Let’s take a quick journey. Imagine you we are back in June 2018, and you have just started your own business. I personally chew a lot of gum, so let’s just say that your business is a gum company. As of now you only have four flavors available. You have the classic mint, you have strawberry, hot cinnamon (which tastes like that one time you had Fireball Whiskey at 17 years old) and lastly you have spearmint. The whole point of your business, your whole mission statement is that your gum is completely natural, has no refined sugars and you only work with the best materials out there. You have your mints sent from this plantation in Ecuador, your strawberries from California and your cinnamon from Indonesia. I am telling you; your gum is only done with top notch best of the best ingredients.
You have a little production facility in Florida (which is where you live and because there is no state tax) with two employees and two gum making machines. Apart from your flavors, you also get your other ingredients from great places. You use recycled paper to wrap around your gum and recycled cardboard to package it because you are very ecologically conscious. When it comes to flavor and presentation, your gum is the best gum there is out there. However, there are also a couple of problems. Problem number one: your business is relatively new; you are barely starting to hit the shelves at a couple of businesses and people are used to buying big named brands like Trident, 5 Gum, and others. Problem number two (and this is the holy grail of problems when it comes to retail): your product is overpriced.
You see the gum industry and market is filled with competitors. There is a surplus of products, and they are all around the same price point. Your gum, as mentioned, is better quality, you have better service, and it has a better taste. Those three pillars are the main reason why your gum is more expensive, but you are okay with that because even though it is $1.47 higher priced than the gum to its right and left, people like your gum and people want to chew it.
Fast forward two January 2020. You have been working hard for the past year and a half on this new venture of yours. Business is booming. You just signed a big contract that will change your whole game plan. The shelves at Walmart will now have your gum on them. This is huge. You’re pumped. But there is a small issue. On the other side of the world, a man in Wuhan China just ate a bowl of Bat meat soup. Fast forward again but to March 2020; the UN just declared a worldwide pandemic; people suddenly start buying toilet paper in bulk for no apparent reason (we will get to that later) and everyone/everything is locked down. People’s jobs are on pause and people are naturally being more cautious on their spending.Now as an avid gum chewer, I went to Walmart, and thought to myself “Should I rather buy an extra box of pasta, or should I spend that extra $1.47 on gum?” I decide for the pasta and buy a pack of Trident.
I get to my car, sanitize my hands, lower my mask, and pop a Trident in my mouth. It’s not bad at all and it serves the same purpose than your gum does. Right then and there, you have just lost me as a client. What’s your next move? If you lower your price, you will lose money, so that is not an option. So seriously what’s your next move? You investigate your supply chain.
You have heard the term before, but what really is a supply chain? In simple terms, a supply chain is every step of the way from producing to selling a product. Supply chains encompass the entire process of material supply, manufacturing, and distribution/sales. Having a well-managed supply chain is crucial to the success of a company now more than ever. We now live in a world that is very upped tempo. We rely on same day shipping and Amazon Prime. We simply do not have the same patience as we did 20 years ago. Why is that? because big companies, small companies and practically every supplier of goods started to look into their supply chains. Once companies started digging deeper into how to manage their supply chains, the costs of products, cycle production time and fulfillment rates started reducing; and that made people happy.
As mentioned before, supply chain or supply chain management (SCM), covers every step of the way; it covers product development, material sourcing, procurement, production, logistics and more. Without a well-managed supply chain, companies risk losing their competitive edge and a big portion of their customers. Keeping your customers happy is the cornerstone of a successful business, and studies have shown that customers are over 70% more likely to become returning customers if they are satisfied with how their return process has been handled. A smooth return process means a successful supply chain; a supply chain that has its links well communicated and well connected.
It is a simple chain of events. Having a happy customer leads to having a happy business which equals having a higher performance. A happy customer will order more products from your business and maybe even tell his/her friends about the amazing job you do, and the more customers, the higher your order-rates will be, and ultimately the lower the cost-to-serve for the business. However, there is a big misconception that supply chain management heavily relies on creating the most efficient process. It also looks deep into risk management and ensuring everything runs smoothly, since it ultimately really is a chain. Now think of this: you have two physical metal chains. One is 20 links long and one is 40 links long. Which one would be easier to put in the trunk of your car? If you thought that the 40-link chain is easier to store in your trunk, you definitely have never stepped foot in a Home Depot and that’s okay, nobody is judging here. But the premise of handling/managing a supply and a metal chain is the same! The shorter your supply chain, the less liability, the more communication and ultimately, the best response time/service.
Now let’s look at some real-life examples, no more fictional gum companies. Remember that previously it was mentioned that people went nuts over toilet paper when the pandemic started? Let’s see how the toilet paper supply chain handled that. The first stage of the Toilet Paper supply chain is the paper supplier/paper mills. This then proceeds to the manufacturer (P&G, Kimberly Clark, etc.) where it is assembled into individual rolls, packaged, and stored. It then moves to wholesalers (Costco, Walmart, Target, Amazon, etc.) which place the actual packages in the shelfs and make it available to consumers. Toilet Paper is a very expensive item to have stored. It is very light weighted, very bulky, and rather inexpensive to sell. It makes no financial sense to store too much of it since it takes great amounts of space, and one pack does not have a significant price point. Because of this, and because the toilet paper industry is not seasonal and has always been rather constant, companies have just the right amount of toilet paper in their warehouses, maybe a 30% surplus in case sales and demand rises. Compared to shampoo or other personal care products, setting a new toilet paper facility is very expensive. Machinery is enormous and takes a lot of space. Adding a new facility is also not very financially viable; it would take a considerable amount of time to set up, and maybe by the time it is done, toilet paper sales are back to normal trends and the pandemic is over. The fact that it is a product that is rather expensive to produce and rather inexpensive to sell, makes it hard for manufacturers to keep up with triple digit sales increases.
One very smart thing that companies did to keep up with these ridiculous sales trends was to limit the amount of toilet paper variety. Instead of stopping the machinery every hour to produce a different kind of toilet paper, they would just stick to one or two types and have the machines running for hours. Another thing that was done was re-strategize the packaging types. Instead of packaging 12 or 24 rolls in a pack, manufacturers are now packing four, or six, which results in more toilet paper being available to more people without really producing more. I think that these two changes make the system resilient to future disruptions, however, another change could be to produce the toilet paper in less space consuming ways, such as individual sheets piled up together.
Moving on to another real life example. We’ve all heard of it, we’ve all used it. It practically runs the world now. It has one day delivery on anything you can think of. It’s fast, it’s reliable, it’s amazon.com. Amazon has an arsenal of products. Ranging from baby pacifiers to furniture. It’s amazing. However, how can they fulfill the millions of next day amazon prime shipping orders they have daily?
Well, Amazon has one of the best and most interesting supply chains in the retail business. Although recently a lot of controversy has arisen with Amazon drivers and employee treatment, I will not take part in that discussion for this post. For simplicity’s sake, I will refer to Amazon’s supply chain as the entire process from warehousing, to inventory management, to pricing and delivery. I will not talk about procurement or material sourcing. To complete their fulfillment, Amazon offers to options to its sellers: FBA (Fulfillment by Amazon) and FBM (Fulfillment by Merchant). For FBA, Amazon takes care of all logistics and third party sellers just have to send bulk products to Amazon’s fulfillment centers for them to pick, pack, and lastly, ship.
On the other hand, while participating in FBM, third-party sellers are responsible for listing their products on Amazon’s webpage, and handling all of the storage and fulfillment processes. Following, is a chart that represents Amazon FBA among worldwide top-sellers.
Amazon currently holds 112 million Prime members, which rewards its users with two-day shipping for their monthly paid membership (just imagine the amount of orders per day! ). With over 175 operational fulfillment centers spanning over 150 million square feet, Amazon has done a great job adapting to the record breaking past year. However, having all this space to hold the shampoo you ordered does not mean anything if you don’t have a powerful delivery fleet. Each Amazon truck helps carry more or less 2,000 boxes from fulfillment centers to the sort centers. From there, Amazon distributes the packages according to the location and the delivery speed required. Once done, the company selects the most efficient transportation method to deliver these packages.
Not only does Amazon have an impressive truck fleet; Amazon can also count on an airplane fleet that helps meet the one or two-day delivery Prime promise. Departing from over 20 airports nationwide, each plane can carry about 30 or more containers.
All of this was probably a little too dense to handle so let me end on an easy note with a couple of takeaways. First of all, is crucial for a business to dig deep into its supply chain management. Number two, if you can’t lower the price of your gourmet gum, change the sourcing, material handling process, or fulfillment rates. Apart from that, I hope you gained a little insight on how an aspect of the world works. Until next time!
