Whether you’re manufacturing goods or distributing them for sale, your supply chain is critical to the operation of your business. Even a small disruption can grind your business to a halt. So when you’re just starting out, you may be focused on getting your supply chain up and running consistently, rather than analyzing exactly what each link costs you.
However, if you haven’t examined your expenses, you may overlook a few of the costs that are eating up your profits. In this article, we’ll walk you through three small business supply chain scenarios you might want to analyze more closely. By understanding the factors involved, you’ll be better equipped to take control of your supply chain costs, eliminate inefficient spending and increase your profits.
Scenario #1: Are You Using Your Seller’s Carrier for Shipping?
When you’re buying products either for manufacturing processes or resale, your seller may offer to use their own carrier and invoice you for the cost. (You may hear this referred to as “prepay and add.”)
While this can be convenient for you—especially if the vendor is in a foreign country—be aware of two things:
- There is no free lunch. The cost of the transportation is either built into the cost of the goods or you’ll see it in a separate line item on the invoice. It’s important for you, the buyer, to examine that cost and, ideally, try to take control of it, where possible. More on that in a moment.
- Some sellers may use this service as a profit center. Some of your vendors may tack on an additional fee over and above the freight cost. Many consider it their due for negotiating and managing the transportation. If it’s not explicitly listed on your invoice, you might not even know how much that extra charge is costing you.
What You Can Do: The name of the game here is visibility. If your seller is arranging the freight, ask for the costs broken out so you know exactly what it’s costing you. You may be able to get a better price by working with a freight forwarder to arrange your own transportation.
The bottom line? If you don’t ask, you may never truly understand what you’re paying in transportation costs. As a result, you won’t be able to control these costs, and you won’t be able to negotiate something better, either with the seller or with a carrier on your own. Your best bet is to get as much visibility into these costs as possible so you can choose the one that keeps your expenses low.
Scenario #2: Are You Buying More Inventory So Your Seller Will Pay Freight?
Many suppliers have a threshold above which they agree to pay shipping costs. For example, if you buy $1,700 worth of products, your vendor will pay the freight to your location. You see this type of offer on consumer websites all over the Internet, and it may seem like a good deal for your business. However, before you jump on it, consider these two items:
- As in the scenario above, there’s no free lunch. At the end of the day, someone has to pay for that freight. The carrier doesn’t move it for free. It’s possible that the vendor rolls the transportation costs into the cost of your goods. As a result, you may be paying a higher cost per unit for “free” shipping.
- Is this “deal” pushing you to order more than you need? If cash flow isn’t an issue, this might not be something for you to worry about. However, keep in mind that if you’re upping your order to meet a threshold, it may mean carrying goods for longer than you expected, which means cash tied up in inventory. It could also mean additional warehousing or storage costs. If you can move these goods quickly, this might not be an issue, but it’s certainly something to weigh.
What You Can Do: Get a quote for shipping the order you truly want—threshold aside—through your own freight forwarder. Compare the costs and see which option makes more sense for your business. At the end of the day, you might discover that paying your own freight and ignoring the threshold, is the more economical choice.
Scenario #3: Are You Weighing Inventory Carrying Costs Against Transportation Costs?
Especially when they’re starting out, many small businesses may elect to purchase and ship freight nearly every day via small parcel. On one hand, that scenario offers low inventory carrying costs. On the flip side, it creates high transportation costs, since shipping via small parcel results in one of the highest costs per unit across modes of transportation.
However, that’s not to say that moving to larger and larger shipments is the right decision for every business. Your next size up from small parcels would be less-than-truckload shipments (LTL). LTL shipments would offer a lower cost per unit than small parcels. However, before you increase your next order, you’ll need to ask yourself:
- How fast can your supplier ship a pallet? They may not be able to get a pallet shipped as quickly as small parcels can move.
- Can you afford to purchase an entire pallet of goods? Do you have enough cash on hand?
- How will the purchase of a pallet affect your inventory carrying costs?
It gets even more complex when you make the decision to order a full truckload. You might have to wait even longer to order enough quantity to fill the truck. Then, once you receive it, you’ve got significantly more cash tied up in that inventory all at once. How soon do you have to pay the seller? How quickly can you sell it?
What You Can Do: Recognize that every action you take within your supply chain has a trade-off. Hopefully, you’re making trade-offs that improve your position, rather than ones that cost you more money or more time.
As a small business owner, negotiating these decisions is part of your greater responsibility for identifying both costs and opportunities in your business. Ideally, you’re making decisions that consistently lower your costs and create greater opportunities. Understanding, analyzing and taking control of your inventory and transportation costs offers you a significant opportunity to do so.
Visibility Creates Informed Business Decisions
It all starts with getting transparency into your supply chain expenses, including your transportation costs and your inventory carrying costs. Once you get a handle on these expenditures, you can take control of them—and make more decisions that positively impact your bottom line.
Need help with your transportation costs? Whether you need assistance quoting freight costs or choosing the right mode of transportation for your shipments, our experts can help. Just reach out to us to schedule a consultation. We’ll help you analyze your options to find the right solutions for your business.