Logistics management is the cornerstone of any successful business. While we’ve talked about common poor logistics management in “Who Else Wants Better Construction Project Logistics?” , we haven’t talked about the consequences that those mistakes can have on the health of your business.
Let’s be extremely clear: these mistakes have serious consequences and you need to be willing to address them if you want your business to be a long-term success instead of a flash in the pan.
Risks of poor logistics management
Your costs will almost inevitably go up if you don’t have an efficient method of providing goods or services to your customers.
- Increased raw material costs due to poor forecasting of customer demand
- Increased labor costs—either to provide contracted services or to manufacture goods. If you’re a manufacturer, this will directly impact your COGS and if you’re a service provider, this will impact payroll and potentially indirectly impact COGS depending on whether or not you can pass the cost along to the customer.
- Higher shipping costs due to rush orders—and depending on your agreement with your customers, you may have to absorb these into your bottom line instead of passing them along.
Difficulty Tracking Inventory
If you have too much inventory or if you don’t know what you have, you’re going to lose money. Unsold inventory is not only a waste of raw materials, but it’s also taking up valuable space in your warehouse.
And if your warehouse is full of unsold goods, it may be difficult for your fulfillment personnel to ship orders in a timely manner, causing your customers to go elsewhere.
The correlation here is that for service businesses if you’re not doing a good job managing your employees’ availability and scheduling them appropriately, you cannot provide your services in a timely manner—which will also cause customers to go elsewhere.
With an efficient end to end supply chain, you can produce just the right amount of inventory to ship to your customers when they need it and in the quantities they need.
Conversely, if your supply chain is inefficient, you will almost certainly see reduced productivity from your employees. From waiting on raw material shipments to arrive to rework and delayed order fulfillment, these all have an effect on your bottom line.
As your overall productivity goes down, your cost of goods sold goes up. This impacts your balance sheet and if you choose to increase your pricing without a clear value proposition to the customer, you run the risk of reducing your revenues.
In a service-based business, decreased productivity can lead more directly to customer dissatisfaction—if you’re billing your customers on an hourly basis, if your employees don’t have the supplies they need to complete the job and have to make multiple trips, your customer will end up paying more. Or if your scheduling system is inefficient, your customers may end up waiting excessive periods of time for your employees to arrive and do the work—do this often enough, and they’ll go elsewhere (unless you’re the cable company, in which case you do you).
Inefficient Decision Making
What this can lead to is an inability on your part to make good decisions about your business. You aren’t going to have the data or other information you need in order to hire more employees when needed or to increase your orders for raw materials. You’ll find yourself wasting time and money in a way that will affect your bottom line.
Poor decision making has a cascading effect across the entire business: your employees won’t be as productive as they could be and their morale may be lower; you may find it harder to retain good employees in a disorganized and inefficient environment. You may also end up holding excess inventory, which will probably cost you more to warehouse and which will affect your cash flow. Without a healthy cash flow, you may find it more difficult to procure materials from your suppliers or obtain the lines of credit you need to expand or grow.
If you have outside investors, inefficient decision making can erode their confidence in your ability to be successful and undermine your position in your business.
The problems of higher costs, inventory management problems, decreased productivity, and inefficient decision making will eventually cause your business to fail if you’re unable to address them in a way that works for your business—which includes not only you and your employees but your suppliers and customers as well.
While correcting these problems may look overwhelming, if you break everything down into the component parts you’ll be able to start to see patterns and places where you can make some improvements to your poor logistics management. Not all your improvements will work, but by being willing to try new tools and methods to enable improvement, you will, with luck, hit upon a winning strategy.