How to Reduce Cost of Goods Sold
I want to talk about two areas – supplier pricing and excess inventory that impacts your Cost of Goods Sold as a business owner. If not measured, these areas will have a major impact on your business.
Supplier price increases can be lethal to the bottom line if not measured. They can kill your profit margin in the blink of an eye. In reviewing supply costs with a coaching client, I was told they did not measure the cost of their plumbing supplies because it was too hard. Too hard?
My response was…
How do you know you are getting the best price when purchasing?
How do you know you are charging your customer correctly?
The response was, “We estimate when invoicing customers.”
Estimate? How do you estimate if you are buying from multiple suppliers? It is difficult at best to estimate if you are NOT tracking your supplies purchasing. Why would you buy from multiple suppliers? If you’re buying the same widget from vendor w, x, y and z (and they were), I guarantee you’re not getting the best price from all of them.
To improve the process, my client tracked their purchases for 3-weeks. The goal was to show that their current process was detrimental to their business. Guess what? It was. From there, we created a strategy to source from two suppliers, track the supply costs, and ensure the customers were charged accurately. Once implemented, they quickly realized how easy it was to do with the new process in place.
Excess inventory sitting on the shelf collecting dust serves no purpose. First, you must dust the darn stuff and second, you’re losing money! If you’re like me, I don’t like to dust!
Turning your inventory over frequently is a good thing. It means you’re making sales and putting money in the bank.
A manufacturing client was churning out finished product; however, they had an excess inventory of parts waiting to be used. When we looked at part turnover, we found they had in excess of 60 days. 60 days! That was a million-dollar problem!
I asked: Why do you have 60 days in parts inventory?
Their response: “We don’t want to shut down production.”
I asked: When was the last time that happened?
Their response: “Never.”
Never in their entire existence had they shut down production as a result of not having parts to manufacture. The light bulb went off in the owner’s head that they needed to fix that problem and fix it quickly.
In working with them, we were able to implement a just-in-time inventory system with their suppliers to ensure production always had parts to produce. The buyers did struggle with the change; however, they adapted to it once they saw that it worked. By doing a pilot with a few parts, they quickly realized that it worked and was a huge benefit to them and the company.
An inventory management system is key to monitoring and measuring supplier costs and inventory. It can be as simple as an Excel spreadsheet or a cloud-based application depending on the complexity of your business. In addition, it is critical you identify key performance indicators (KPI) to measure key systems within your business. It’s not hard and it needs to work for your business. By measuring your key systems, you will be able to optimally run your business and deliver exceptional customer value!
If you’re experiencing problems in your business related to time, team, or money, please don’t hesitate to reach out to firstname.lastname@example.org or click to a schedule a complimentary 30-minute strategy session.