Selling the future to reduce COGS: Issue 12

You could probably save COGS by reducing procurement costs - by selling the future.

What does that mean?

Most of a co-manufacturer’s price is driven by classic cost buckets like:

1. Raw materials & packaging

2. Direct/indirect labor & energy/utilities

3. Fixed overhead & depreciation

Add in real operational drivers - changeovers/setup time, scrap/rework, QA/compliance, yields, MOQs/lot sizes, financing/carrying costs, scheduling volatility - and you get the full picture.

But

There is a major premium surcharge that comes from your demand risk: if you don’t buy as planned, they absorb idle time and inventory distortion.

From what we have learned so far, roughly 10-15% of the purchasing price is a demand risk surcharge, driven by

(1) short runs and changeovers;
(2) schedule and idle buffers;
(3) RM and packaging hedge and MOQ exposure;
(4) rush and lead-time compression;
(5) under-take or cancel exposure;
(6) storage and cash-term effects.

Some co-mans even add fees if you won’t commit; hence, some co-manufacturers charge additional fees if you do not commit to a plan. But maybe your demand-to-supply process was not accurate, too.

But what if you increased your internal forecast accuracy, built out an accurate purchase order plan, and worked together to improve manufacturing idle time?

This is a win-win for both - brand reduces costs; manufacturer reduces costs through lower idle time and less inventory overhead. Even better, they might sell your certainty back to their raw material supplier and negotiate better terms - a virtuous cycle.

Obviously, creating this purchase order plan is hard.

You need the right S&OP process for demand planning, which creates a supply plan including inter-warehouse transfers, and it must consider constraints such as production capacity for your manufacturing partners and expiration-date considerations.

Need help with this? Check out Spherecast!

See you next time!
-Leon