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3 Insights on How to Reduce Your COGS

By Marcel Deer
Kelly Hendrickse - Editor for BeProfit
Edited by Kelly Hendrickse

Published March 1, 2023.

COGS cost of goods sold symbol. Concept words COGS cost of goods sold on white paper on beautiful orange background.

Knowing how to reduce your cost of goods sold (COGS) is essential to staying competitive in the market as it can result in higher gross revenue and bigger profits. Often, lowering your COGS—without even increasing your sales—can result in a considerable difference in your bottom line.

Ideally, your combined COGS and labor costs should not exceed 65% of your gross revenue. COGS includes all direct costs associated with creating products, such as material and inventory expenses, labor costs, and more. Thus, it directly impacts how profitable your business is. Let's look at three powerful strategies to help reduce COGS and directly improve your business's bottom line.

» Don't know your COGS? Find out how to calculate COGS for your Amazon business

Insight #1: Optimize Your Supply Chain

In many cases, reassessing your supply chain can help optimize your COGS. Supply chains are the driving force behind shipping physical goods between and within businesses. Unfortunately, they frequently remain one of the biggest costs that go unchecked despite the significant effects they can have on COGS.

To maximize efficiency, it is essential to establish a systematic approach to optimize your supply chain. Here are some strategies:

  • Collaborate with suppliers - Get on the same page with your suppliers to ensure improved planning, better communication, and greater transparency about delivery times and pricing. If possible, try to renegotiate pricing based on your inventory needs.
  • Improve inventory management - Tracking your inventory and usage can help you reduce COGS by investing in the right supplies, reducing waste, and preventing overstocking.
  • Optimize transportation and logistics - Streamlining your transportation and logistics operations can help you reduce costs by improving efficiency, cutting down on unneeded extra storage space, and lowering delivery times.

By implementing these strategies, you can lower COGS and enjoy the benefits of having a more efficient system. A great example of successful supply chain optimization is Starbucks' reorganized supply chain into four groups: plan, source, make, and deliver.

By addressing supply chain inefficiencies, Starbucks was able to effectively reorganize its supply chain, reduce costs, and lay the foundation for better supply chain capabilities. This resulted in a new production facility and over $500 million in savings.

Insight #2: Streamline Your Operations

If your COGS percentage is on the higher end of the spectrum, streamlining your operations can be an effective way to bring it down. This includes eliminating redundant tasks or operations that do not add value to your business but are costing you money.

Here are some strategies to streamline operations:

  • Implement lean manufacturing principles - Lean manufacturing is an approach to production that seeks to reduce waste, simplify workflows, and optimize the use of resources.
  • Automate your operations - Automating repetitive tasks, such as data entry or ticket issuance, will help you increase efficiency and save time.
  • Optimize workforce management - Analyzing workforce performance and managing employee hours can help you maximize efficiency, reduce labor costs, and ensure that employees are deployed optimally.

The Toyota Production System (TPS) is an excellent example of peak operational efficiency achieved by improving their production line to halt equipment when there's an issue so no defective parts are produced, as well as only producing what is needed for the next stage in the production process. This allows the company to reduce waste and costs and achieve higher efficiency during production.

Insight #3: Leverage Technology

Technology can be a significant upfront investment, but it can help automate tasks and optimize how teams work. For example, using a computer program to track your inventory can help prevent overstocking. Automation can help you cut down on maintenance costs and wasted expenses spent on unnecessary processes. Technology can also help save time and money by reducing delivery times and improving communication between suppliers.

Here are some strategies for leveraging technology in your business:

  • Use data analytics and AI - Artificial intelligence (AI) and data analytics can provide valuable insights that can guide decision-making and help you identify areas of improvement.
  • Adopt cloud computing - Cloud computing offers scalability and cost savings since you don't have to worry about hardware or software maintenance costs.
  • Implement an ERP system - An enterprise resource planning (ERP) system can help manage the entire supply chain and ensure that every aspect of your operations is streamlined.

By using technology to reduce costs, you can achieve greater efficiency and enjoy a better return on investment (ROI). One example of successful technology implementation helping reduce COGS is Walmart's supply chain automation systems. Through the use of autonomous robotics and specialized software, Walmart was able to leverage technology to boost efficiency and increase warehouse capacity.

» Learn about revenue analysis in e-commerce and why it's important

Let BeProfit Help You Reduce Your COGS

Reducing COGS requires strategic planning and smart decision-making. Industry leaders are focusing on optimizing supply chains for efficient cost savings, streamlining their operations to minimize waste and optimize resources, and leveraging technology to automate processes and data analytics to identify areas of improvement.

With BeProfit's easy-to-use platform, you can manage your business's spending intelligently and reduce your COGS to increase revenue. BeProfit can help you track your business expenses, identify wastage, and prioritize spending for maximum efficiency. With these analytics, you can make informed decisions to ensure optimal resource utilization and reduce costs to increase your business's profitability.