this point (and PS if you’re generating over 1M annually in sales, we may be able to help with that investment).
What you need to do here is use the accurate data you’ve been collecting and create a model that forecasts sales, takes seasonality and growth into consideration as well as any product development you’re doing. You then need to work backward to know when to place those orders in order not to overspend on getting your product from the manufacturer to you. If you’re manufacturing in another country this may mean planning an order 6-8 weeks in advance. How do you do this? Well, it’s not exactly easy, but there are specialists that can help here. While it takes some planning, thinking, a good bit of math, and spreadsheet skills, it will make a massive difference in your business. If your business is crossing into the Health Stage, this needs to be looked at asap.
The final element involves specialized resources that make all of these pieces happen. Most high-growth brands that we work with are rarely looking at this area as a place to staff up and provide ROI. Staffing up in this area by hiring sourcing, logistics, manufacturing, and analyst roles is literally investing into the engine that runs your entire company. Start small with outsourced consultants. We highly recommend hiring a supply chain consultant; these experts will work spreadsheet magic to help you determine your forecasting and inventory needs. There are also apps for Shopify Plus that help monitor order velocity.
Supply Chain Metrics to Watch
As you assess which element of the supply chain puzzle your business could improve upon, there are a few metrics that are important to keep an eye on:
1. Order velocity
As mentioned, this is the rate at which your products are selling. This is a key metric that determines how much inventory is needed at any given time, which products (and which product variants!) are in highest demand, and how fast orders are going out.
2. Lead time
Lead time refers to how far in advance you will need to order your product supply, based on manufacturing and shipping times. How long does your product take to make? How long does it take to get this product on a boat or train and ship to your facilities, as opposed to airfreighting, which is much more expensive?
MOQs, or minimum order quantities, are another important way to save money in your supply chain. This looks at which price breaks are available when you order at certain quantity tiers, and how you can take advantage of those discounts when you order in bulk at the right time of the year. Whatever quantities you decide to order, our rule of thumb is to have at least 3 months of inventory on hand. This varies by industry, but we don’t recommend having more than that for a variety of reasons, including tax purposes.
4. Shipping Time
Shipping time is just like it sounds— how long does your inventory take to ship from your manufacturer (whether just up the road or across the world) to your facility, get unboxed, and be ready to sell? Again, if your manufacturer is out of the country, it’s always most cost effective to ship on a boat than rush it in the air.
Whether you’re just starting to see some serious traction or you have already hit viral success, take a close look at your supply chain and see it as a massive opportunity to optimize your business. It may not seem like the most glamorous aspect of your business, but it is critical to helping you grow, all the while uncovering hidden dollars along the way.