Last updated on January 23rd, 2025 at 06:38 am
If you want to build a business that revolves around selling physical products, you will need to create an efficient, resilient, and cost-effective supply chain.
That’s why today we want to discuss the basics of supply chain management for startups…
#1: What is a Supply Chain?
The process of sourcing raw materials, using those materials to manufacture products, and then delivering those products to customers is called a supply chain. All businesses have one.
#2: What is Supply Chain Management?
Supply chain management consists of planning, building, and managing supply chains so that businesses can meet market demands while remaining profitable.
#3: Supply Chain Strategies
Stable Supply Chain Strategy
Companies that manufacture products with stable demand, such as various staple goods, use a stable supply chain strategy. This strategy is designed to optimize efficiency at the expense of flexibility.
This strategy works well, but it can also backfire if the demand surges due to unforeseen events that cause people to rush to the stores and stock up on necessities.
Such situations might lead to temporary product shortages because stable supply chains cannot accommodate sudden spikes in demand.
Reactive Supply Chain Strategy
A reactive supply chain strategy is used by companies that sell products with variable demand, such as clothing brands that need to quickly adapt to the latest fashion trends.
Of course, this flexibility comes at the cost of efficiency because constant changes make it impossible to streamline everything.
We recommend this supply chain strategy for startups, especially in the early stages when you don’t have any data yet and cannot predict the demand.
Proactive Supply Chain Strategy
Since the Covid-19 pandemic, there’s been a lot of discussion about reactive vs. proactive supply chain strategies.
However, the latter term is just a buzzword used to refer to a well-managed reactive supply chain that is resilient to disruptions.
As a startup founder, you want to be able to react to changes in demand while also taking proactive measures to anticipate and prevent supply chain disruptions.
#4: Supply Chain Stages
Supply chains have five stages:
Stage #1: Planning
Begin by doing market research, designing a minimum viable product, and creating a prototype. Once you have it, start showing it to potential customers.
Some of the feedback that you get will inevitably prove to be just a matter of individual taste, but if a bunch of potential customers are telling you the same thing, you better listen.
Your product will likely undergo several design iterations before it’s ready for manufacturing. It’s best to take your time and get it right; otherwise, you might end up with a batch of poor-quality products that no one wants.
Stage #2: Sourcing
Once you settle on the final design, it’s time to start sourcing materials. This is known as procurement.
It’s important to strike the right balance between quality and price. You don’t want your product to feel cheap, but it also needs to be affordable enough to appeal to your target demographic.
Stage #3: Manufacturing
Once you know where you’ll get your materials from, you need to find a reliable manufacturer that can produce your products.
The first decision you will have to make is between onshore manufacturing within your own country and offshore manufacturing abroad. Each option has its pros and cons:
Onshore Manufacturing
If your business is based in a developed country, onshore manufacturing will likely be more expensive.
However, you will benefit from ease of access and be able to visit factories, see their facilities, and talk to the people in charge without having to travel abroad.
Moreover, it’s unlikely that sketchy local manufacturers will ghost you because you can always show up there in person.
Finally, if the manufacturer fails to uphold their end of the agreement, it will be much easier to take them to court in your own country.
Offshore Manufacturing
If your business is based in a developed country, offshore manufacturing in developing countries will likely be less expensive.
However, finding a reliable manufacturer will be more challenging because it will require traveling abroad.
Also, you will be more likely to get ghosted by sketchy manufacturers because they know you won’t be able to do much about it as a foreigner. Do you have the resources to sue them and see that lawsuit through? Probably not.
Corruption is something that you need to take into consideration as well. In theory, you should have legal recourse if someone scams you; in practice, the scammer might bribe local officials to look the other way.
Of course, this can happen in a developed country as well, but it’s much easier to navigate situations like that when you are a local yourself as opposed to a foreigner who doesn’t speak the language.
In summary, while offshore manufacturing can work well, we would advise startups to go the onshore route whenever possible simply because it’s the less risky option.
Different Approaches to Product Manufacturing
The most popular way to manufacture products is called “made-to-stock.”
It’s the traditional approach where you pay the manufacturer to produce a certain quantity of your products and then keep that inventory in a warehouse.
However, products can also be:
- Made-to-order is when the manufacturer only produces the product once a customer places an order.
- Configured-to-order is when the manufacturer produces the required parts beforehand but only assembles the complete product once a customer places an order.
- Engineered-to-order is when the manufacturer produces the product according to the specifications provided by the customer.
All of these approaches have pros and cons and can work well for different types of products. However, realistically speaking, you will probably have to choose the made-to-stock option, at least in the beginning.
Minimum Order Quantity (MOQ)
Manufacturers typically require a minimum order quantity, and they will not work with you unless you order a certain number of products.
Generally speaking, the larger the manufacturer, the higher the minimum order quantity, so it might make sense to look at some of the smaller ones and see if they can offer a low MOQ.
Still, you should be prepared to produce 500–1,000 products as your first batch. And yes, that is risky because you might end up losing money on unsold inventory.
Unfortunately, there’s not much you can do about it except try to negotiate a smaller MOQ. This risk is inherent in the made-to-order approach.
Stage #4: Distribution
Once you find a reliable manufacturer, you need to figure out the best way to deliver your products to customers.
Some manufacturers offer to handle the logistics as well, but it’s probably better to find a trustworthy third-party logistics (3PL) service provider instead.
This is especially important if you are manufacturing your products abroad, and shipping them from the factory to the customers would take ages.
In that case, it’s better to get the manufacturer to ship everything to a 3PL center in your country and then fulfill the orders from there.
Stage #5: Returns
Finally, no matter how great your product is, some customers won’t be happy with it and will decide to return it.
Make sure that returns are processed quickly because delays can cause people to freak out and request a chargeback from their bank. Remember that your payment processor might suspend your account if you get too many of these.
Again, while some manufacturers offer to handle returns as well, going with a trustworthy 3PL service provider is probably a better choice.
#5: Supply Chain Optimization
At first glance, optimizing your supply chain may not be possible because you have so little control over it.
However, doing the basics like using sales forecasting to anticipate demand, properly tracking inventory, and consolidating data from every stage of your supply chain in one place can enable you to boost its efficiency substantially.
Also, once you have built solid relationships with suppliers, manufacturers, and 3PL service providers, see if you can negotiate better rates.
#6: Supply Chain Resilience
If you are just starting out, you probably won’t be able to do much to increase the resilience of your supply chain besides choosing reliable suppliers, manufacturers, and 3PL service providers.
However, as your business grows and you acquire more capital, you can diversify your procurement, manufacturing, and logistics.
Ideally, you want to work with suppliers and manufacturers from different regions. This will make your supply chain more resilient to local disruptions like disease outbreaks, political unrest, and natural disasters.
As for the logistics, consider eventually building your own logistics centers so that you won’t completely rely on your 3PL service provider for warehousing, distribution, and returns.
#7: Supply Chain Expansion
There are two main approaches to supply chain expansion:
Vertical Supply Chain Integration
Vertical supply chain integration is about gaining more control over your supply chain.
The most extreme version of it would be controlling everything from the extraction of raw materials to processing them, transporting them to the factories, manufacturing your products, warehousing them, and delivering them to the customers.
Of course, that wouldn’t make financial sense in a globalized world, which is why even the businesses that have the resources for it don’t do it. However, it’s worth noting that some of the most valuable companies out there have gone to great lengths in pursuit of vertical integration.
For example, Tesla manufactures its own batteries, motors, and electronics, assembles its cars, produces software for them, and handles their distribution. Of course, setting this up costs billions of dollars, but the competitive advantage it gives the company seems to have been worth it.
Horizontal Supply Chain Integration
Horizontal supply chain integration is about expanding your supply chain by incorporating other businesses’ supply chains into it, typically either via mergers or acquisitions.
For example, if your company sells protein shakes and you want to launch a protein bar product line, you can either build a protein bar supply chain yourself or acquire a business that already has one.
Strategic acquisitions like that can help you capitalize on opportunities in adjacent niches!
Sales Funnels: The Secret to Increasing Profitability!
Vertical integration can help you improve your supply chain efficiency, make it more cost-effective, and give you a competitive edge. But where can you get the capital for it?
Here’s what we recommend:
- Build a Value Ladder sales funnel for your business
- Add downsells, upsells, and cross sells to your core offers
- Use split testing to optimize your sales funnel for conversions
This approach can help you drastically increase your profitability. You can then reinvest all that extra money in vertically integrating your supply chain!
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