The coronavirus pandemic’s disruption of supply chains is old news by now. However, the scope of the problem can still be surprising. According to Accenture, 94% of Fortune 1000 companies have experienced disruptions in supply chains due to COVID-19.
Across the board, most companies are seeing negative impacts from such disturbances and have to downgrade their growth expectations.
Despite these attention-grabbing statistics, supply chain issues aren’t limited to pandemic-related bottlenecks. While COVID has shown a spotlight on the fragility of the global supply chain system, companies may face problems with this network at any time for a wide variety of reasons—and sometimes seemingly for no reason at all.
Ecommerce sellers are just as impacted by such problems as every other retailer—and perhaps more so since their business model depends on shipping around the country or even the world, adding an extra step to getting products to customers. If they are not proactive in understanding everything that goes into costing their products, they may not see the need to adjust their sale price in time and end up significantly less profitable than planned.
Example: Skyrocketing freight shipping costs
Let’s look at an example of how one element of the supply chain—freight shipping—affects the gross profits and net income of an eCommerce seller.
This seller ships a container full of goods with a total sale price of $233,333 per container.
In July 2021, the cost of ocean freight for the shipment was $11,000.
By January 2022, that cost had almost doubled, to $20,000.
After accounting for the cost of the product and duty, which we imagine will stay the same, the gross profit of this shipment sunk by 4%, from $148,133 in July to $139,133 in January, a drop of $90,000.
The chart below lays out the calculations.
While a 4% loss in gross profit is a gut punch, the loss of net income is even more severe and tangible for business owners. It means less income for the business owner, and less capital redeploy to grow the business further.
How to overcome supply chain disruptions as an eCommerce seller
What’s an eCommerce seller to do when faced with the scenario in the example above?
You have two options:
- Increase the sales price, or
- Increase volume.
Which path to take will depend on various factors, such as true inventory costs, the price sensitivity of the market, competitors’ pricing models, and the company’s capabilities for handling higher volume sales, among others.
Other types of supply chain disruptions may require different considerations and adjustments. For example, delays in the supply of a certain part for a product could prompt a company to find a different component from another source, redesign the product to remove the need for the component, or accept the delay and notify customers, providing the option to cancel.
Regardless of the type of disruption impacting the business, it’s important to analyze the effects of the two options on profit, income, operational efficiency, customer satisfaction, and other business factors.
This project can be complex, so getting assistance in parsing relevant factors can help make the right choice. Bookkeeper360 helps eCommerce sellers understand their true inventory costs and develop an optimized pricing matrix to maximize sales and maintain as much profit as possible while staying sensitive to the market.