Managing The Rising Cost of Materials and Logistical Challenges: Part 1
Operating an e-commerce business in the consumer packaged goods (CPG) space has always had its fair share of challenges, but navigating through a pandemic has brought unprecedented logistical problems that no one could have predicted. The Commerce Department reports that before Covid-19, e-commerce sales in the U.S. were growing 14-16% each quarter. Then, in Q2 of 2020, online sales grew by a record 44.5%.
This growth has brought positive and negative changes to an already fluctuating industry. This past year the logistics industry has seen non-stop challenges, including:
Freight driver staffing shortages: CPG companies must rely on freight to transport their products to their consumers. According to the American Trucking Association, the trucking industry is already short about 80,000 drivers. In the next ten years, it’s estimated around 1 million drivers will be needed.
Delivery delays: Due to driver shortages, supplier’s delivery times have hit record highs (or should I say slows) since late 2020. Unfortunately, a delivery delay seems to be part of the new normal, but experts agree these times should decrease and stabilize, although predicting when that will happen is a different story.
Increased lead times: Between lockdowns, labor shortages, and disruptions to global logistics, networks and supply chains have significantly increased lead times. Longer lead times have a trickle-down effect that leads to longer fulfillment times which can be frustrating to customers.
Increased raw materials cost: The cost of materials has increased 44% since 2020. To accommodate the continual pricing increase, companies in the CPG space have to figure out how to offset these substantial costs and find different ways of sourcing raw materials.
These challenges have made order fulfillment, forecasting, and production runs difficult. In a time of cost-of-goods-sold rising, how can you still be profitable? Don’t worry. As your Virtual Sidkic, I’m here to tell you a few ways to combat these increasing costs and challenges, starting with calculating the cost of goods sold (COGS) and profit margins.
Understanding the Cost of Goods Sold and E-commerce Profit Margins
As an e-commerce business owner, you have to know your numbers and track everything. Before you can begin to strategize, you need to understand your COGS and profit margins. What’s cost of goods sold mean? It is typically your most significant expense and is one of the most critical metrics for your e-commerce business.
Knowing how cost of goods sold is calculated is crucial to learning how to take control of your business finances and accurately strategize. There are four ways to calculate your COGS:
First In, First Out (FIFO) Method: This is best for items in mass, similar to the weighted average method. Assumes you sell your oldest inventory first.
Last In, First-Out (LIFO) Method: The reverse of FIFO. Assumes that you sell your newest inventory first instead of your oldest inventory (FIFO).
Weighted Average Method: Doesn’t track specifics and considers your inventory as a whole. This method uses the average cost of your inventory and all of your units. The costs are weighted by the number of units.
Specific Identification Method: This method tracks individual items and is best for unique, high-value, customized items.
Now that you know how cost of goods sold is calculated and what’s cost of goods sold (COGS) means, let’s move on to profit margin. Profit margin indicates what percentage of sales has turned into profits or how many cents of profit has been made for each dollar of sale. The four levels of profit margins are:
Operating profit
Gross profit
Pre-tax profit
Net profit
Each of these are important in their own right and are necessary to understand when coming up with solutions for your current challenges with logistics and sourcing raw materials.
4 Ways to Offset Logistical Challenges
Here are some great ways e-commerce businesses can combat some of the challenges I mentioned above:
1. Strategize, Forecast, and Plan
While there are various ways to offset some of the current challenges, being proactive vs. reactive is essential. If you’re constantly having to put out last-minute fires your vendors (and customers) will be unhappy with you. You should always be planning ahead.
If you have a large PO for example, you have to consider all variables like your raw materials lead time and your co-packers schedule to accommodate it. That’s where forecasting is essential. Have consistent meetings with your key accounts and marketing team to forecast orders and demands for the next six months. Then work with your production team to get on their schedule.
By forecasting orders and watching for trends, you can secure your raw materials far enough in advance that delays or long-lead times won’t negatively impact your operations. Your customers, team, and vendors will appreciate your forethought and proactive approach to reducing stress in an already stressful climate.
2. Use Consumer Insights to Offer Operational Alternatives
To successfully overcome challenges, listening is key. Listen to your customers and consider operational alternatives driven by consumer insights. Two trending initiatives requested by customers are sustainable packaging and affordable shipping. By evaluating your AOV and rates, you may be able to prioritize these two strategies.
Offering a lower flat rate shipping option at a certain threshold can help keep customers from abandoning their carts and also set the expectation upfront that shipping will take a bit longer.
To help with customers’ desires for shopping sustainably, consider using sustainable packaging materials. Givr Packaging is a plastic-free, net positive packaging company that plants 20 trees for every one they use. If you use Shopify, your customers can also make their order Carbon Neutral, which typically adds 1-2% to their total cost. You can also educate customers on reusing sustainable packaging materials, such as boxes, bags, and jars. Put these suggestions on your packaging and product labels, so your customers can continue to pay it forward and reuse or dispose of packages responsibly.
3. Increase Prices (While Always Prioritizing Transparency)
According to the 2021 Zendesk Customer Experience Trends Report, 75% of consumers buy more and spend more money at companies that treat them well. Customer satisfaction used to mean proper pricing, perks, and gifts. However, now customers prefer transparency and sustainable business practices. If you need to instate a pricing increase due to the cost of materials, transparent customer service serves to deepen relationships with your customers. Communicate to them why and how you are mitigating these price increases in other areas and that you have to adapt in these changing times to stay in business and be successful. You can also use your metrics to determine your average order value (AOV) and bump it up a bit for free shipping or another promo offer.
4. Outsource Logistics to an Operations Professional
As a small business owner, outsourcing your logistics to a professional specializing in e-commerce and CPG operations can really help relieve the pressure of your day-to-day. They can assist with streamlining your operations, implementing processes and automations, sourcing raw materials and sustainable packaging, and so much more. By outsourcing your logistics, you will have more time to focus on critical operations, reduce your administrative work, and enhance customer satisfaction.
Understanding current logistical challenges, knowing how to calculate cost of goods sold (COGS) and profit margins, and having strategies in place can help ensure your success as you continue to navigate the e-commerce post-pandemic terrain.
Your Virtual Sidkic and Operations Manager
As you see from the above, outsourcing your logistics to an operations manager is the best solution to tackling logistical challenges strategically and effectively. For entrepreneurs operating alone or CEOs looking for their right-hand woman, Virtual Sidkic will work with you every month to elevate your operational functions.
Our Done For You e-commerce operations support package helps you run your business (instead of it running you!) I’ll put strategic systems in place and help you manage your key metrics, including calculating the cost of goods sold and profit margins, to help you tackle challenges and scale with ease. Contact me today to see how I can help take your business to the next level. And be sure to stay tuned for Part 2 of this blog - coming soon!