In the dynamic realm of beauty, there's an oft-missed lever to profitability: thoughtful supply chain design. Understanding and aligning your supply chain with your product and channel strategy can easily drive double digit increase in profitability.
“For every dollar a company with innovative products invests in bolstering its supply chain’s responsiveness, it typically reaps more than a dollar's decrease in stockouts and markdowns on surplus inventory.” - Marshall Fischer, Harvard Business Review
Recently, I revisited a seminal piece on supply chain design: Marshall Fisher's “What is the Right Supply Chain for Your Product”. This isn't just another article; it's a blueprint for financial optimization.
Deciphering Products: Innovative vs. Functional
Fisher's starts by placing products on a spectrum with 2 sides:
- Innovative Products: characterized by high contribution margins, volatile demand, and many variants per category
- Functional Products: marked by lower margins, consistent demand, and limited variants
Here's the crux: Fisher's research discovered that many brands, despite selling innovative products, still rely on a non-responsive supply chain. Additionally, he found the ROI from investing in responsiveness is much greater than efficiency investments. Intuitively this makes sense, since innovative products have low COGS relative to their margin, it’s much harder to drive profitability through lower COGS than for functional products, which are defined as products with lower margin (and thus higher COGS).
The Strategic Advantage of Responsiveness for Innovative Products
What does a responsive supply chain look like for innovative products? It's a supply chain that is "optimized to respond quickly to unpredictable demand... in order to minimize stockouts, forced markdown, and absolete inventory", rather than an efficient supply chain, which is optimized deliver product at the lowest possible cost.
This means having the tech stack to rapidly interpret early sales metrics or market indicators and act decisively within the product's brief lifecycle. The focus pivots from cost minimization to judicious decisions about inventory and capacity, ensuring a buffer against erratic demand. In this paradigm, suppliers are chosen for their nimbleness and adaptability, not just cost.
The Tangible Impact: An illustrative case study
Consider an innovative product selling through a 40% contribution margin channel and incurring a 10% stockout rate. The loss in profit due to stockouts alone is significant - 40% X 10% = 4% of total sales, straight to the bottom line. So for a typical indie beauty brand with net margins of 10% to 20%, even getting back 2% of sales would equal to a 10 to 20% increase in net profit. Thus, the financial advantages of preventing stockouts and surplus inventory are so profound that investments in supply chain responsiveness invariably drive business performance.
From our extensive dialogues with indie beauty brands, the majority of prestige brands on platforms like Amazon and in wholesale channels resonate with Fisher's “innovative” classification, while mass and masstige brands typically align with “functional”. We also realize that for many beauty brands, the same product might have very different contribution margins depending on which channel it’s selling in, which makes the analysis more interesting.
As brands burgeon, they might straddle both innovative and functional products. In such scenarios, it's astute to operate distinct supply chains tailored to each product genre.
Your Brand's Positioning
Do your products lean more towards innovative or functional? We value your perspective. Engage with us on LinkedIn or Instagram @teamshypyard.
For a deeper dive, check out the original article here.
If you’re interested in improving the responsiveness of your supply chain, Shypyard provides comprehensive demand planning and inventory visibility. Click “Get Started” at the top to chat with the team.
Note: This blog post draws from Fisher's insights and our conversations with beauty brands. The interpretations are a blend of rigorous research and case studies.