This article is published by Skoda Minotti’s Manufacturing and Distribution Group.
What are your manufacturing business’ primary goals? Normally those goals are pretty clear: sales growth, profitability, cost reduction—the list can go on and on. Manufacturing businesses must be able to monitor and benchmark different areas of their organization to support those goals and measure the extent to which they are accomplishing them. Monitoring areas like inventory levels, cycle times and sales can help set your organization up for success. That said, sometimes it takes a little creativity to unlock value within your organization in areas that are overlooked.
Manufacturers sometimes find it hard to control those costs, or find new opportunities to increase sales. If you find that to be the case for your business, have you ever thought of examining your logistics structure? Normally, this is viewed as another cost center; but try to envision it as your company’s new profit center instead. Depending on your margins or variable cost structure, something as simple as reducing freight costs by a couple hundred thousand dollars could have the same effect on your business as a multimillion-dollar increase in sales. To maximize the value of your logistics structure, it’s important to ask yourself the question, what is my current logistics strategy?
In an effort to evaluate your current logistics strategy, or build a new one, first you must analyze your current pricing platform with your vendors or carriers. Be cognizant of certain tactics carriers may try to employ that actually are hurting your bottom line. For example, a carrier may bump up shipping costs, yet offer large discounts in order to make it seem like you’re still paying the same amount of money when in reality, it could very well be costing you more over time.
Another way to analyze your logistics structure is to determine if it’s more cost effective to either “make to order” or “make to stock” when shipping your inventories. If you find your organization operating under “made to order” inventory and spending a lot on shipping, it could be beneficial to work with your customer to determine if any of these made-to-order inventory items can be mass produced and shipped all at once. A quick example can explain how strong of an impact this could have on your business:
Suppose you sell $3,000 worth of inventory to your customer at a shipping weight of 4,000 pounds which costs you $315 dollars to ship. However, after conducting some further diligence into your carrier agreement, you realize that you can ship up to 5,000 pounds of inventory, and it will still cost the same $315 to ship. It may then be possible to work with your customer to determine what other inventory items they may need in the future that you can produce and ship to them right now. That way, you can increase your sales amount, yet your shipping cost remains the same, which provides an immediate boost to your profit margin.
Lastly, one of the main keys to a sound logistic strategy is having a strong working relationship with your carrier so they understand your needs, and you can understand theirs. By trying to obtain that “win-win” scenario, it will make it easier for you to work out better shipping agreements with your carriers. Not only is it necessary to communicate with your carrier, but it is just as important to work with your customers to determine what their inventory needs will be. For example, if you can guarantee your carrier you will ship “x” amount of shipments consistently throughout the year, they will be more inclined to give you a lower price on shipping.
In today’s market, manufacturers are doing all they can to gain that edge above their competitors. There is no better time to get creative and determine whether updating your logistics strategy could be that missing piece to push your manufacturing business to the next level and unlock hidden value.
Do you have questions about reviewing your logistics strategy or other manufacturing issues? Please contact Michael Knight, CPA, at 440-449-6800 or email Michael.