A supply chain, the term used to describe the system of supplying a product to a customer, is an essential process that start-ups need to get right. There will be several elements and different businesses involved in your supply, so planning, preparation and efficient systems are vital.
There are many examples of businesses achieving colossal success by operating a streamlined supply chain. One of the most famous is technology giant Apple which uses just-in-time (JIT) manufacturing.
JIT is a process that means businesses produce a product once it has been ordered rather than having lots of products already assembled waiting to be purchased. By operating one central warehouse in the US and developing strong relationships with contract manufacturers worldwide, Apple can launch, manufacture and ship millions of iPhones very quickly. This has kept costs low and profits high.
An effective supply chain is essential, no matter the size of your business. It allows you to quickly get your products into customers’ hands without unnecessary costs such as warehouse storage.
Want to learn more about supply chains and how to effectively manage them?
What is a supply chain, and why it is important?
A supply chain is the system of organisations, people, activities, information, and resources involved in supplying a product to a consumer.
An effective supply chain is critical to start-ups, especially as they start to scale and meet growing customer demand.
There are many steps to getting a product to a customer once it has been ordered. Organisations that can be part of the supply chain include manufacturers, logistics companies and transportation firms.
Getting the process right and dealing effectively with all those involved can make a difference between success and failure.
Negotiate poorly with your suppliers, and your costs will be high and eat into your profits. Choose unsuitable suppliers and customers may receive an inferior service that damages your business’ reputation.
Managing a supply chain
With thousands of suppliers to choose from, it can be easy to pick the wrong one for your business, so it’s wise to use trusted sources. Friends, family or other business owners who you know well may have recommendations, while trade associations and business support groups often have lists of approved suppliers. You can also visit exhibitions and trade shows once Covid-19 restrictions are lifted or read media publications relevant to your sector.
Create a shortlist of suppliers which you believe can deliver what you want. Approach the suppliers with a clear brief outlining your requirements. Compare their responses and decide which to speak to about agreeing on a contract. You might also want to carry out credit checks and ask for testimonials from some of their existing clients.
Enrol in our free Project management course as part of our Learn with Start Up Loans partnership with the Open University.
Negotiating prices and agreeing on terms
The key to negotiating a good deal with your chosen supplier is being clear on your priorities. Decide what’s most important for your business, such as price, customer service levels and payment terms. If you’re dealing with overseas suppliers, you’ll also need to consider delivery and lead times.
Be confident about what you want and ask the supplier for a price. If it’s too high, make a counteroffer. The negotiations will likely result in a revised offer. Make sure you’re clear about what the price includes before accepting it.
Once a deal is agreed, draw up a service level agreement (SLA). This should cover:
- The responsibilities of both parties.
- The service that the supplier must deliver.
- Metrics for how service levels will be measured.
- Delivery schedules.
- Payment terms.
- The process for resolving disputes.
- Penalties to be imposed should the agreed service levels not be achieved.
- Conditions for terminating the contract.
Some suppliers may require you to agree to a standard company SLA. If so, make sure you scrutinise it thoroughly and identify any risks to your business. If it’s too risky, you may need to look for another supplier.
Maintaining good relationships with your suppliers is vital. Open communication and regular face-to-face meetings will help you achieve that.
Keep suppliers updated on any changes that may affect them, such as plans for launching new products, and play your part in the relationship by being efficient with your orders, stock management and payments. Failing to pay a supplier in time can lead to unwelcome disputes and delays, which could impact getting products to your customers.
Managing lead times
You may face several challenges when managing your supply chain, but the most common issue is lead times for the delivery of products. If a supplier fails to deliver what you need on time and in the right quantities, it can have a negative effect on customers. Delays may mean you need to rely on the existing stock you have to hand, which might be insufficient to meet demand. As a result, customers could face delays, get frustrated and take their business elsewhere.
If lead times are persistently too slow, you might also have to deal with increased storage costs due to the need for higher inventory levels in your warehouse or other locations.
The Covid-19 pandemic is an example of an issue that has had a significant impact on lead times, with shipping problems across the world delaying the delivery of goods. This has been particularly true for dropshipping, a popular method used by many start-ups to sell products. Dropshipping involves purchasing a product from a third party, often based overseas, which then ships it directly to the customer.
Melissa Sinclair, founder of Big Hair + Beauty, which launched with help from a Start Up Loan, understands all too well the impact Covid-19 had on the supply chain for her natural hair products business.
“We had stock issues for most of the year,” she says, though she worked quickly to resolve these. “When we did have stock, it was great, but we were selling out so quickly. In June 2020, for example, right around the time of when Black Lives Matter, a lot of black-owned businesses were getting a lot of support. We sold three months’ worth of stock over a weekend which was amazing. But it was also around the time where shortages had a huge impact. We couldn’t easily get any suitable packaging.”
How to reduce your lead times
While global pandemics are hard to plan for, you can take steps to reduce lead times. Extensive due diligence at the point you select your supplier is vital. Sourcing of testimonials and other checks are essential for making sure your chosen supplier is reliable.
Maintaining good relationships and communication is vital so that you and your supplier understand each other’s ways of working and expectations are appropriately managed.
To make sure your systems are efficient, you may also want to invest in inventory management software.
Another way to protect yourself against slow lead times is to have a backup list of suppliers who can deliver at short notice. Costs may be higher, but they can help to prevent customer complaints and loss of business. Using more local suppliers, rather than those overseas, is another option.
If you are hit with delays, that’s when you need to be very focused on providing excellent and transparent customer service. Be available and responsive on all your customer channels, including social media, live chat and the telephone. It may also be necessary to pause marketing on products that are hit with delivery delays.
Thinking of starting a business? Check out our free online courses in partnership with the Open University on business operations and supply chain management. Our free Learn with Start Up Loans courses include:
- Introduction to operations management
- Commercial awareness
- Digital thinking tools for better decision-making
- Entrepreneurship – from ideas to reality
Plus free courses on finance and accounting, marketing, project management, management and leadership.
Disclaimer: While we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.