How can eCommerce Sellers reduce their production costs?

One of the main things on any eCommerce brand owner’s mind is: “How can I reduce the cost of getting my product to the customer?” 

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So we asked our Head of Supply Chain and Sourcing, Warren, for his views on how to reduce what is typically one of the biggest costs for any product - manufacturing.

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What are the key things to do when checking whether the manufacturing price of your product is competitive?

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The first step is to get an open costing sheet for your product (or products). That means getting a breakdown of what raw materials the product is made of, what the cost of those raw materials are, and what the cost of the labour to turn those raw materials into your product is. Then do a common sense check of whether the costs you’re being given in the open costing sheet seem reasonable (you can search for online indexes to find some examples of how much raw materials and labour should cost).

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The advantage of doing a full product breakdown is that it also gives you the chance to pause and take a look at how your product is made. Do you really need all of the accessories and/or packaging that come with your product? For example, eBrands had a product group within the portfolio where the brand manager simply went through the whole product range with the supply chain team and removed unnecessary plastic bags from the products, which resulted in a significant cost saving and made the product much more eco-friendly. 

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The second step is looking at your competitors’ products and checking whether i) their products are cheaper than yours and ii) if you think those differences may be down to more competitive sourcing.

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The third step is making sure that you question your factory. You shouldn’t be afraid to have an open discussion about pricing - you can often learn a lot from these talks.

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If you don't think that you're getting a competitive price for your product, how do you negotiate cost reductions with your factory?

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This goes back to step three in my first answer – don’t be afraid to ask. Make sure that you do your research beforehand and come in with good reasons for your request for lower prices:

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• Have raw material prices reduced? (This is definitely one to watch out for as raw material prices are now coming under downward pressure in some areas, in part due to the slowdown in global economic demand)

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• Is it the low season for the factory?

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• Have currency exchange rates changed in the factories favour?

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• Is there new government legislation that has benefited the factory? There can be targeted government initiatives with rebates for foreign trade that will boost factory profits for example.

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Another point that I believe is crucial to successful negotiations on price is to always negotiate “face to face” with the factory. This can be in person or via a video call. It is essential to develop a good working relationship with the factory’s management team.

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If you're not happy with your current manufacturer, how would you find a new supplier?

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 A word of caution, before you look at switching suppliers, always have a frank and open discussion with your current supplier. It is amazing how often an open discussion can lead to compromise and a continuation of the relationship.

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There is always a cost to changing suppliers and you may see a short-term rise in costs (whether that is in time, money or resources) even if the new relationship will eventually lead to substantial savings. 

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If you do decide to switch supplier - for smaller customers, it’s always easier (and probably more profitable) to look for factories that already have experience of producing products that are in your products’ category.  

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It's also important to make sure that the new factory is open and keen to develop a longer-term relationship. You are looking for a stable and competitive partner to minimise volatility in your supply chain. Long-term relationships also have the chance to yield much more value because it allows you to build the systems, networks and overall supply chain infrastructure that will allow your business to develop the competitive advantages it needs to perform in the marketplace.

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Your supplier will also usually be a very good source of information on the latest developments and trends in packaging and design and building a strong long-term relationship with them will yield the chance to keep on top of developments in sustainability.

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A final word

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Decision-making in product sourcing (as with many other business areas) often ends up being influenced by our perceptions and gut feelings. You shouldn’t ignore these. Your intuitions can often help to act as a guide for decisions where data is limited and uncertainty is high. 

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The supply chain is the heart of any eCommerce consumer goods business and mistakes here can’t be overcome easily.

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