Shorter the supply chain, longer the profits.
I know, I too have always been under the impression that the longer the chain the better. Though a supply chain is nothing like a cuban link. You might be asking yourself, “what is a supply chain?” Well, I’m glad you asked. A supply chain is by far the most important, overlooked component of your business. A supply chain is essentially, the path that your product travels through from manufacturer to end user. Still a bit confused? Check this out.
Let’s say you are an artist and you paint pieces of the San Francisco skyline during every full moon, to sell online for $40 each. Just on the surface, it’s pretty obvious that one of the essential components of you making these pieces is a blank canvas. Let’s consider that you buy these canvases at a local art store for $10 a piece. I can promise you many things, but in this moment I’ll promise you that these canvases weren’t made in the store that you bought them at. In fact, they more than likely weren’t even made in the same country. There’s a great chance that most things you buy for your business, were assembled and/or produced in a country outside of the United States.
The change of hands of the canvas from the manufacturer to the end user, who is either you or your customer, is what we call the supply chain. It’s highly likely that the canvas has been sold many times before it was bought by you, with the price rising every time. Take a minute and think about the most important product in your business. The one essential piece of your operation that you couldn’t conduct business without. How many people do you think bought and sold it before you became it’s new owner? Anyone in the supply chain that conducts business between you and the manufacturer are called middlemen, though I’m sure there are many middlewomen as well. So let’s ask another question. How much money would you be able to save if you were able to remove some of the middle people? Actually, here’s a better question. How much larger would your profit margins be if you were able to minimize the number of people in the supply chain?
In the case of the canvas that sells for $10. If you were to contact the manufacturer directly, I know for a fact that you can buy the canvas for $1.20. So what accounts for the rise in the price of the canvas? Well, profits. Typically the manufacturer sells to a wholesaler. Who then adds on to the price that they paid for the canvas, the price for them to conduct business and their desired profit. The wholesaler then exports from their country to a wholesaler or a distributor in another country. The new owner then does a similar practice of adding on to the price that they paid for the canvas, the price for them to conduct business and their desired profit. From there a retailer buys the canvas from the wholesaler in order to display and sell on their shelves. In order for you to one day come in and purchase it. In this basic example you’ll see that there were just four parties involved in your purchase of the canvas. Just imagine how many parties are involved in more sought after items with greater value like electronics, daily use products and luxury items. Cutting out the middle people, can not only bruise some egos but increase your profit margins by dozens of percentages.
How do you get in direct contact with a manufacturer? Well, Google is still effective. Though if you really want to work smart you’ll hop over to Alibaba.com, which is essentially the Ebay for buying items in bulk directly from manufacturers. How else did you think I was able to find the $10 canvas for $1.20?
Get as close to the source as you can. With less middlemen, the lower your costs will be which increases your profit margins. With larger profit margins you can either pocket more money or lower your prices to undercut your competition, while maintaining your desired profit margins. Good luck!
Chadwick Burnaw - Founder