For most food and beverage businesses, the first few stages of growth are exciting
Sales grow and profits grow accordingly. But then you reach a certain point and the numbers stop looking so impressive. Sales are still growing, but your profits aren’t growing at the same rate.
One of the reasons for this is that the ways of working you developed when you were a small business aren’t fit for purpose when you’re a medium-sized business. The result is that they’re costing you more than they should. And that’s why your bottom line is suffering.
The area of your business where this is most likely to be a problem is your supply chain. As you scale, there are plenty of ways your supply chain could be costing you more than it should. And because your supply chain is probably the biggest cost associated with your business, its inefficiency is likely to be having the biggest impact on your bottom line. Reducing costs will help to boost profitability, creating capital you can use to fuel your next stage of growth.
When I work with clients to reduce the costs in their supply chain, I find it makes most sense to divide the costs into two areas: variable costs and fixed costs.
Let’s look at each of them now.
How to reduce the variable costs in your supply chain
The chances are that the biggest variable cost in your supply chain budget is transportation.
At first glance, it seems like a simple equation – the more you ship, the more it costs. But it is more complicated than that. There are things you can – and should do – to maximise the efficiency of your spend.
There’s a mental shift that needs to take place as part of this process. As a small business you were used to buying what you needed. As a medium-sized business there are economies in planning your purchasing according to the size of the trucks and containers that deliver your inventory rather than what you need.
Then there are the manufacturing costs to consider. You need to know exactly how much each unit costs you to produce. When you know this, you can benchmark costs against industry standards and look at where you can cut costs.
Then there are the inventory costs. Are you using your space in the most efficient way possible? What do your wastage stats look like? (WRAP estimates the food sector wastes 3.1 million tonnes of food and drink with a value of over £5.1 billion. It’s bad for the environment and it’s bad for your business.[source])
In my experience, the biggest problem most food and drink businesses have is that they buy too much and have too many assets at any one time. Agile replenishment systems, for example, allow you to buy what you need at the very last minute, reducing wastage and storage costs at the same time.
You should also look at your packaging. Ask yourself honestly: is your packaging over-specced? Could you reduce the spec, reduce the costs and still deliver on brand expectations?
How to reduce the fixed costs in your supply chain
In supply chain terms, your fixed costs essentially break down into labour and systems.
Take a look at your staffing levels. Do you have too many staff in your business? Or, more accurately, do you have too many staff in the wrong areas of your business?
Inefficient processes typically mean you need more people doing them, which in turn means they’re costing more than they should. Streamlined processes are more efficient and need fewer people.
At this point it’s important to say this doesn’t necessarily mean you have to get rid of people, but you might want to make better use of them. For example, could you move people away from operations and onto the sales floor where they can make a direct contribution to the bottom line?
Then there are the systems you’re using. There are typically two ways they could be costing you more than they should. The first is that you’ve simply outgrown them. A system that worked perfectly when you started may become too cumbersome and longwinded now you’re bigger.
The second is that the system is simply outdated. There are several ways to spot if this is the case in your business. Are the support and maintenance fees too high? Does it fall over more often than it used to? Are you looking at upgrades when you should be looking at switching to a new system altogether?
Outdated systems cost your business time and money – you need to get them under control if you want to continue to grow a profitable and sustainable business.
Getting the costs back under control is crucial for the continued growth of your business. It can also be scary. Recommending a switch to a new way of working is easy to say but far less easy to do.
But not changing is not an option. Your current ways of working are holding your business back. They may even end up causing it to fall behind and fail.
As you look to change, remember that reputable systems suppliers have a great deal of experience in working with businesses switching from an old system to a new system. They will know the challenges to overcome and the pitfalls to avoid. They will also be used to helping businesses track workflows, transfer from the old to the new and train staff in the new way of working.
Remember too that you don’t have to tackle the work alone – the support of an expert consultant gives you expertise, peace of mind and an extra pair of hands. I have worked with businesses trading with the big names in the industry and with the leading supply chain service providers. Perhaps most importantly, I understand that if you want to grow, your systems and processes need to be grown up.
If you’d like to discuss supply chain cost reduction in your business, get in touch. Let’s have an informal conversation about where your supply chain is costing you more than it should – and what you can do about it.