Your Supply Chain Team should be a Profit Center
Here’s why your Supply Chain Team should be a Profit Center for your business.
When I began my manufacturing career in a Purchasing role, I had no idea how much I would learn about the impact great suppliers could have on inventory turns, on-time delivery, cash flow and profit. After all, I was just a “buyer”. For too long Purchasing has been overlooked as an administrative activity when it should be viewed as a true profit center. The following examples prove this point.
If your company has an 8% net profit, and purchasing saves $10,000, it has the same effect on earnings as $125,000 in sales. The formula for calculating sales equivalency is as follows: Amount of Savings ÷ Profit Margin = Sales Equivalent
Using this example, we can see that the company’s in this model achieved significant savings ($10000 ÷ .08 = $125,000). And, the smaller your net profit margin, the greater the impact your cost reduction becomes.
Want more good news? The savings don’t stop there!
Supplier Performance also has a cost impact on the entire operation. As an example, warehouse space and cash flow are directly impacted by supplier quality and on-time delivery performance. The general rule for calculating replenishment levels is as follows: (Average Daily Usage X Supplier Performance Risk Factor) X Planning Lead Time = Replenishment Level.
If your company has an average daily usage of 10 for a $75.00 purchased item and the supplier’s performance risk factor is 25% with a lead time of 30 days, you will need a max level of 375 parts on hand. At $75.00 each, that equates to an inventory value of $28,125. A 20% improvement on the supplier’s performance risk factor equates to an inventory reduction of $4,500 for just that 1 material. It also increases cash flow by an equal amount. The material also requires space at an average of $11.00 per square foot. And depending on the parts size, lower inventory reduces the space required and cost on warehousing.
Finally, the average small to mid-sized business has at least 18% waste or excess cost within its operations and often times much more. A total department salary of $300,000 can therefor produce 18% more without additional resources if waste the is eliminated. In a time where benefits costs are rising, and resource availability is at an all time low, higher productivity will help companies sustain during growth and increase profitability.
Optimizing the use of your business systems, subscribing to Lean techniques to eliminate waste and leverage digital transformation tools and products will allow your company to grow both your revenue and your profit!
And that’s a proven fact.