The New Metric of Supply Chains 

In 2020, the world’s supply chains were thrown into a mode that could only be defined as “apocalyptic”. Nations closed borders, ships were stuck at sea in record numbers, and many people were without critical supplies to last both the effects of the pandemic as well as regular life. 

As we acknowledge that society held tremendous shortcomings, we looked for new ways to reconcile and keep tabs on our supply chains. Working at Wayfair and at Cann, I discovered new ways to track supply chains efficacy. 

Supply chains care about 3 things in particular:

  • Timing (Specifically, lead times)
  • Cost (Cost per unit) 
  • Quality (Proximity may be a metric used here) 

and more recently (but still not highly sought after, unfortunately): 

  • Impact (Carbon Footprint)

But the question comes down to: With such harsh constraints, how do we optimize these? 

Cost per unit is a metric that is the most obvious to calculate, but sometimes the hardest to apply. If you’re dealing in an MSO (multi-state-operator) operation, you may find yourself struggling with both multi-tier products as well as many facilities in which one holds product, all with varying production levels. While chopping down on quality may land lower costs, it may also land you less customers. By sacrificing on timing by sourcing from Asia when in the USA, there may be missed projects, unexpected international issues and other uncalculated variances that may disrupt hitting key deadlines and product deliveries. 

Since there are many factors that are intertwined, do we mix metrics together to give us an optimization score? Probably not — but when we’re making business decisions, figuring out the right metrics may help your company find its best path forward. 

Skip to my job at Cann: For nearly a half a year (until I was replaced unexpectedly to an eye on the bigger cost drivers) I was running Cann’s supply chain. There were many different factors we had to consider when shipping anything: The products we shipped were typically frozen, and in small batches (sometimes a pallet or less!). Shipping raw materials frozen usually requires significant cost increases, and being in an industry with “no such thing” as reefer LTL present, it can be a daunting task to practically implementing a cost savings initiative. Every day, new shipments were needed (and most were expedited), but with this each shipment beared its own set of contraints. Where was the shipment going? How critical was the demand for the territory? How much time can we afford? What’s the impact of not shipping? What’s our maximum budget to ship? 

Every decision we made had to factor in timing, demand, and the overall impact on COGS. To combat this, I devised a system called “cost per can”. In our case at Cann, items were shipped in units of cans being the lowest saleable unit. To make sure I had a good idea on what the margin impacts were, I took one key factor into account with every production-related shipment: How many cans (minimum saleable unit) worth of product is being shipped?

From there, we were able to calculate if our shipments were worthwhile. For example, the way our production works is that we ship blood orange juice from a cold storage facility to our production facility. If we’re only shipping 2 pallets worth of product (roughly 8 drums of BOJ), a $3,000 shipping cost may look pricey on the surface. However, 2 pallets yield about 80,000 cans worth of product (as the cans are carbonated with light amounts of juices to be mixed nicely into their THC/CBD emulsion mixture). Although a $3,000 price tag is nothing to scoff at, it only adds less than $0.04 of cost to the overall cost of the product. When retailing for about $2, this is a 2% margin change. The impact of this decision is smaller than anticipated, which is why the $0.04 difference here should not be treated as heavily, when other key components of the business — i.e. packaging and can costs — most likely need more attention to gaining better margin lifts. Also, if you can combine that blood orange juice shipment with other key ingredients that either go in that saleable or other future productions, then that $0.04 shipment cost/can may go down greatly. 

Working in a startup is tricky, and each day when these decisions are made one doesn’t have the energy nor time to do complex analysis. That’s why rules of thumb such as a “cost per can” strategy can aid in the process of what should be shipped and when. When the objective of a position in supply chain is to optimize on cost while maintaining production as much as possible, metrics such as “margin impact” become a good framework to breaking down key issues. Similar to Pareto’s principle, margin impact can help us determine where to spend most of our time. Since this shipment was only 2% of revenue, it may not be as big of a pressing issue as our packaging, raw ingredients, can shipments or manufacturing costs may be. Figuring out the breakdown of all COGS and determininig the margin impacts of every single situation can be a key driver in determining where to find success:

In this instance, shipping 8 drums of BOJ holds a 2% impact to the COGS.

Other margin impacts we discovered yielded much higher results, and in effect became evidence that our strategies on the supply chain need to be changed. Our efforts stressing over freight costs and when to ship what were able to be subdued as we focused our efforts on what was really important to the P/L of the business. 

Tracking My Progress

As the quarters went on and I found myself in a bubble in organizing freight for the company, so did my idea of what was right. I had hunches — don’t send reefers in mild temperatures if product is moving down the street, and maximize product with every shipment since holding costs won’t be effected — but I never had the data to prove my hunch was correct. That was, until I took cost per can into a quarterly progress report. 

MRP Logging Progress

Our MRP system would log progress, where we could look into every shipment that had been sent before us, with its shipping cost (which had to be webscraped to get all the data together, unfortunately). We pulled together Q4 2021-Q2 2022 data, which at the time was one quarter before I took over until the time the analysis was run (early Q3). Using the data — of every shipment inbound that I managed, I was able to put that information and compare it to total can counts. In the example above, the 8 drums of BOJ to 80,000 units was the metric I used to determine can counts in my costs per can — so every shipment had their can counts calculated accordingly. By the end of my analysis, the results came in the way I expected:

My Reduction in freight costs per can from Q4 2021 (before joining) to Q2 2022 was nearly 40%!

When compared with Q4 (the quarter before I managed freight), freight costs per can had been reduced by almost 40%. However, there were a few external factors that may have influenced this: Total cans being run and overall freight rates nationwide. To disspell these doubts, I did my research:

While slightly more cans were run in Q4, Q2 was similar in sizing too.

Since almost all our shipments rely on trucking, I took to the interwebs to determine the external forces of the shipping world, on the FRED trucking index:

My 40% CPC savings occurred during FRED’s surge — I’ll take it!

Looks like 15–16% of my freight costs savings happened during a >15% increase in trucking costs — implying that this could have been closer to ~50% in freight savings.

How did I save Money? 

When it comes to complex supply chains and especially MSOs, initial infrastructure can be quite a burden. Sending product to and from many different facilities can add huge cost detriments to a business. 

  1. Build better logic flows
  2. Think carefully about FTL vs. LTL
  3. Store products only when necessary 

Wrapping it Up

After the course of an operations’ run, I discovered that the biggest challenges facing supply chains are not in their execution, but in the systems that are currently in place. By upheaving and removing the current infrastructure to include more data-savvy partnerships (which typically implies greener technologies), then a lot of the mess of logistics, spending and touchless interactions would be spared.

Don’t like my writing? Please give me a shout and let me know how to improve!

Leave a Comment