How to Reduce Your Cost Of Goods Sold When Prices are Going Up
Think you have no choice but to increase prices for your most important customers? Good news: there is one a lot of more you can do to turn your P&L in your favor and Build your relationships with your customers – no need to raise prices.
If you haven’t read the first part of this P&L Survival Guide, go back and start there. We’ve covered the first step to turning around your P&L without a price increase. It was about generating new income.
If you’ve done everything in your power to increase your sales and you’re still struggling, first let me offer a lot of sympathy. It’s a scary situation in an even scarier global environment, and turning things around may feel overwhelming at best and maybe even impossible.
It‘It’s not over for you. In Part II, we discuss six steps to reduce your manufacturing costs and help you get your P&L in shape so you can increase your sales do have goes on.
By definition, COGS consist of raw materials, direct labor, and inbound freight. In the past, the primary tactic used to reduce manufacturing costs was to negotiate and pit suppliers against each other. It was about finding the best price. From existing domestic suppliers to overseas options, the saying goes, “If you can’t lower your price, we must offer it.” Sound familiar?
This worked for many years – even decades – but the world has changed rapidly in recent years. Bottlenecks, bottlenecks and ramp-ups across the board have resulted in companies needing to adjust their processes and attitudes towards partnerships rather than leverage.
In the current economic situation, suppliers are no longer willing to lower prices or participate in procurement offers. In fact, they pass on price increases at a faster pace and threaten to stop supplying existing customers who don’t accept the new terms and prices. If you’re still relying on leverage, bidding, and threat-based negotiation tactics, you probably won’t get the materials or product you need. Getting better prices for the same product is no longer the primary way to reduce COGS.
Companies have also often looked for ways to lower their COGS on direct labor costs through natural turnover, training efficiencies, and productivity incentives. From manufacturing and restaurants to retail and entertainment, however, companies that rely heavily on direct labor face real labor challenges. Many are at risk because they do not have enough people willing to do the work at the wages provided by the COGS. This has resulted in a significant increase in direct labor costs as a percentage of COGS in recent years, leaving companies with little or no opportunity to reduce their COGS by reducing direct labor costs.
So if we can’t attract suppliers for the best prices or by reducing direct labor costs, we have no choice but to raise prices. Right?
Keep. You might want to double check before hitting that button.
There is one more a lot of You can control when it comes to the cost of goods sold. Here are six ways you can lower COGS while building relationships with your customers, suppliers, and your team when lowering price is no longer a viable option.
collaboration with suppliers.
Think you’re too small to make a difference? How about partnering with your strongest suppliers and utilizing her Network and purchasing efficiency? You’d be surprised how much scale and influence your larger suppliers could have.
For example – Inbound Freight: If you don’t have the size and purchasing power to buy freight efficiently, lean on your relationships and coordinate with those who do can. What if your biggest suppliers could source the freight and bill you? They may have deeper and more strategic relationships with transport companies or have their own dedicated fleet. If this is the case, it will likely reduce your net cost of ownership. Not feasible? Then maybe try negotiating with your suppliers to move to prepaid or delivery prices instead of FOB pickup while keeping the price the same for you. There are endless levers you can pull to make savings and avoid an increase in your COGS – and many of these levers will result in stronger partnerships while saving costs, which is a win-win situation.
Going forward, look at changing order cycles and order lead times to achieve economies of scale with your suppliers. Change from one-time orders to an annual or framework order, where Their suppliers Stocking the materials but only charging when you pull from stock can lower the cost per piece due to the larger order volume while reducing lead times.
There are many ways to think creatively and invent options to lower your COGS without sacrificing the quality of your product or service if They are willing to invest the time and energy to develop them.
Get Hyper Local.
In recent decades, there has been a massive outsourcing of production and manufacturing to overseas locations to cut costs. This failed in a big way with supply chain bottlenecks devastating businesses and the supply chain at large. Empty shelves stocked with toilet paper, cleaning supplies and anything microchipped are just a few examples.
So consider the very real value of doing business locally – and I mean hyperlocally. Work with your Chamber of Commerce to find or develop new suppliers of high quality materials and goods much closer to your operations. They support your community, reduce freight costs and help ensure you have access to raw materials. The closer you can build your supply chain to your operations, the lower the risk of disruption. In fact, some companies have gone so far as to create new divisions and companies just to vertically self-supply within their existing locations. now the is hyperlocal.
Do you Yes, really Do you need water-based packaging with four (or six!) colors on an iridescent pack when it arrives at a retail distribution center on just a pallet and is then (hopefully) to be recycled?
Probably not. Packaging is an important factor for COGS. Standard black printed 32 ECT corrugated is probably all you need for inner and outer packaging. Look for creative ways to reduce costs in the box itself, such as: B. Changing the configuration so that the inner flaps of the box are smaller. It’s easy to fall into the habit of doing what you’ve always done, even if the product was developed when margins were healthy during a stronger economy.
Consumer-facing packaging is of course important, and you may need to adopt a different tactic if your product is destined for D2C or shelf-ready retail. There are also alternatives and innovative possibilities for these types of packaging that can reduce costs. As packaging trends towards sustainability – which are increasingly being monitored by major retailers – simpler options have become a key initiative. They are often less expensive and can be a factor in the purchasing decision.
Switch from private label to national brand.
Go to any major retailer, whether brick-and-mortar or online, and you’ll find that almost every category has that particular retailer’s own brand available. Creating private labels for retailers is often more More expensive than the national branded counterparts due to product testing, packaging and sustainability process requirements. Private label also reduces economies of scale in raw materials and inventory. As raw material costs increase, they are likely to increase exponentially for private label and OEM products. Instead of passing these increases on to the customer, see if they would accept your national brand as an alternative. The savings generated by using your brand could allow you to forego a cost increase while improving your brand exposure.
Reduce pack sizes.
Consumer psychology is fascinating. People regularly shy away from paying more for their favorite products, but they’re far less likely to complain that they’re getting fewer items per pack for the same price. This is why changing the package size is such a time-tested cost-cutting strategy. And it’s not just them number of items in a pack; it can also be the amount per item. Take the candy bar: Many of the top candy bar brands have shrunk significantly since their debut, but people continue to buy them. many from them.
Smaller quantities per item and fewer items per box also mean more frequent purchases, which maintains margins and accelerates inventory turns.
Look at the wording.
Similar to packaging, over time we get used to the product formulas we have used. Are there any components or ingredients that could be removed or replaced with alternatives that are more readily available? The formulation applies to all types of products, from pet food, printing inks, textiles in clothing to the ingredients of soft drinks. Could you tweak your formula to make it more cost effective? without jeopardize the integrity of your brand? That last point is crucial, as not every market or product can tolerate a shift (new cola, anyone?), but the exercise of analyzing your formulations to look for changes that might work is important.
Of course, consumer perception is everything. You know your market, your product and your customers best. Not all of these will apply or work for your business, your products, or your customers, but don’t just carry on as you are out of laziness. There are always new ideas and ways to find solutions.
Explore what can be done to lower your manufacturing costs without sacrificing quality, especially when prices are no longer right.
That is a a lot of consider. And we’re not done yet. We’ve already discussed how to optimize sales and now how to reduce manufacturing costs. Next, we’ll dive deeper into your workforce and other expenses, and look for even more places to become more efficient.
Hold on. You’re almost there.