For many companies, and their supply chain, the ‘Cost of Goods Sold’ averages between 40 – 65% of sales revenue.
Each year companies face and accept price increases for their materials based on their supplier’s notifications of increased labor and material costs. In turn, these companies simply pass these additional costs on to their end customers.
But, is this good business to regularly pass along these kinds of price increases? Probably not …
First, it’s not always clear what drives these increases. Secondly, by allowing regular increases, it can appear to end customers that your company lacks control over its supply chain.
By developing the ‘right’ supply chain, the company will find many opportunities to optimize performance leading to a reduction in total costs, so it may not be necessary to increase prices.
To serve customers at the right time, with the right product, for the right price, companies must build advanced supply chains. This means evaluating and selecting suppliers based upon,
1. A shared vision
2. ‘Trust’ (once developed)
3. Specific criteria (ranging from technical capabilities to issues like ‘supply chain maturity’
4. Collaboration, i.e., the ability to operate together as one organization, and;
5. Long-term contracts (with critical suppliers)
The Bottom Line. Companies spend over half of their sales revenue for the cost of goods sold. Each year there are pressures to increase costs. Businesses do not always have to increase prices. Companies can, through their evaluation and selection process, build the ‘right’ supply chains that optimize performance, reduce total costs and increase gross profits.