In the office of finance, the supply chain may seem like someone else’s concern. But consider that finance and operations are interconnected, and the supply chain is likely one of your biggest cost centers as a products-based company. That means it’s also a function primed for optimization — and cost savings. So even if you’re not responsible for optimizing truck routes and calculating ideal inventory levels, the effects of these decisions will show up on your income statement.
Early on, your business may have nailed down a few decent suppliers and used the most simple, accessible methods of ordering or manufacturing goods, tracking on-hand inventory and fulfilling orders. Those simple systems — spreadsheets, paper packing slips and manually-created shipping labels — are probably still in place as your company surpasses $10 million in annual revenue. And the limitations of this approach are likely leading to issues that directly impact your customers, sales and profitability.
As your organization moves into the tens of millions in revenue, it’s necessary to step back, evaluate each component of your supply chain and make the necessary improvements, even if it comes at the cost of short-term growth. It will become almost impossible, or at least extremely cost-prohibitive, to continue relying on manual methods to run your daily operations — and that matters for CFOs.
“A lot of entrepreneurs want to just keep moving like a freight train, and it’s hard to really say, 'We’re going to slow down and get certain ducks in a row,'" said Bruce Krinsky, whose furniture manufacturer has crossed the $50 million threshold. "But I feel like a disciplined approach, in the long term, really helps the company.”
Bruce Krinsky, co-founder and CEO at TOV Furniture
Spencer Shute, consultant at Proxima
Nada Sanders, distinguished professor, supply chain management, Northeastern University
Before we delve into best practices, it’s important to note that even with top-notch talent, processes and systems, supply chains are always a work in progress. They need constant monitoring and adjustment. However, these recommendations will keep the scrambling to a minimum, reduce costs and ultimately help you better serve customers.
Each of the recommendations below requires capable technology — likely more capable than what you currently have. We’ll cover what to look for in new technology, if you need it, in the next section.
You can measure countless aspects of your supply chain. Popular supply chain metrics and KPIs include inventory turnover rate, profit margin, on-time delivery rate and perfect order rate. There’s no way to know where your supply chain is faltering — gut feel and anecdotal knowledge aside — without some method of measuring current performance.
The hard work comes in choosing a handful of metrics to track that are especially crucial to your supply chain. Many businesses surpassing $10 million either lack clearly-defined operational KPIs or have no way to quickly and easily find their latest numbers. Outdated information can be misleading: If a distributor of construction materials bases its margins for various types of lumber on its costs six weeks ago, but prices have since tripled due to a worldwide shortage, then the company could be losing money on those sales and not realize it.
Once you and other decision-makers can reliably measure KPIs with a capable reporting tool, you need to actually use those metrics to determine where to direct your time and attention.
“We’ll see a lot of companies that will have KPIs, but sometimes they’re reporting on KPIs to be reporting on KPIs,” said Spencer Shute, a consultant at Proxima who helps companies optimize all aspects of their supply chains. “They’re not actually driving business decisions based on these KPIs.”
You may realize that the true costs of the products you sell is more than what you pay a manufacturer or distributor for them, but tracking and compiling those expenses is another story. Manually crunching all of the numbers for every item in a catalog isn’t realistic, especially as an organization grows, so many companies simply don’t know their landed costs.
Without knowing your true landed cost for various items, you don’t know the true margins for various items. Certain products could be cheap to manufacture but expensive to transport or subject to sizable tariffs due to their country of origin. This information is critical in deciding which items to push, scale back or stop selling.
One of the biggest challenges for any products-based organization is finding the right inventory balance. On-hand inventory is one of a company’s largest expenses, and too much or too little stock results in money lost. Add in disruptions — not just a pandemic but also more typical issues like dockworker strikes or shipping container shortages — that delay replenishment times, and it’s not hard to see why demand planning is important. Under ideal circumstances, the standard lead time for getting goods from Asia is three or four months, so there’s no quick fix if you start selling through inventory quicker than expected.
Many fast-growing businesses work around this challenge by simply carrying a lot of safety stock, but that can prevent you from making valuable investments elsewhere, maybe even in your supply chain. It’s an especially wasteful approach if you’re handling items with an expiration date, like food or pharmaceuticals, or ones that quickly become obsolete, like apparel or consumer electronics.
To build more trustworthy forecasts, closely examine how available inventory compares to sales and how these trends change over time. Operational leaders need access to both real-time and historical information on each SKU they sell and must factor in the lead times for new orders. If you’re in a fast-moving industry like apparel or consumer electronics where the product lineup changes frequently, pay extra attention to consumer trends and look for comparable items previously offered as a point of reference.
“Omnichannel” has become a retail cliché. Selling through multiple channels is indeed critical long-term, but that doesn’t mean you should start selling to everyone who wants to carry your items as soon as they ask. Specifically, wholesaling to retailers who only buy in large quantities so they can get a lower price per item could eat into your margins.
Nada Sanders, a professor of supply chain management at Northeastern, has seen the allure of big-name retailers nearly put companies out of business.
“As a small business, the volume that you commit to your large customer could just swallow you, and you might find that you can barely satisfy that and you have no more inventory for other channels,” Sanders said.
So, understand your customer profile and via which channels they want to buy. Then, make strategic decisions about how to allocate your inventory and gradually welcome new opportunities as your capacity increases.
As the name indicates, each piece of the supply chain is connected. Remember that as you make cost-cutting moves or other adjustments.
“I think the biggest pitfall is not understanding the downstream effects [of changes to your supply chain],” Shute said. “So yes, you can go to the cheapest carrier, but what’s that going to do downstream in terms of what your customer service looks like? What’s it going to look like in terms of damages or on-time shipments, delivery, things like that?”
In other words, chasing quick wins that temporarily boost the bottom line but lead to other problems is a mistake. Any such issues will only be magnified as a business gets closer to the $50 million mark. Realizing the full impact of these decisions requires more insight into the entire network: Revisiting Shute’s example, do you know whether switching carriers would cause any changes or issues for suppliers? Is the carrier’s on-time delivery percentage as good as or better than that of its predecessor, and what remedies does it offer for orders delivered late?
Since there are always areas of your supply chain to strengthen and vulnerabilities to address, adopt a continuous improvement approach. Philosophies like Kaizen promote making small, frequent tweaks that add up to larger gains, with suggestions often coming from lower-level employees (i.e., bottom-up leadership).
Such a philosophy can help companies quickly adapt to shifts in customer preferences and broader changes in market conditions, Sanders said. They’re especially helpful during periods of rapid growth, which she described as the “most perilous time” for a business. It’s often easier for smaller organizations to commit to continuous improvement because they tend to have less bureaucracy and red tape.
Take Krinsky’s company TOV Furniture: The team resolves its biggest supply-chain challenges by breaking them up into small, achievable action items with clear timelines that keep everyone on track, Krinsky said. TOV attacks those small goals in part by tweaking the supply chain system it implemented four years ago to implement faster or better ways to complete certain processes.
The best practices outlined above rely on access to accurate, up-to-date and extensive data. Everyone we spoke with agreed that end-to-end insight is crucial to addressing the operational hurdles that $10 million to $50 million organizations face. That insight requires unified systems that can automatically collect and report on information — orders from suppliers, on-hand inventory, freight availability, shipments to customers and more — from across your network. If you’re still running the applications you’ve used from day one, chances are you’re dealing with either a lack of or conflicting sources of data.
You may find temporary relief by treating employees as the integration layer between applications and having them manually move information from one to another. You might also add an employee to allocate inventory when you launch a new channel. Neither of these fixes solves the root problem.
“There’s so many businesses that die from indigestion versus starvation,” Krinsky said. “You have to have [integrated] systems and processes, because the bigger you get, the more the consequences of not having a system will show. With a $50 million company, there’s a lot more waste than a $10 million company.”
The real solution is moving to a system that can automate as many processes as possible and provide a real-time picture of your network that flags inefficiencies and unexpected issues. A unified set ofsupply chain management (SCM) applications can offer that comprehensive view, helping you build a network that can support $50 million in sales and beyond.
This is when many business leaders begin to recognize the value of an ERP system that serves as a single source of data for the entire organization, with integrated SCM applications that manage specific functions like inventory management, order management, warehouse management/fulfillment and procurement. Exactly which of those solutions you need depends on your business; a lot of products companies start with the inventory and order management pieces.
More Resources From NetSuite
An inventory management system is one of those critical supply chain management applications that makes an ERP system tick. Explore how it accounts for all incoming, available and outgoing stock in this overview of features.
Manage a supply chain that spans multiple continents and time zones with a single, unified platform that integrates many of the elements detailed above. Take a look at NetSuite's tool, and get more advice on supply chain adjustments.
As your operations team evaluates various supply chain solutions, here are a few features to look for:
Just about any business management application can collect your most important data, and many update it in real time. The depth of reporting capabilities, however, varies widely. It might be limited to prebuilt reports in one solution or allow users to choose only from a pre-populated list in another. You want a system that allows users to easily build any report they need and, once built, updates them automatically via digestible dashboards.
This constant access to KPIs and other supply chain metrics allows decision-makers to spot supplier issues, changes in demand and other meaningful developments.
“You could say ‘Yes, I’m 90% on time to my customer expectations,’ but what’s that 10%?” Shute said. “That’s really where you start to go from good to great, is when you start analyzing that last little bit and understanding what happened. And you can’t do that without reporting.”
Even if you don’t have inventory spread across multiple stores or warehouses now, you likely will by the time you approach $50 million in revenue. Many entry-level inventory management systems cannot track inventory across multiple locations nor goods in transit, making it that much harder to optimize your stock levels.
Also investigate the level of detail an inventory management solution provides. Can it track items down to the exact bin location in a warehouse? Does it offer lot tracking so you can trace specific shipments, which is critical for highly-regulated goods like food and pharmaceuticals?
In order to get all the reports and metrics you need, information needs to automatically flow between your various SCM solutions and back to your finance system. These individual pieces of software are frequently tied together with third-party connectors. These integrators are not only another piece of technology to manage, but they can fail and disrupt the exchange of information, particularly when any of them gets upgraded.
The alternative approach — and the one we recommend — is getting all of your supply chain and finance systems from a single provider so they’re all delivered through a common platform and user interface. No integrations are necessary because the systems are designed to work in concert.
No two companies are exactly alike, and the system you select should be capable of adapting to your particular needs. Ask detailed questions of potential technology vendors, and propose detailed use cases to ensure the solution can support your operations not only today but also down the road.
The right solution will make it relatively simple to tweak workflows, add reports or make other minor adjustments as your business evolves. It will also support multiple inventory costing methods, like FIFO and LIFO, and allow users to relocate products to different parts of a warehouse when it makes sense.
“But the Old Way Works Just Fine...”
As you introduce new processes and move to new systems, some employees will undoubtedly push back. We asked our experts how to minimize this initial resistance and increase adoption among those harder-to-convince staff.
Involve all employees in the project early on, ask for their feedback and ideas, and incorporate that into your implementation plan, Sanders said. Keep them updated on what’s coming and why you’re making these adjustments. Similarly, Shute suggested first working to understand why certain people don’t want to change the way they do their jobs, then explaining how a revamped process or system addresses their concerns. They may realize there are other ways your revised strategy can make them more efficient and effective.
Additionally, reassure employees that new technology tools are meant to help them do their jobs better, not replace them.
“The worst thing you can do is just spring [changes] on to employees and mandate,” Sanders said. “That creates this really giant pushback.”
Once you select a system, treat the implementation process as an opportunity to closely examine and enhance your processes. Top vendors and consultants can act as trusted advisors because they have extensive experience with companies that mirror yours. They can recommend industry-specific leading practices and explain how your new system supports those. For example, a top vendor might set up a dashboard where you can view parcel rates and costs over time or a warehouse workflow that tweaks the way orders are fulfilled to increase shipments per hour.
It’s also critical to focus on the basics. Too many smaller companies get caught up in the promise of more advanced technology like AI or blockchain, Sanders said. The right solutions will use those technologies where it helps you, without you needing to worry about it.
For many companies growing beyond $10 million, day-to-day operations depend on one or two employees with deep historical knowledge of how everything works. These businesses still use the same, inefficient processes because they haven’t taken a moment to slow down and reevaluate, but that’s not sustainable for those with grander ambitions.
Revamp your supply chain with both our best practices and your specific pain points in mind, and you’ll be set to reach $50 million in revenue — and continue providing a great customer experience when you get there.