Any business owner worth their salt knows that it’s a tough balance between costs and revenues that determines profitability. All the best accounting practices in the world won’t do you any good if your product costs exceed your revenues, so how do we remain profitable?
Most businesses instinctively lean towards boosting sales. Increased sales can lead to increased revenues and profits, but what about the other side of the balance sheet? Reducing product costs is often a far more efficient way to increase revenues. In fact, most businesses stand to benefit from even small reductions in product costs as this can have a multiplier effect on revenues. This is referred to in supply chain management as the procurement leverage effect.
What is the Procurement Leverage Effect?
The theory behind the procurement leverage effect is that a small reduction in procurement costs can lead to big benefits to revenues in lieu of putting more resources into sales. It has also been observed that the larger the percentage of purchasing cost to revenues, the larger
the intended purchasing cost reduction, and the smaller the EBIT (earnings before taxes and interest) margin, the higher the relative EBIT increase.
In the real world, this translates to optimised and streamlined supply chains that boost both your profitability whilst keeping landed product costs low, enabling you to pass on the savings to customers and generate greater profit margins.
How Can I Cut Procurement Costs?
Put into practice, business owners should be looking to reduce procurement costs without sacrificing strategic areas that drive their profitability. This varies from business to business, but one simple way that is often overlooked is outsourcing your freight management to a reputable logistics company such as Freight Broker Australia.
Negotiating with suppliers and hiring a quality freight management service can streamline your supply chain. This can lead to an increase in delivery times, delivery reliability, customer satisfaction, and a wide range of other KPIs that affect your bottom line positively.
Other ways of lowering procurement costs include optimising delivery routes and evaluating intermodal transport logistics options. These tasks are best handled by supply chain personnel, and they can be quite resource-intensive, especially for small to medium enterprises that simply don’t have the manpower or resources to boost supply chain management.
Boost Your Business Profitability
Depending on your business, logistics and transport can eat into as much as half of your landed product costs. That really adds up over time and forces you to either risk raising prices to compensate or by accepting much smaller profit margins.
According to the procurement leverage effect, you’d be much better off in terms of profitability by devoting resources to lowering procurement costs than by increasing sales staff and resources. Freight management solutions, for most businesses, are one of the most achievable and realistic ways to drive down these costs.
If you’re worried about spending cash on a service that you could do yourself, think again. Organising intermodal transport and optimising routes to provide reliable, on-time deliveries of products in a safe and efficient way is an industry all on its own. Spend more time creating value and doing what you do best and let a professional take care of this important task for you.
Cut Costs with Freight Broker Australia
Supply chain management is no longer an optional facet of businesses large and small but it’s now a necessity. Logistics strategies can be quite complex and resource-intensive on your business, so trust your freight with a reputable logistics provider such as Freight Broker Australia.