16 Supply Chain Secrets to Boost Gross Margin (and Keep Your CFO and Creative Director Happy)

At the start of every annual planning cycle, the budget ritual usually begins like this.

The CFO and the Finance team trek to my office for a gross margin discussion.  During our conversation, someone might say, “just call the factory owner and explain we need an x% decrease in the cost of goods because of the ‘partnership’.  Sound familiar?

A common misperception is to mistakenly assume that the ONLY way to improve gross margin is to ‘squeeze the the factories’ -- but there are many other places in the supply chain to look, without touching the product or beating up your manufacturing partners. In my experience, thinking about this topic more broadly yields better results.

So with that, let me be your guide on the trek for higher gross margin. Tracking down savings -- like any journey -- is easier with a roadmap. And like excellence in any endeavor, the hunt for gross margin usually requires a total team effort.

Merchandising Participation in the Hunt for Margin  

Merchandising plays an essential role in bridging the gap between satisfying the consumer and meeting financial goals. Here are three ways merchandising can help:

• SKU Productivity:  Examine the # of skus that are produced for each season and try to reduce the sku count by 10% while still reaching the forecasted sales volume.  This will result in larger production runs, less sales sample and development expense, and theoretically greater sell through if the best styles are selected.
• Reduction in Markdowns/discounts:  Marking down product that doesn't sell is costly. What steps need to be taken with the markdown cadence to help?  Should the # of fashion skus be reduced?  
• Forecasting and Planning: A good initial margin (imu%) doesn’t mean much if you overproduce product -- visit the local TJ Maxx store on any afternoon to see what I mean.  The best way to avoid taking a haircut is to improve your forecasts, and not to produce it in the first place.  Get sales and the forecasting group talking … buy tighter … chase product … the list goes on, an entire topic in itself.
• Value engineering: Is the consumer recognizing the value of all your bells and whistles? Eliminating certain product attributes may not impact product satisfaction at all, and can be a great way to improve gross margin without compromising the product. Carefully consider the alternatives through the lens of customer experience.

Design Participation in the Hunt for Gross Margin:

The hunt for margin begins with the design concept and materials selection. Here are three design team do’s and don’t’s that can help to make the CFO happy:

• Clarity about price and cost factors: Understand the target retail price for the design concept from the get-go, and select materials and techniques that reflect the target retail price.  Don’t “fall in love” with materials or make samples out of a material that is out of reach cost-wise, with the hope that something close can be sourced, and the thought that "we’ll find something close to it, cheaper". This sets up false expectations, and can result in unhappy faces and in some cases finger pointing at the end of the process.  Sourcing alternatives takes time which you may not have.
• Stay on calendar:  Such a simple concept, but so hard to achieve in reality! Creating a cross-functional team approach with a disciplined process can create real efficiencies with a major dollar impact. On the other hand, submitting designs, or approving product late, can create many unnecessary costs. The end of the supply chain is squeezed, the flexibility for searching out alternative material suppliers or finished goods supplier is limited, the cost of freight jumps dramatically, a risk may be taken on some aspect of the quality. Or the ultimate no-no: if product is late to market, the selling season is shorter, increasing markdown risk.
• “Get it right the first time”:  The cost of having to cancel a product launch that was scheduled has a dramatic impact on sales revenue and profit dollars, retail store planning, marketing planning, factory allocation, etc.  Everyone needs to assess designs critically early on, and acknowledge that there can be no hard feelings if a design concept is dropped.

Logistics and the gross margin hunt:  

Further down the supply chain, many new savings initiatives can find fertile ground. Here are six that come to mind:

• Direct shipping to reduce handling charges:  As businesses get more sophisticated can a brand ship from a factory DIRECT to a customer to avoid distribution costs?  
• Duty free zones:  Is the U.S. distribution center located in a DUTY FREE ZONE to avoid paying duty until product is shipped out of the zone?  Note that if product is exported it saves all of the work associated with duty drawbacks.
• Packing costs:  Is packing analyzed for new products inbound and outbound from the distribution centers?  There are specialists in this field that can help save materials and freight costs based upon their specialized expertise.
• Logistics optimization:  Is freight being shipped from a factory in Asia to an East Coast distribution center then back to a West Coast retail location?
• Trade agreements: Is the Sourcing and Logistics team taking advantage of changing free trade agreements, and planning ahead for new low cost countries on the horizon that may impact factory selection?
• “FIRST SALE” duty rate mitigation:  Is Sourcing and Logistics taking advantage of legal ways to reduce inbound duty rates on goods being sold in America?   

Manufacturing discounts and the Gross margin hunt:

The funny thing is, often these gross margin conversations begin with the factory in mind, and the assumption that there are endless riches there if we only turn the screws a little tighter. In reality, when it comes to improving GM%, a balanced approach is best.

That said, there’s always an ongoing need to manage traditional product cost factors, and there are reasons to renegotiate contracts on existing product:

• If a factory produces a product family in fairly constant or increasing quantities on a regular basis there will be valid discussions on learning curve discounts.  
• As a brand grows with a supplier we would expect a discount as the Fixed Overhead Cost decreases as a % of total shipping value.  
• Large disruptions to exchange rates are another opportunity to revisit prices.

Remember, the factory is entitled to make a fair profit and be compensated for their expertise and willingness to “go the extra mile”. In your zealousness to drive gross profit savings, don’t be penny-wise and pound foolish --anyone who has ever experienced the financial distress of a key supplier knows that givebacks have limits.

Bottom Line, To Keep Everyone Happy ...

I hope these strategies give you a few new places to look, the next time your CFO pays a visit …

And don’t tell anyone this, but I always keep a few financial aces up my sleeves when it comes to budgeting, too. I've learned that as the year unfolds, the ability to over-deliver keeps everyone calm, and helps to generate unexpected cash when it’s needed most.

Challenge all functions involved in the supply chain to participate in the annual hunt for gross margin. When everyone partners up and collaborates, it can pay big dividends.

Something to add? I'd like to hear about your experience ... please leave a comment!