← Coffee N° 5 with Lara Schmoisman
Coffee N° 5 with Lara Schmoisman
Is Supply Chain Sexy?: Cash Flow, Control, and Scaling Reality with Aaron Alpeter
00:26:32
Loading summary
Transcript65 lines
- [00:00]
A
Foreign. This is Coffee Number Five. I'm your host, Lara Schmoisman. Hi, guys. Welcome back to Coffee Number Five. I'm excited in this new episode, and I want to bring today a subject that it's not so sexy, like many things that we talk here in Coffee Number Five, but let's try to make it a little sexier at this time.
- [00:28]
B
So.
- [00:28]
A
So there is something that I learned. I mean, my world is digital. My world is marketing. Yeah, it's sexy. No, I'm just kidding. But I. But working with clients, I learned that there's a whole different side of the business, that it's. It has their challenges also because this world that is changing constantly and you need to get materials, you need to get suppliers, and there's. There's a new word that I learned, supply chain. And this is was. Okay, what does supply chain means and what do you do with that? So today let's talk about supply chain. And I brought you an expert. So welcome. Aaron, how Alphiter, how did you get into supply chain? What? Tell me a little more about it. Because you have multiple lives like me, and I know that today you're working in this space, but how did you get here and why you feel like there's a need?
- [01:28]
B
Yeah, well, first off, I think supply Chain is very sexy. And I think I've loved supply Chain since before I knew what it was. To me, supply chain is just how things happen in the physical world. And I studied it in school. I worked at Unilever for about five years in a rotational program. Did everything from, like, you know, working in a factory floor making lipton tea to running import export for North America and then have been lucky enough to work with a lot of different startups over the years. And fast forward, today I've got three companies, two podcasts, and a newsletter, all in the supply chain space.
- [02:01]
A
Okay, so break it out for us. What is supply chain?
- [02:05]
B
Yeah, like I said, I think it's the intersection between ideas and ambitions of the business and the physical world. So it's anything from figuring out how much inventory you should be ordering to where to source that, how to move it, how to hold it, how to distribute it, how to make sure that the products are of a sufficient quality that your customer wants to come back.
- [02:22]
A
You're right. Sounds kind of sexy. Now.
- [02:25]
B
It's, it's, it's, it's. I love it. I mean, I remember this was years ago. I was with my sister and we went. We were like in Walmart to pick up some cereal and I just stopped and I talked about, do you know how much effort went in to getting this box of cereal here on the shelf so you could buy it? And I went on like this 5 minute tie trade where I was just like going through and talking about the person at the planet and the raw materials and the factory and the trucks and she just like looked at me and was like, I'll take my Cheerios. Thanks.
- [02:50]
A
Yeah, well, it's not for everyone, but I mean, if you want to own a business and that you send sell products, you need to understand about supply chain because these also can make it or break it for your budget.
- [03:03]
B
Yeah, I mean next to marketing, I mean supply chain related costs are kind of half the total expenditures that most businesses have. And so, so being able to really understand and control those is an important piece. And most businesses don't die because the product is bad or the founders aren't very good. They run out of cash and that's what kills the business.
- [03:24]
A
I know. Okay, so let's talk about that other sexy word, cash, that a lot of people need. An influx of cash. When is the right time for a company to ask for cash or get a partner that can give you that influx?
- [03:39]
B
Like from an investor point of view.
- [03:40]
A
Or leaning onto suppliers in general, just a company. When is the right time? Because I see so many companies and we had a previous podcast about investing also and finding investors. But I see that there are so many other ways to get cash right now. And when is the right way? I mean, because also I see so many brands going and saying, I need to fundraise, I need to fundraise. Yeah, but every time that you fundraising, you're giving your company away. And is it the right time to give your company away?
- [04:10]
B
Well, I think there's. First off, there are other ways that you can get cash into your business. That isn't straight equity. But I think the fundamental piece comes down is you have to be a profitable business from day one. I think maybe five or 10 years ago, money was free and you just had to have an idea and an Instagram account and you could become founder and raise money. But today, whether you have a small business or a large business, you need to be profitable from day one. When it comes down to making sure you've got good unit economics, the next step is to making sure that you have a good cash flow cycle. And so there are lots of things that you can do to help improve that cash cycle without necessarily raising investors. I mean, some very simple ones are looking at your payment Terms are you paid by your customers before you have to pay your suppliers? Is a very simple one.
- [04:57]
A
Oh, that's a really good question, actually. So I want to talk about how to negotiate with suppliers. That's a huge one.
- [05:04]
B
Yeah, it is. And I think that, you know, I've scaled quite a few businesses and with Isba, we've, we've helped create about $2.5 billion worth of exit so far for our founders. And you know, one of the key things is just trying to leverage someone else's balance sheet to grow your business. And so you have to be the right type of customer for that supplier. But if you can get net 30, net 60 day terms, there's a lot that can happen. Well, and so, you know, let's just go through like how to even qualify for that. You're probably not going to get net 30 or net 60 day terms from the beginning. You're going to probably have some sort of deposit. It's going to be very, very tight because this factory doesn't know you. Right. But if you can make sure that you do a couple of things right, you can qualify to get terms later on. And the first thing is to pay your bills on time. Right. So if you are owing a deposit and you know, or something's doing ship pay on time, you don't want there to be any daylight between what you say you're going to do and what you actually do when it comes to.
- [05:59]
A
And something else that I learned is that many times when, mostly when you work with different cultures, you need to be very clear on the communication. And if you negotiated something, you agree on something, then you cannot go and change the terms or try to change the terms.
- [06:16]
B
It's true. And having good, simple to read and simple to understand contracts goes a long way for doing that. And I think a lot of founders, especially when they're first starting out, they just say, oh, it was an email or we have an understanding or maybe I put something on the P.O. but that's not good enough. Like you need to have an actual contract.
- [06:32]
A
Yeah. So when is the right time to negotiate with a supplier?
- [06:37]
B
Well, there's, there's three reasons why you would ever renegotiate. The first one is there's a fundamental change to your business. So either it gets a lot bigger or a lot smaller. The second one is there's a fundamental change to their business, they get bigger or smaller. Or the third one is there's a fundamental change to the market. So think Covid tariffs, things like that, that kind of Triggered in there. I think it's important that when you're looking at negotiating with your partner, you really need to first and foremost look at it as a partner. And this, this is a relationship that you need. And there are different things that you can trade and give away that will be helpful. And so one of the things I definitely recommend younger brands do is to trade payment terms for a lower margin. So be willing to pay a little bit more in the actual price that you would, you would sell for if that means that you get net 60 or net 90 day terms. Because again, that, that cash is going to be a key thing that you can do there. But pay on time, make sure you give a forecast. You want to be the type of customer that when they're looking at everybody that they could be working with or should be working with, they're always like, you know what, we have to protect this person because we just love working with them. They're easy to work with, they are, you know, honest, they're straightforward, they're fair. Right. Doesn't mean you're pushover, but you want to be the right relationship.
- [07:47]
A
This is really important because you mentioned Covid or you mentioned the tariffs and there is not much you can do. The only thing you can do is to work on your relationship, grow your relationship. And if you don't have a good relationship with your vendor, right, then nobody's going to help you. So this is the opportunity to both of you do something together to strengthen the relationship.
- [08:10]
B
And I would say that the time to strengthen your relationship is not when you need something.
- [08:14]
A
Exactly.
- [08:15]
B
You need to be making all of these deposits into your virtual relationship bank account when things are going well. And I encourage people to go visit to get to know them. Who are they, you know, what are their kids into, what sports teams do they like, you know, when's their birthday. I mean, there's some really simple human things that really matter, that will pay dividends down the road. Not, not because you're doing them to be manipulative or things like that, but just human to human, it's important to build those relationships.
- [08:39]
A
Yeah, absolutely. So let me ask you a question because this I think also is super important and I see it from the marketing side. As you mentioned before, supply change and marketing are normally the biggest expenses. And we can discuss how to use it, do marketing right or wrong, and how to use that money. But I see that there is a lot of waste in both sides many times. And I even talk to my clients because you cannot expect in a new Business to get return of investment at the first, right away you need to create, have the possibility of very strong business. But you will need to spend money to make money.
- [09:16]
B
Yeah, I think there's always investment there. And I think that where most companies fall short is they think of supply chain as purchasing or as, as an afterthought. And really the best partners are your strategic partners that can think about, okay, how are we actually going to pull this off in the physical world? And when, when I'm advising a client or talking to somebody, I'm always trying to say, okay, what's, what's the idea here? What's the financial goals we're going for? What are the exit, you know, potential you're looking for, what timeline? What's the marketing ambition that we have, the claims we want to make? And let's work backwards from that. And I think if, if you take that perspective where you are saying, okay, I have this goal, let's flush it out, it's a good one, let's figure out how to, to break it into smaller acts. You can do that because you may have the goal of being a billion dollar company one day, but focus on being a million dollar company before you become a billion dollar company.
- [10:04]
A
Yeah, but, but at the same time you need to know your numbers. You need to know that if you get a po, you're going to have to have money to, to produce that po. It's the same. I always say that if you get a partner like you get in retail, you need to support your partner with marketing. It's not like, hey, they're going to do all the work.
- [10:23]
B
Yeah. This is why, you know, I think that having a really tight linkage between marketing and supply chain is crucial because you need to have a, I mean, I was just working on one this weekend, a integrated inventory and cash model. So something that can give you a three year projection for your P and L, your balance sheet, your cash flow statement, that is taking marketing demand and what you think you're going to sell, the assumptions that are in there, turning that into what you need to purchase and when, and letting you know when you need certain cash. You need to be able to see all of that so that you don't run into a situation six months down the road where you're like, oh shoot, marketing is doing really well, but I don't have the cash to buy the inventory so we're just going to end up wasting, you know, marketing dollars on this stuff.
- [11:06]
A
Yeah, but also when we talk about marketing, you have to consider from the supply ch. And this is a recommendation that I always make. You gonna have to give a lot of product away. You have to prepare for that and that's gonna be a cost that you need to absorb. Because right now with the social media world, even if you do demos, you need to have to give a lot of like I had a client that said, well I have the product, but can we ask the influencers to pay for shipping? And I was, no, you cannot. Those are expenses that you have to contemplate and have it in your budget.
- [11:41]
B
Yeah. And I think there are things that you can make that easier. Right. So instead of sending out a full size product, make a trial size. Right. You can have something that is, is good enough just to, to test something. And so I think that's where you know if you have that conversation as a business. And again, it's not supply chain versus marketing, but it's as a business. And you say, we think influencer is, is going to be a really important piece. We need to have a unique, you know, unboxing experience for them and we need to have something that allows them to test it and opt into it. You can go out and create that accordingly. And maybe it makes Sense to spend $10,000 to make something that's completely separate for them, but it's going to save you $30,000 in shipping or lost product or things like that.
- [12:19]
A
Yeah. So what other mistakes or things that they could be done better from the supply chain that you see over and over and over?
- [12:27]
B
I would say the number one problem people have is they, they don't have the right fit in their supply chain. So they either overbuild in anticipation of future demand or they under build and they're constantly fighting fires and doing things like that. When, when I think about launching a business and I like to think of it as like a, you know, accent of play. And when you're starting out and you're just trying to create that product market fit, there is a certain success criteria you need to back into. And so you need to build a supply chain that works for that. Once you've hit product market fit, then you need to grow and you need to do things differently. And there's a different supply chain that fit purpose for that. Then when you think about, hey, I want to sell this business one day, I need to make sure that it's ready and prepared to be to exit, that's a completely different supply chain as well. And I think when you, when you look at this and say, all right, I need this to work for the next 18 months because I'm in this particular season and I need to do these very specific things. Then you're in a situation where you can be much more rational about it and maybe you won't spend a million dollars on an ERP system that you don't need. Right. Or you'll understand that, hey, this factory is great, or maybe they're not great, but they're good enough for where I need to be right now. And eventually, you know, we'll outgrow them and that's fine, and we'll start to look that way. And so understanding where you are and where you're gonna be and having somebody who can look around corners is really important. Because in supply chain, if you're fighting a fire today, you made a mistake six months ago.
- [13:45]
A
Yeah. But also this is something really important that you just mentioned, that you need to be ready to pivot, that maybe whoever you work now, it's not gonna be the right fit for you in the future.
- [13:56]
B
You're absolutely right. And especially in this day and age where we have tariffs by tweet, we have government instability everywhere, we've got, you know, wars and climate events and things like that. This has never been a more unpredictable time. And so it's, it's not about just hoping it's not going to happen. That now needs to be a core operating philosophy. And so you need to build in the optionality into your business. That may mean that you have a manufacturer who's low cost over in Asia and you have somebody who is more reactive but higher cost in North America. And you're going to, you're going to split your production between both of those. It may mean that when you launch a product, you're going to intentionally plan on stocking out. If you can build a reactive supply chain that will get back into stock quickly because you don't want to throw away $1 million in product if it doesn't go well. So really the key thing here is just plan on things changing and making sure that you have the ability to go one way or the other as things change. You're not locked into any long term decisions.
- [14:54]
A
Another thing that I've been seeing in CPG brands is one challenge, which is how can I make everything fast in one place. To me that's kind of impossible unless you have an unlimited budget and great margins. And one of the challenges that I see the most is with packaging. I don't know if you've seen that too because people concentrate more so Much in the supply chain of their product and the ingredients of creating the product. But then they forget the cost of packaging, the shipping of packaging and timing of packaging.
- [15:30]
B
It's an important piece. I mean, one of the first companies that I helped launch was a company called Hubble Contacts. And I was responsible for the entire supply chain, you know, finding the factory, getting things designed, forecasting, things like that. And there was a point there. We're like, okay, cool, we've got the contacts, they're on the water. You know, we know what we're going to do. And then it was like, how are we going to ship these? And we're like, shoot. And we were, you know, we had enough time at that point we could go through and develop something. But it was also one of those things were like, man, I. I hadn't thought about the thing that I literally look at for 30 seconds and then throw away before I actually use the product. And you know, you get elements of what's the unboxing. You know, you don't want it to have too much extra air because you're just paying for that with the right weight.
- [16:08]
A
Yeah. But also serves things that you need to keep in mind that if you do the packaging either overseas or in the United States, getting that product to you or getting that product to where they will put the product inside the packaging, that's going to cost you money too. And depends what materials you use and how they're folded. The same with product, how the fits. The product fits in pallets. And the design of the product can affect all your shipping. And not only that, then you can change the cost of fuel storaging the product completely.
- [16:44]
B
I mean, just take a simple example of if I wanted to rent a truck. Well, you know, truck is only so, so large. And if I'm shipping a whole truckload of pillows, that's going to weigh a lot less than if I'm shipping a bunch of bowling balls. And there are weight limits on trucks in just the same way that there's space limits. And so there's a whole art and science here to figuring out what is the right load factor. And do I mix heavy things and light things because I don't want to have something just pillows because I'm, you know, I'm paying for weight that I'm not moving around. But I also don't want to have bowling balls because I'll have empty space in there. So you want to mix them together.
- [17:21]
A
Well, yeah. And also I remember many years ago my, my husband is also in CPG actually he works in the toys industry, as you guys know. And there is something you need to be very conscious because you can make this amazing packages that everything will look great, but then you can only fit so many in a truck.
- [17:40]
B
Yep.
- [17:40]
A
And that is a lot of money.
- [17:43]
B
Yeah, yeah. You kind of have to think through those things. And this is why I love Supply chain is because it is literally the intersection between the ambitions and the dreams of the business and the physical world. And you've got to work around those.
- [17:54]
A
So what are the things that people don't know about supply chain and they should know?
- [17:59]
B
I think it's really, you know, the job isn't to predict the future, it's really to operationalize this unpredictability. And so you need to make sure you've got advisors and members on your team that understand that yes, I need to take care of the fires that pop up, but the real value is looking forward and thinking about what is it that we're going to do if X, Y and Z happens. I mean, when, when tariffs were first announced, the number of calls that we got where we're talking with folks and you know, saying, okay, this has happened, right. Let's, let's acknowledge that it happened and instead of being upset that it happened and you know, wishing that it's going to go away, let's just talk about what our options are. Because supply chain is all about identifying trade offs and helping people understand that, you know, there are certain trade offs that if I, if I go down door number one, that closes door number two and door number three and there's other ones where if I go down door number one, I can always come back and do door number two and door three down the road. So the role of supply chain is to identify the trade offs and to help the entire business make a educated decision in terms of what they should be doing.
- [18:58]
A
So let's say company name and they are challenging, having challenges their company, their products are, with the tariffs, the products are not making as much margins, shipping is higher, the company is not doing great. So what will it be your recommendation? What's the first thing that they need to look at?
- [19:20]
B
Yeah, yeah, this, this is a great example. We actually have a couple clients. We did exactly this. The first thing you do is you take a look at and say, all right, let's just take assess assessment of our costs. We can't change the tariffs, but can we, can we change where we're producing the product? Right. There are different tariff routes coming out of China versus coming out of Mexico. And one of our companies, Sourcefy, does exactly this. They've got boots on the ground in like 15 different countries. Highly curated network of factories. And so what we're doing is saying, okay, we're making your toy today. It's coming out of China. We know what the tariffs are there. Let's go look at India and Morocco and Mexico and Turkey. And we would go get actual quotes from actual factories and they'd say maybe they're paying a little bit more price wise coming out of Turkey. But when you include the tariffs and the transit time and things like that, it's actually lower than what you're paying with a higher tariff. So that's the first thing to look at is just changing it. The other big thing is just let's look at the entire cost structure and understand where you can take other costs out. When was the last time you negotiated your parcel rates? Should you be in more fulfillment centers than just where you're at to shorten the distance it's going to, which will lower the parcel rate? Is there a lot of automation that can be done inside the business to remove a lot of the manual work that people are doing? So those people are freed up to do other things that actually move the business forward versus just reporting on it. And so there's a whole lot of stuff that can be done and these are really fun problems to fix. Yeah.
- [20:39]
A
And give me, let me give you some my two cents. Also, like I see a lot of marketing and marketing departments or brands that they see, they thought that they're going to scale really fast or something happened really fast and they want to bring everything in house. So. And they really, they don't need a full time cmo, they don't need a full time team. What they need is experts doing what they're doing and do it in a fraction of the time. That's actually why I created my agency. But you can save a lot of money there by not having a full team and full time.
- [21:14]
B
Yeah, absolutely. And especially if you start pairing that with folks in different time zones or different countries, you know, they have the right proper things in place. You can get a lot of arbitrage with overseas talent that is trained properly and those sort of things. And you and I bonded on this when we met. We do a lot of the day to day blocking and tackling for brands from an operational point of view. And then we also have fractional CEOs. So think of us as like non equity business partners that help the founders think through these operational things.
- [21:40]
A
Yeah, absolutely. And also I have another question for you because I see another issues that I see with, with brands is how do I trust or founders? How do I trust that first relationship with a supply chain? How do I know who to trust? Do I go to Alibaba and I found all these people because. And also a lot of countries, they don't have. I'm not even gonna say the language. It's a culture. And how you communicate and the modisms and how you speak. And I mean, I'm English as a second language and I can tell you when I had to learn English. It's not about learning the language, it's learning the culture.
- [22:18]
B
Yeah, it could be really difficult. I mean, there is nothing that beats sweat equity. Right. So if you are fortunate enough to be sourcing in a place that you can go to regularly, being able to visit, being able to provide FaceTime and to show them that you're sincere about this and that you respect them in their business goes a long way to getting both sides of trust you. Because I think people may not recognize that that trust needs to go both ways. That factory has to want to work with you. And you know, most of these factories are not dying for business. They want, you know, they're selective with it. You know, one of the things that we'll do.
- [22:52]
A
Something you need to know also. Sorry I interrupt you. Is that the customer is not always right. If you decided to partner. Yes, we decided to partner with the factory because they're experts in a material or in a specific thing. You need to listen what they say because sometimes your ask are not feasible.
- [23:13]
B
Yeah, you're absolutely right. And so that's where you know, if you've got a trusted third party, whether that be a factory sourcing network or a network or a consultant that can help you translate your needs and ambitions into what they need, that's where there can be a lot of value. And that's where like a firm like ours would be able to step in or consultants would be able to help help you translate between what is it you actually need and ask the questions that you should actually be asking. And then also to be vetting out the factory to making sure that you are asking the things that you should be asking and not just hearing what they tell you.
- [23:44]
A
Okay, so I have one more question for you that I think it's fundamental in the supply chain is how you start putting your budget together to. To know that you are not missing steps.
- [23:59]
B
Yeah, it's a great question. I always want to build budgets very Conservatively. So I'd rather show that I'm spending more money and that things cost more because I'd rather miss favorably than unfavorably.
- [24:10]
A
I'm a big fan also to have contingency, for sure.
- [24:14]
B
Yeah, you're going to want that. I mean, if you think that in your model that you need a million bucks, go raise two or two and a half. Right. You kind of need that. But I mean, it's just very simple where take a first principle approach and literally walk through every step that has to happen for your idea to get to a consumer's house. And if you don't understand how something gets made or where the products come from, or how it's going to be moved from point A to point B, or how it's going to be delivered to the customer's house or how they're going to return something, that's a pretty good place for you to start. And so I love that.
- [24:43]
A
Like. Like what? Your cereal box to explain all the steps that it took to get there.
- [24:48]
B
Exactly. You know, I think that once you go through and do that and really take a first point, you'll understand that at least, the very least, you need more lovers in your operational model. So you can put a placeholder and look at it and you'll find that, okay, you know, the same person who is going to move it overseas is probably the same person who's going to clear customs is probably the same person who can move it into my warehouse. And so, you know, you don't need four assumptions there.
- [25:13]
A
But also remember, your relationships are not going to be only with your manufacturer. You need to have a relationship with your freight forwarder. You have to have relationships with every part of every piece of the pie and whatever. I mean, you don't know how many people and companies are involved, so you're going to have to try to get who can do this and something else many times to simplify your work.
- [25:36]
B
Yeah. Which is why you either need to put the effort in yourself to go learn all those things and to build those relationships and to educate yourself, or you need to tap into one or two relationships that you really trust that you can lean on their recommendations and their relationships.
- [25:51]
A
That's great. Well, Aaron, one more question before we go. How do you drink your coffee?
- [25:56]
B
I actually don't drink coffee. I'm more of a. Oh, my God. So I like coffee ice cream. We'll go with that.
- [26:02]
A
Okay, well, that's a good way to have coffee. Thank you so much, Aaron, for being here with us. Today.
- [26:08]
B
My pleasure. Thank you so much and look forward to having you on the podcast too.
- [26:13]
A
To you guys. I will see you next week with more coffee. Number five. Find everything you need at larashmoisman.com or in the episode notes right below. Don't forget to subscribe. Was so good to have you here today. See you next time. Catch you on the flip side. Ciao, ciao.