Cost Cutting and Scale Start at the Supply Chain.
Supply Chains are a foreign concept to small business owners. In fact when you ask many owners about how much their relationships with suppliers costs them they often don’t know and will weigh that relationship in trust and loyalty and disregard cost. It’s not because they are blind to the costs of operations, instead they just accept it as a necessary expenditure without taking a closer look.
I once sat with a client who was an herbalist and she had been running her business for a number of years. Her business consisted of making healthy cocktails with fruits and herbs to help people reach their fitness and health goals. The business was very labor intensive since she worked by herself. She sourced the fruits and herbs, mixed the drinks, wrote the usage instructions, and delivered the product to her clients all by herself. Naturally, when we sat down to talk the first thing I asked her was how much she charged for her services. She said “$25”, I immediately told her “That price seems too low” and she debated me, until we did the math and she saw that she was losing money on every sale. She immediately told me that she doesn’t think she can charge more for her services, and asked what she could do. After looking at her process, I advised her to find a supplier for her herbs and work out a contract for pricing to reduce costs based on volume and look at reducing the types of juices she made to reduce variation, then charge a premium for customized juices. She came back in two weeks because she was having a hard time negotiating with the supplier she found, so we sat and worked out a deal with him.
The solutions to the complex problems often aren’t this easy to find, as a matter of fact they are almost always far more complex and have variable constraints that complicate the goals of the project. However, for small businesses looking to lower their costs the most important place to look first is in the supply chain.
What is a supply chain and how do I understand it?
Maybe this definition from Investopedia will help.
A supply chain is a network between a company and its suppliers to produce and distribute a specific product, and the supply chain represents the steps it takes to get the product or service to the customer.
And an easy way to model it is to look at Alexander Osterwalder’s Business Model Canvas
I often refer to section left of the Value Proposition as Production, simply because its how we produce our products and services for our customers. The Key Partners are your suppliers and distributors, the Key activities are the activities that either we undertake to produce our product or the activities that our partners provide for us and the Key Resources are things we procure often from our partners, and they go into our production process. The power in understanding these steps is unquantifiable for a small business. Similar to keeping strong records it has a profound effect on how a business owner manages costs and operations overall.
How do we cut costs then?
The answer to that question takes creativity and skill. There is no straight answer, and if someone tells you there are then they don’t know the answer themselves. You could negotiate with suppliers or streamline your processes, and both of those suggestions come with a plethora of endless options as well.
To find a solution you should start with your accounting books and let the numbers lead you to a viable solution. If you don’t have books, start by getting books then in a few months undertake some analysis to determine your solution.
If you get stuck feel free to message me on twitter (@QuanWasTaken) and I’ll do my best to help you, or if you want more information about the business model canvas, tweet me and I can email you a guide.