Supply chain: cost or tool to improve profit margins?
Column by: Prakash Kamble is the 3PL vendor account manager, Middle East & Saudi Arabia (TSN & Mhub), for Hewlett-Packard.
Supply chain resources are not a cost; they are an investment for increase in profit margins. Only a few big MNC have understood the true importance of supply chain when we talk about business.
How often have you seen a planner, a purchaser or a logistics employee receive a yearly bonus or an award? The answer would be “very, very rarely”.
The problem is that today’s entrepreneurs are still not recognising the importance of supply chain or the resources that are used in supply chain.
A lot of people still have the feeling that anyone can handle logistics or purchasing and so they ask why we need quality resources they seem to feel that it’s just an expenditure to achieve business goals.
My views are a little different: First, I think one should ask ‘What is a business goal?’To put it simply, the answer would be “to make a profit” and “to satisfy/retain the customers”. How do you deal with any business proposal? Or, to re-express this, on what basis do you quote the price for a business proposal? Again, a simple way of doing it would be to use the following formula: All/total spend + expected profit = total quote price/ cost of product per unit. This formula is applicable to all businesses, whether it is a $2 soap manufacturing company or a billion dollar machinery manufacturing company.
Now let’s review what this formula really means. We will split up the spend so: All/total spend + expected profit = total quote price/ cost of product per unit. This becomes: Manufacturing cost or actual product cost (if it’s a trading company) + admin paper work + supply chain + profit margin = total price. As an example, we will use a company who deals with computers and computer accessories. The company name is “ABC”, based in the UAE.
During a sales visit to a big educational institution, the company’s sales representative got a request for a quote. The requirement was to provide 2000 laptops and all laptop accessories to their offices in Egypt. The customer would also need the deliveries to be split into one delivery per month over a period of five months (total of five deliveries).
Now they must provide a quote for the deal. ABC management decided to make 10% - the minimum profit margin to be earned from this deal. The total deal became approximately $1 million. This was a large amount for the company so the sales person got a bonus for the achievement.
Now my argument here is as follows: Yes, sales do deserve to be rewarded but why do we forget about “supply chain - freight + planning/purchasing + duty and taxes + storage”? This amounts to 20% of the overall deal, so it should matter.
In the whole quote, the only factor that can shake the profit margin is “supply chain”. What if the purchasing team makes a mistake while negotiating with a vendor? What if the planning team does not plan it according to the customer requirement and instead stocks it in excess and has to pay additional storage charges? What if the logistics team does not make the effort to ensure that they have the best rates in the market for freight? What if the logistics teams do not monitor the material after it leaves the warehouse? If one of these factors is overlooked or missed, your profit margin can end up as a loss.
In my opinion, business leaders need to give additional attention to the supply chain because this is the only factor which can retain or increase your profit margin by reducing overall supply chain cost. How? Very simple; if you have the right employees, the necessary experience, resources and tools. There are a lot of ways you can reduce your inventory costs with good planning and contacts, and skills to negotiate the best rates from freight forwarding companies. Also, having geographical and country customs knowledge can help to have the best practice and reduce overall custom costs.
In the above case – Let’s say “ABC” had a really good supply chain team. If they were able to reduce simply 10% from overall supply chain spends, their profit margin would go up by minimum of 2%. It takes the margin from 10% to 12% straight away. This 2% was earned by maintaining a consistently good team and tools within the supply chain and without adding any new investments.
In conclusion, I believe that although the sales team is responsible for achieving the business goals, at the same time the supply chain is also a major element and contributes considerably to the success.
ABOUT THE AUTHOR
Prakash Kamble is the 3PL vendor account manager, Middle East & Saudi Arabia (TSN & Mhub), for Hewlett-Packard. pany.