Supply Chain in Ecommerce: Save Untold Thousands in Costs (Full Guide)
A few topics in the world of eCommerce can instill a sense of dread in any seller: logistics, accounting, supply chain, and so on.
At the end of the day, within these fundamental aspects of a business are nuggets of knowledge you can use to your advantage to save untold thousands of dollars in cost that add directly to your bottom line.
Simply put, understanding these “boring” areas of your business can be exactly what you need to be more profitable.
In this post, we’ll go over the supply chain in eCommerce and the parts you need to know that can affect your business and margins the most so you can make informed decisions that will empower you to make better choices.
What is the Ecommerce Supply Chain?
Since COVID, I think everyone is tired of hearing the term “supply chain”.
But what exactly is the supply chain?
It’s not something exactly specific.
The supply chain is the series of events that occur to get a product from its creation all the way to the end-customer.
This begins as early as the collection of raw materials to even make your products, up until the last-mile delivery when the customer receives it at their doorstep.
Let’s go over each step of the supply chain and where you can stand to save some money.
The Beginning: When Your Products are Made
It all begins with production.
All products are made of raw materials, and combined with the labor from your manufacturer, you get a finished product.
This is obviously a simplification, and some products are much more complex than others.
The first step in the supply chain can be the most costly phase for a lot of sellers, and there are a few places sellers stand to make some savings.
Ways to save in the product production phase
Purchase raw materials in bulk while prices are low
If your product heavily uses a raw material for its production, then prices for that raw material will rise and fall based on different market conditions.
If you notice that the price of raw materials for your products are at a low point, you can coordinate with your manufacturer to purchase some raw material in bulk to put toward a future order.
Depending on how heavily your products use a specific raw material, the savings here can be significant.
Purchase a large order and store it in your manufacturer’s warehouse
We all know that larger orders mean a lower per unit price, but you might not be able to sell large orders fast enough to justify a larger order.
Depending on the relationship between you and your manufacturer, you can negotiate that they make you a larger order at a lower price per unit, and they can store it in their warehouse until it’s needed by you.
This has a lot of benefits:
- You can have products ready to ship, reducing lead time.
- Potential free storage or products, which can be expensive usually.
- As mentioned above, a lower per-unit price due to bulk ordering.
The drawbacks are you need more initial cash to even make the purchase, and your manufacturer has to agree to store extra products within their warehouse.
Use currency rates to your advantage
This one is a bit tricky, because it might test the strength of your relationship with your manufacturer, but could also save you significant amounts of money.
Essentially, if exchange rates are greatly in your favor at the moment, you should notify your manufacturer about it and you want them to invoice you with these rates in mind to get a discount.
The benefit here is obvious, you pay less for more products, but if you go this route, your manufacturer will certainly let you know when exchange rates go the other way around, they will definitely invoice you appropriately.
Once your products are made, they need to be delivered, and for most people that means sea freight.
After Your Products are Made: Shipping
Sea freight is an absolutely essential and huge part of the eCommerce supply chain.
COVID showed us just how volatile and important sea freight can be.
Today, sellers have to be more nimble and clever with how they procure sea freight services for their shipments, because prices rise and fall at sharp rates and they do it fast.
How to save on sea freight and shipping costs
Shop around different freight forwarders when your shipment is ready
The old way of shipping products with freight, you had an agency or agent prep your shipment (sometimes your manufacturer can even use an in-house shipper), coordinate a bit with your manufacturer, and your goods are on their way.
Nowadays, however, freight can get expensive, and rates across forwarders and agents can vary by quite a bit.
Therefore, you should have a few different agents and freight forwarding companies on hand to give you quotes for your more recent shipment so you can get the best rate possible.
And as always, cross reference all quotes you get with Freightos, because that will give you a baseline for how much a shipment with your exact parameters will cost.
Shopping around for freight can save you thousands of dollars for a single container, which directly contributes to your bottom line.
Save by learning about Tariffs
Tariffs, supposedly temporary when first implemented but as each day passes seem to be a permanent part of an eCommerce seller’s life.
As your goods are about to reach their final destination port, customs will bill you based on the Harmonized Tariff Code attached to your products.
You can find your tariff rate for each of your products by searching your HS code in the government’s HTS Search page.
If you aren’t aware of the HTS code for your products, your manufacturer will, so ask them if you don’t know.
Tariffs can be really expensive, upwards of 25% of the total cost for what you paid for your entire order, which can represent a huge chunk of change.
Two ways to potentially save on tariffs:
- Since the tariff you pay is based on the invoice you send to Customs, make sure that any extra costs you’re paying to your manufacturer not directly contributing to the cost of a unit is taken out of your invoice and put on a separate one. Stripping away extraneous costs will give you a lower per-unit price, and by extension a lower tariff to pay.
- Hire a tariff expert to research through the harmonized codes to see if there is a code that matches your products that either has a lower tariff rate, or even a complete exemption from paying any tariffs at all. You can find tariff experts on sites like Fiverr and Upwork.
Reduce the distance your products have to travel
It’s a bit of an obvious concept, but longer distance traveled for your products means higher costs, so if you reduce the overall distance your products need to travel, it can turn into big savings.
A few ways to save on travel distance:
- Ship from factory directly to an Amazon FBA warehouse. No need to worry about 3PL storage and FBA prep fees when everything is sent straight to Amazon. This option only works for Amazon sellers, but Amazon can also act as a fulfillment service for purchases made off Amazon.com where they will send products to your customer as a proxy 3PL.
- Have your warehouse/3PL near the port, which is also near an Amazon warehouse. If you sell on Amazon, you have the added step of sending your products to Amazon’s FBA warehouses. If your 3PL is far away from the port your products land in, and then your Amazon warehouse is in another state from where your 3PL is, the costs can stack up pretty high (not to mention everything is slow). If your 3PL is near the port, and it’s in the same state as your main FBA receiving warehouse, you stand to save money.
- Use a 3PL that has multiple fulfillment centers. Companies like ShipBob mimic Amazon FBA where they will spread your product around the country to ship faster and cheaper to customers than if your products all came from the same location (for example, shipping from California to New York).
Once Your Products Land – Warehousing
Another part of the supply chain is where your products live until they are purchased.
This is called eCommerce warehousing, and it’s another area where you can either keep costs low or burn a bunch of money with a few non-optimal decisions.
How to save money when storing your products
Make sure your stuff isn’t sitting in one place too long
Warehouse space can get expensive, and if you’re an Amazon Seller, they will start to charge a premium when products are stored longer than 1 year.
With good sales forecasting and inventory management, you should strive to ride the line between having products move out of the warehouse and into customers’ hands fast, but also have enough to not face stock-outs.
When you’re starting out, store things in your house
An obvious solution, but your house is free real estate for your products when your order volume is low and you’re just getting started.
Utilize any resources and advantages you can early on.
Vet your 3PL carefully
Rates for things like services and storage vary wildly with 3PL companies. Find one that charges a reasonable price for storage, typically by the pallet-load.
Last Mile Delivery: The Final Journey to the End Customer
Last Mile Delivery is the last trip a product makes before it finally arrives to a customer.
This typically means a shipment involving USPS, UPS, or FedEx.
And while the last mile may seem straightforward enough, there are a lot of little places you can make potentially big savings overall.
Ways to save money on Last Mile delivery
Pick the best shipping service for a product
Depending on the size and weight of a typical order, the shipping service you choose can greatly impact your cost.
For example, if you’re shipping a package under 1 lb, there is nothing that beats USPS First Class Package service, which is fairly fast, offers tracking, and comes at a fraction of the price of any other shipping service.
When shipments start getting heavier, the best service can change depending on factors like size, weight, distance traveled, and delivery times.
Rather than calculate shipping for every order, however, there are ways to automate this process.
Use shipping software to automatically determine the best shipping service
If you use shipping software like Shipstation or ShippingEasy, you can have the software pull in orders from everywhere you sell online, and they’ll find the best service based on the different attributes of your order, and they’ll provide you with the best option.
As a bonus, shipping software typically comes with better rates than you can get yourself directly from the popular shipping carriers.
Let Amazon handle shipping
For a lot of product types, Amazon FBA shipping is much cheaper and faster than anything you can get from the big 3 carriers.
It’s almost unfair, but if you can’t beat Amazon, you can certainly join them.
Now that you know each of the parts of the supply chain process for eCommerce products, and are equipped with a few tips to lower costs, examine the journey of your own products across the supply chain and see where you can make some improvements.
Most sellers stand to save a lot of money by optimizing the supply chain process and simply being aware of where every dollar they are spending is going.
There’s a lot of moving parts to an eCommerce business, and you need to know about every aspect of the business to maximize returns, stay profitable, and keep cash flow steady.