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Having a successful food or beverage business takes more than just having a tasty product and good sales! Michael Fougere has been in the CPG industry for over 20 years and he knows a thing or two about optimizing your supply chain so that you can grow a successful and healthy business. He has shared some insights below to help entrepreneurs get a grasp on managing their supply chain in the right way!
The first half of my career I worked for some of the biggest CPG companies in the food and beverage industry and I was lucky to work for some great managers who were willing to mentor me. When I moved to the consulting side and worked with my first entrepreneur, I was snake bit! Being an adrenaline junkie, I was hooked on the world of entrepreneurs, especially newbies!
Working in the world of entrepreneurs was eye opening as I learned that they have one thing I did not have: creative vision. An entrepreneur can take a concept, nurture it and birth a prototype while consuming a good chunk of capital.
Once an entrepreneur has a prototype in hand and they are ready to market and sell, many will recommend hiring an experienced sales or marketing executive. While sales & marketing are definitely important, hiring a big shot executive that early can be expensive, and maybe not the best place to spend all your capital early on!
I have seen it time and time again when an entrepreneur goes this route. They go big on marketing and sales right off the bat and when it comes time to make the product, the entrepreneur will only have enough money left to hire a college intern or a distant relative with some retail experience to run operations. Often finding that after the first year they are not making margin.
In the world of CPG today, the money is in supply chain and freight!
Someone with experience in supply chain will easily pay for him or herself. I work with many early stage entrepreneurial spirited companies on margin improvement, tearing apart their supply chain and rebuilding it with typical savings averaging 20% on cost of goods. This 20% savings can easily cover hiring an experienced supply chain professional at the beginning.
I admit that some of that savings is like picking fruit from a low hanging tree and the entrepreneur can start by doing a lot of it on their own. A few examples of what brands should be doing from day one to set up their supply chain:
- Electronic Data Interchange (EDI) As early as possible, get your business up on an EDI system for all transactions with customers, suppliers, warehouses, manufacturers and carriers. There are some reasonable, cost-effective systems to work with. The benefits to the start-up will include optimizing staff size as business grows while maximizing your order-to-cash flow.
- Turnkey – To conserve cash during your startup period, you may want to have the co-packer quote a turnkey project where they supply 100% of ingredients and packaging materials and sell you a finished product. This type of pricing will typically include a 10% up-charge to cover their administrative costs, however it will likely still be cheaper than what you can get on your own in the beginning. My suggestion is to run cost of goods model for both turnkey and non-turkey options and compare to make a good business decision. Whatever you decide initially can always be changed in the future. Need help choosing a co-packer?
- Plan Accordingly – If you decide to order your own ingredients you should factor in enough ingredients to do one more batch of each SKU you plan to run for your initial run. You want to have enough ingredients on hand in the event you run into a problem when making the initial batch. The last thing you want is not be able to run what you planned to run because the initial batch needed to be scrapped.
- Forecasting! To develop the best possible pricing on ingredients and packaging, provide suppliers with an annual forecast when negotiating pricing. A forecast is NOT a commitment and should be adjusted on a quarterly basis once you begin shipping orders. Your initial purchase orders will be small to begin with and price will be the highest you will ever pay. If your suppliers know what they can expect for future orders, it could help you upfront.
- Delivered Pricing – Freight is a component of ingredient and packaging procurement. When ordering for the first time, get quotes for delivered pricing and non-delivered pricing. Initially it may make sense to buy based on delivered pricing otherwise you need to have someone on your team manage all the admin related to freight, such as quoting, invoicing, payments etc. It can be consuming for a small staff. However, as soon as possible, try to manage your own freight. Suppliers will be less diligent about cost of freight because they are just passing it on to you. Freight will become a bigger expense as your business grows so you definitely need to plan to manage it directly as it impacts your cost of goods.
- Freight – There are savings to be gained by managing freight including UPS and FedEx. Many start-ups think nothing of shipping materials overnight to meet a poorly planned production run only to find out at month’s end that their FedEx bill is in the thousands of dollars. Sourcing the right Freight partner can be a huge advantage, especially one that has experience working with startups and is able to grow with you. You want a freight partner that can provide value added services at no additional cost. Setting up freight consolidation programs or pool shipments for outbound customer orders can generate significant savings.
An experienced supply chain professional will then use their experience to mine for additional savings, be it through finding alternative sources, negotiating favorable supply contracts, bundling purchased items from fewer suppliers.
At the end of the day, establishing a solid supply chain from the beginning will provide the basis for launching a successful business and will properly set the entrepreneur up to sell more through their developed marketing and sales programs.
About Michael Fougere
Michael Fougere is the owner of Bayview Consulting Group. He is a consummate professional with over 20 years expertise in developing and executing successful manufacturing and distribution strategies in the food, beverage and nutritional supplement industries utilizing Third Party Manufacturers and Logistics Providers. Demonstrated expertise ranges from product/package development, supply chain, processing and packaging, logistics, distribution and customer service. Specializing in Start-Ups and Early Stage entrepreneurial spirited companies.
Learn more about Michael and his services at Bayviewconsultinggroup.com!