You stare at your screen, trying to figure out what’s wrong. You thought your company had laid out a clear shipping plan for how to get your goods from one location to the next, but the numbers (and complaining customers) say otherwise. You eventually realize something about your supply chain strategy is broken.
Unfortunately, you don’t know exactly what about it is broken.
A supply chain is a delicate system which can easily fall apart if even one element is out of line. While you may have considered some aspects of your strategy, you could have easily overlooked one that’s now causing you a massive headache throughout the process and by extension, your entire business. But no worries; with a little bit of knowledge, you can understand where your supply chain strategy is breaking and how to correct it.
Here are seven reasons why your supply chain strategy may not be working the way it should be:
1. Mismanaging Money
One of the key elements of a successful supply chain strategy is understanding that cheaper is not necessarily better. For example, some businesses choose to go with a carrier who can ship goods at a lower rate than the competition (mostly because the carrier takes longer to transport), but this can backfire if the service is unreliable.
You should always be willing to pay as much as your shipping budget allows for your ocean freight needs. Be upfront about these figures with your logistics provider, so you can get the best rates and shipping terms possible within your means. It’s best to put your money towards ensuring reliability and quality, even if that means you sacrifice in other areas like frequency of shipments, amount of goods you can afford, etc.
And speaking of quality, make sure you invest money into proper inspection procedures surrounding your goods, both before and after production. Many times, products need to meet specific requirements in order to be shipped to their destination countries. Your supplier may not know this information or care to learn about it.
It’s your job to make sure these requirements are met through samples, lab tests, reports, etc. This could even involve you hiring an outside expert to verify it’s of the highest quality possible. For example, if you’re buying machinery from a supplier, you would want to bring an engineer on board to inspect the product before it’s shipped. This may seem like extreme measures, but the alternative is incurring losses from goods which don’t meet required specifications.
2. Slacking on Forecasting
A major setback to your supply chain strategy can be a lack of proper forecasting, a major portion of which includes the lead time from the start to end of your shipping process. For example, let’s say you seek an unreliable supplier for your goods; doing this means you risk not just poor-quality items (as mentioned in the previous point), but also theft, damage, or delay to your products. This would directly affect the lead time of your entire supply chain.
Not learning where your supplier is geographically situated can also result in longer lead times and delays in long-distance shipping. A big factor to consider here is if a supplier is in the interior of a country instead of near a port. If so, you’ll need to factor in the additional transport time (and costs) needed to get the goods to port. A lead time of even 2-3 days’ difference can cost an extra $1000 for Chinese imports, for example.
It’s also important you focus on understanding market trends and predicting upcoming demand. If not, your supply chain strategy could fall apart quickly and cost you sales. Plus, if you operate without a strong forecasting system, you won’t be prepared for increased or decreased market demand for your goods. Essentially, even a small problem related to forecasting can impact your entire supply chain.
3. Trusting the Supplier
Do you generally like your supplier and believe what they tell you? Maybe it’s time to rethink the way you view this relationship. A supply chain strategy can be crippled by too much trust in a supplier. No matter how good your relationship is, misunderstandings and mistakes can still happen.
Because of this, you need to make sure any agreements with your supplier are written out in a contract which legally covers your business in case of a problem (a word of promise from your supplier isn’t good enough). This will ensure your supply chain stays intact and your business afloat if your supplier doesn’t pull through for any reason.
4. Shipping CIF
If you’ve ever shipped on Cost, Insurance, and Freight (CIF) terms, your supply chain strategy could’ve been thrown because of this decision. A CIF agreement involves a supplier quoting a price which involves insurance and other charges up until the point when the goods arrive at the destination port. Then you, the buyer, will have the necessary paperwork to pick up the goods from the carrier at port.
Shipping CIF may not seem that bad on the surface. However, when you dig deeper, you run across plenty of problems which could interfere with your supply chain strategy. When you ship based on CIF, you lose control of the cargo because you have no legal right to it until it reaches destination.
This means a supplier, who usually only cares about getting your goods out of their warehouse and getting paid, can select whatever freight forwarding company they wish. These types of decisions can interfere with your plans if you need a different or faster route for your goods. And usually, a supplier won’t even be able to get updates on your shipment due to language differences or time zones, which messes up your supply chain even more.
5. Not Insuring Cargo
This seems like common sense, but it’s not unheard of for some companies to overlook cargo insurance in the hustle and bustle of shipping schedules.
For starters, it’s important you understand the rule of general average, a legal principle in the maritime world where all parties involved in an ocean venture proportionally share the cost of losses in the case of an emergency (like an explosion which would cause the crew to jettison some sections of a carrier’s cargo). If you don’t purchase cargo insurance and something were to happen to your cargo under a general average situation, you’d have to count your cargo loss.
But this situation can become even worse for you if an entire ship were to sink. You, along with all the other merchants who had cargo on the vessel, would be responsible for sharing the cost of replacing the entire ship based on the general average rule. Add that on top of your cargo losses, and it’s easy to see why insuring your cargo door-to-door is the safest action to take.
6. Classifying the Wrong HTS#
HTS stands for Harmonized Tariff System/Schedule. Essentially, HTS is an organizational coding system where the first six numbers identify all goods transferred in international trade; these six digits stay the same across more than 170 countries who use HTS. The last 2-4 digits, however, change according to country. For example, in the U.S., the last four numbers indicate the duty rate and reporting on the balance of trade for the imported goods.
As the importer, you’re the one in charge of knowing the proper HTS# and classification for your goods and filing paperwork accordingly . You can’t leave this job up to your supplier, who may simply end up guessing what the right HTS# is for your product. For your supplier, it could be duty-free to export, but when your product arrives at its destination, you could find a wrong classification results in anywhere from 3-18% duty.
So while this highly-detailed system may seem like a pain to follow, not doing so can greatly impact your supply chain. A single wrong number can result in setbacks, increased fines/charges, more paperwork, and an overall slow-down in your business’s growth.
7. Not Understanding Compliance
Compliance is a major concern for a company’s supply chain strategy. It’s so important that not understanding it can put you out of business entirely. Unfortunately, compliance is a huge topic which covers a variety of legal and industry requirements which can differ by country, so it’s best to consult an expert who knows how compliance relates to your specific product.
For example, if you’re in the U.S., you’ll need to make sure your product isn’t violating any copyright laws (or it could be automatically seized). And U.S. customs will require importer security filing 10+2 documentation (you need to provide 10 required data elements while your supplier provides the additional 2) for any goods coming into the country, 24 hours prior to ocean freight loading for shipment to the US.
There are several other nuances involved in compliance, as well. One of these is certification through worldwide safety company UL. While not required, many large companies won’t purchase goods from you if they weren’t inspected by UL and given the stamp of approval. You also need to be aware of and carefully follow any regulations around hazardous materials if this is the classification of your product.
Finally, if your goods sit at port too long, port officials can enforce demurrage fees. And while your shipper will have to pay those fees, the government could still choose to detain or seize your goods, putting a halt in your overall supply chain.
A solid supply chain strategy can help drive your business to the next level and keep everything running smoothly. However, one little oversight can shake up your entire process. Invest time and resources into setting up an effective supply chain strategy for your business, and you’ll start reaping the benefits while also avoiding that major headache.
Which of these reasons do you think has the most damaging consequences to a supply chain strategy? If you’ve had experience with one of them, share what happened in the comments below.