Like many companies these days, my raw fruit sports drink company Amara doesn't actually manufacture our products ourselves. We work with various suppliers who sell us the ingredients and components we combine to make our products. In fact, we don’t even combine the components -- we pay another company to do that for us as well. The reason for this is overhead. If we did everything ourselves, we would have to spend several million to buy all the equipment needed to mix the fruit and bottle the product. But just like every decision you make as an entrepreneur, there are trade-offs.
When I first started the company I relied too heavily on my suppliers for quality control and cost control. I assumed the systems they had in place were better than anything I could come up with and I should be fine with their loss percentages. Some of the loss percentages were very high though, as high as 10 percent, meaning if they lost 12,000 bottles during production that was considered a “success”. For a small company that is a huge amount of product to lose, so I decided to find ways to reduce these costs. Using these tips I was able to get our average loss ratio below 3 percent, saving us at least $5,600 in lost product per production run.
For those looking to help improve your outsourced production process:
1. Understand each other’s businesses. Your suppliers often have different goals than you do, and while some of them should be aligned, you’d be surprised how often they aren’t. Take the time to visit your suppliers and do a deep dive into their business processes and goals. As you work together you will better understand each other’s businesses and what’s important to the other party. You can both use this information to become a model supplier and model customer.
2. Build internal relationships. Most new business owners spend a majority of their focus on customer relationships. Yes, sales cure all but having solid relationships with your suppliers can be just as important.
In my example many of the production-line workers rarely see client brand representatives -- let alone the owner of the client company -- so they were all very happy to try and help us reduce our loss percentage. I spent so much time on the line I became friends with some of the workers. In the end, just by being on site, observing the run and talking to the workers about how important it was to our company that we reduce our operating costs, we were able to reduce loss percentage down considerably.
3. Track everything. You can’t manage what you can’t measure. Track the costs of everything going into you getting a finished good -- from loss percentages to raw materials transportation costs. If you know what your supplier’s costs are, you can better determine ways to reduce them and then track those reductions over time. Cutting costs is often one of the easiest ways for small businesses to increase your gross profit margin.