Businesses have several avenues to increase profit. It could be boosting marketing efforts to improve sales, increase the selling price, introduce a product to the new market, and so on. While those strategies are good, their impact on profitability is less. The best and easy way to increase the margin is to improve your supply chain performance.
We will see how improvement in supply chain affects the income statement.
Table 1. Current/baseline income statement.
The table above provides us an overview of a typical income statement. We see that the cost of goods sold is 60% of total sales leaving 40% for operating expenses and income. According to the Annual Survey of Manufacturers by the United States Census Bureau, the cost of materials accounts to as high as 80% as a percentage of sales. That data alone would give us an idea of how procurement in the supply chain plays a critical role in driving profits.
What if we can reduce the cost of raw materials by 5% to 20%? Then the financial statement would look like this;
Table 2. Comparison of income statement between baseline and improvement of supply chain.
Reducing the cost of materials has a profound impact on the bottom line. Other expenses are difficult to reduce because they are necessary to run the business, and even if reduced, their impact to profit is little. The above improvement is attributed to materials cost. How about if you reduce further the COGS by improving other areas in the supply chain – reduce logistics cost, optimize inventory, improve forecasting, etc? You get the idea.
Therefore, the supply chain management is a key driver in maximizing company’s financial health.