Supply chain and logistics functions are more than a necessary expense to be minimized; rather, they represent an opportunity for strategic market differentiation and competitive advantage. The consulting company Establish performs an annual assessment of the cost of supply chain and logistics operations; they target costs in the overall categories of Transportation, Warehousing, Inventory Carrying, Customer Service and Administration. From their analysis, Establish draws several conclusions:
- Logistics costs, measured as a percent of sales, are lower for higher valued products.
- Logistics costs in general are increasing.
- Logistics costs are higher for smaller companies.
(For businesses in our relevant range, it is likely that the costs equal or exceed 10.5% of sales.)
Furthermore, based on the average financial results for business classified in the SIC 349 code (Miscellaneous Fabricated Metal Products Manufacturers, in the States of PA and OH, having sales in the range of $0.5MM to $10MM), it would suggest that every dollar saved in the area of supply chain/logistics expenditures would be the equivalent of an increase in sales of $21.74 in 2014 and $14.08 for the 4-year average period. An Entrepreneurial, Small and Mid-Sized Business (ESMB) might look for this dollar in the following ways:
- Review your parcel carrier invoice and ensure you do not have an incorrect “Ship To” address.
- Discuss with office supply providers the potential for an online program for managing these items, thereby reducing overhead and in-house “stashes”.
- If you use fasteners or other commodity items in your processes, consider using a VMI (Vendor Managed Inventory) program.
In summary, it should be apparent that expenditures for supply chain and logistics functions are a major portion of a business’s overall budget. Further, the benefits that will accrue from improvement initiatives focused on the overall operational efficiency can have a direct impact upon the bottom line financial results of the company, equivalent to a significant increase in top line sales. And this is even more important for the ESMB sector. A penny saved may be a penny earned, but it can be more than a penny sold.
Millard Humphreys is Supply Chain Consultant with the University of Pittsburgh, Institute for Entrepreneurial Excellence and a principal with QED Logistics, a supply chain management consulting practice focused on the entrepreneurial, small and mid-sized business sector. For more information or insight into supply chain management, please contact Millard at mhumphreys@innovation.pitt.edu or 412-648-1545.