The Seven Signs Your Supply Chain Is Hemorrhaging Money & How to Fix It

This is a special guest contributor post by Nathan Resnick, CEO of Sourcify

For any company, running out of inventory is painful.

When you’re in the middle of a three-year 2,754% growth spurt, running out of inventory for a full six weeks … is close to hell.

For Spikeball, that’s exactly what happened in 2014.

The company had been importing their product through a single port. When workers at that port went on strike, their product was literally stuck on the shipping yard with no way out. The outage cost Spikeball hundreds of thousands in potential sales and was a rude awakening to one of high-volume ecommerce’s most overlooked, but costly ingredients: supply chain management.

If you’ve been hit with a supply chain or logistics issues, you know the pain firsthand. If you haven’t yet — the best way to deal with these issues is to prevent them.

How?

By getting a wide-eyed understanding of the seven telltale signs something’s wrong and then righting your supply chain management wrongs …

1. You Work with a Wholesaler or Trading Company, Instead of a Factory

One of the biggest flaws we see companies making is working with wholesalers or trading companies. Though they can add value in certain situations, 90% of the time you’re going to want to go directly to a factory.

(An easy to spot trading company on Alibaba)

There are some easy ways to determine who you’re dealing with. First and foremost, look at the actual name of the company. Several trading companies have the words “industry,” “technology,” or even “trading company” hidden in plain sight.

If your manufacturer has one of these words in their name, chances are they might not be an actual factory. Though some factories do also run trading companies to help with the exportation of their products, you need to do your due diligence to confirm this.

Trading companies and wholesalers will usually mark up products anywhere from 10–30% on average. When you’re producing in large quantities, this added margin will drastically increase your cost.

If you’re working with a manufacturer who says they can handle multiple products that stem from different raw materials, they probably aren’t a real factory. Though they may focus on multiple product categories, if they can produce products that don’t stem from the same raw material, something isn’t right.

2. You’re Smarter Than Your Sourcing Agent

I can’t say all sourcing agents are bad, though you should be aware that there are some very lazy ones out there. By lazy, I mean they will literally take an invoice from a factory, add a few dollars to the price, change the company name to theirs, and then send it your way all while hiding the factory relationship from you.

If you’re working with a sourcing agent, make sure they are providing value up and down the supply chain. Sourcing agents can provide value in a variety of ways, from actually being your point of contact with the factory to running quality control checks before products are shipped.

For Spikeball, a good sourcing agent meant someone with deep expertise in plastic manufacturing. Their product comes with a lifetime warranty where they will replace any broken part. This pushes them to create the highest quality product.

When they want to make structural improvements, one of the first steps is asking their sourcing agent to see if it’s physically possible to mold plastic in the way they’re thinking.

Good sourcing agents will not only have years of experience in a specific country but also extensive know-how within a niche industry. As an example, in my seven years in and out of China, I’ve met plenty of people who had been there for longer than me, but were still unfamiliar with the language and culture. That’s a bad sign.

If you take this route to mitigate risk, make sure you’re dealing with someone who knows your industry well.

3. You Work with Suppliers Outside Your Product Realm

When vetting manufacturers to produce your products, the biggest telltale of all is seeing what they’ve produced in the past. You want to work with manufacturers who have made products that are right up your alley. The more overlap their previous products had, the better.

The best way to determine this is by asking to see photos of products they’ve produced in the past. They should also be willing to send you samples for free if you’re willing to pay shipping costs.

The only problem with this approach is that you don’t know if they were the actual factory who produced these products. This is why you want to ensure the photos of their factory that they send you have their name card in the picture. You could also get them to take a photo with the day’s newspaper to see current conditions.

And, of course, nothing beats a personal visit.

4. You Don’t Understand Your Component Costs

Your product is going to be made up of different parts. You should know how each part is made and what costs are associated with each component. When you go to cut costs, this will help you understand the breakdown of costs around your product.

(Example rundown of boxer brief quotation from factory)

Even for simple apparel items like boxers, your costs will revolve around the raw material, time to cut and sew the boxers, and sublimation costs of printing. For a startup brand, knowing these costs will help you understand your breakdown of total unit price.

For example, when we produced custom suits like Conor McGregor’s, we knew the breakdown of fabric cost, printing cost, and labor cost at each stage.

5. You’re Unfamiliar with the Balance of Price, Quality, and Lead Times

The three main goals we see people set within the supply chain industry revolve around price, quality, and lead times. Companies want to produce products faster, at a lower price, and with higher quality.

Unfortunately, improving all three at the same time is near impossible.

Instead, look at your supply chain from a bird's eye view and see how all three are correlated. If you can decrease your defect rate, your overall price will lower. If you produce your products faster, your quality may decrease.

As an example, if you’re trying to catch viral trends like the recent Dad Bod bags, speed to market is going to be your main focus. Though quality should improve over time, if you launch with a product that isn’t perfect, you’ll be able to make adjustments to it overtime.

By understanding your most important goal, you’ll be able to focus your efforts on improving that one standard. Don’t spread yourself too thin when optimizing your supply chain.

6. You Don’t Know Your Weakest Link

Your weakest link can be determined in two ways.

Either your product will have a part that often breaks or one source regularly causes delays. If it’s a product issue, root out what’s wrong with that part itself. This could stem from the factory producing it (process), the way it is engineered (design and blueprints), source materials, or even how it interacts with related components.

If you have a source that is causing delays, decide if you can work to keep them on schedule (particularly if their price is competitive) or find another source. Going the first route almost always means an in-person visit.

Above all, your supply chain shouldn’t hinge on one company, as single sourcing at scale can kill a business overnight.

The best way to understand your weakest link is by seeing what part of your business is causing the most headaches. If a certain component in your product keeps falling apart, you need to talk to your factory to see how you can redesign this piece.

If your shipping times to one part of the country are always delayed, it may make sense to open a warehouse there or invest in a third-party logistics (3PL) partner.

An Example Weakest Link

For a watch company like Original Grain, every component is essential to customer happiness. If your watch stops working, it’s often a problem with the internal movement. If the strap falls apart, it can be linked to a problem with the watch strap supplier.

Like most ecommerce companies, watch companies deal with an assembly factory who is responsible for sourcing other watch components from smaller factories who focus on these specific watch parts. This means the team at Original Grain Watches primarily deals with factories who put their finished watch together, while that assembly factory will deal with factories who produce watch hands and watch cases separately.

(Original Grain team sourcing wood components for their watches)

This enables a company to mitigate some supply chain responsibility, as they aren’t dealing with specific part factories. Same goes for clothing, where a company will primarily deal with the cut and sew factory, not the actual factory who produces the raw material that those clothes are made out of.

With that said, when a component in your product continues to break, you need to let your assembly factory know sooner rather than later. For Original Grain, the factory dealing with their wood wasn’t keeping up and it began to crack randomly. This caused them to realize early on that they needed to find a wood supplier who could keep up with their quality standards.

7. You Don’t Clearly Communicate Your Core Competencies

In today’s world of ecommerce, core competencies among all stakeholders has become common practice. This means your internal team, investors, and customers should all be on the same page in regards to the messaging and brand your company displays.

As an example, for Patara Shoes, a rising brand producing versatile shoes, their supply chain revolves around transparency as they showcase the unique process behind how their shoes are handcrafted.

Even if your product isn’t branded in a sustainable way, ensuring your factory understands your company’s core competencies — and ruthlessly pursuing working relationships that reflect it — will improve your supply chain.

Leave Nothing On the Table

For Spikeball, they soon realized a key to logistics at scale: never single source. They now import through two ports in America alongside their global distribution setups in Europe and Australia.

Though sourcing through a middleman can be an obvious area to cut costs, you need to ensure you have two fallback plans if you’re looking to make a manufacturing switch, as you never want to be single sourced.

Improving your company’s supply chain is an ongoing process, and you shouldn’t make drastic changes overnight. Monitor and understand areas that can be improved. If you catch one of the telltale ways to optimize your supply chain, it’s time for a change.

Ask yourself …

1. Are you working with a trading company or factory? (Read here to learn even more)
2. Is your sourcing agent providing enough value?
3. Are your suppliers product experts?
4. What’s your breakdown of product costs?
5. How do you balance price, quality, and lead times?
6. What is your supply chain’s weakest link?
7. Are you and your manufacturer on the same page with your core competencies?

As you look to improve your supply chain, keep your eyes open for these telltale signs to ensure you’re asking the right questions.

About the Author 

Nathan Resnick is a serial entrepreneur who is the CEO of Sourcify, a platform that makes manufacturing easy. He has brought dozens of products to life and used to live in China.