Thursday, September 23, 2010

Supply Chain 101

The next time you buy a loaf of bread, think of John Holbrook. He's a guy in Richland, Washington working on new ways to fertilize wheat crops. For consumers, the supply chain goes no further than the retailer where they bought the bread, but without men and women similar to John, bread might be a lot more expensive.

I don't know John, and I hope he doesn't mind me using his name, but John is only one of the hundreds (if not thousands) of unspoken heroes that have an effect in the supply chain with regards to bread.

The retailer's supply chain begins with the wholesale distributor, where the money generated from the sale of a single loaf of bread filters down to pay the scores of employees that manage the stock, pay the bills, sweep the floors, and to the driver who trucks the bread from the warehouse to your store. If there's a baker involved, he adds another link to the chain. The guy that delivers the grain to make the dough… another. Then there's the ancillary links like the printer that prints the wrappers supplied by a paper company, and so on and so forth- all the way back up to John who at this moment knows less about you than you know about him.

We can see the effects of the supply chain in every loaf of bread we consume. The North Dakota Wheat Commission reported in 2008: it took about 20 cents worth of wheat to produce a single loaf of bread— and it's going up. The rest of the costs is spread out over energy, transportation, bakers, advertising companies, marketing, packaging, wrapper manufacturers, labor cost, down to the little twisty that holds the wrapper closed.

The 20 cent figure mentioned above was approximately 13% of the in-store cost of a loaf of bread ($1.50) back in 2008. The other 87% came from all the other links in the chain. These costs are not fixed as there are opportunities to adjust costs at every step. For example: Walmart worked closely with manufacturers and suppliers to streamline their manufacturing and delivery processes, resulting in lower costs to Walmart. The truth is, there is opportunity to work at every level of the chain to affect costs.

A convenience store's common profit denominator is the penny, not the dollar. Every single item in a store should be there for a purpose. Either it produces a profit on its own, or it causes profit to be generated on a sister item. The other side of the coin is it might produce a loss, or cannibalize a profit-producing item next to it. Even if it just sits there smiling pretty, you're paying rent on the space it occupies. If you owned 100 pieces of real estate, how many would you allow to be occupied for free? Most real estate investments are made in income producing property. It really doesn't matter whether it is three acres or three inches.

Don't forget about John. He's working hard on the west coast to help you make a profit. The least we can do is to help ourselves. Go to your store. Pick up and item you have never seen before and ask, "What have you done for me today?"

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