Boosting Your Ecom Brand's Profitability: The Impact of Shorter Lead Times and Smart Reinvestment

Boosting Your Brand's Profitability: The Impact of Shorter Lead Times and Smart Reinvestment

"The speed of your supply chain can make or break your business. Just look at how Apple manages its supply chain to maintain a competitive edge." - Harvard Business Review

‍In the fast-paced world of fashion e-commerce, managing your supply chain efficiently can significantly impact your profitability. If you're a fashion brand looking to understand how reducing lead times and reinvesting capital can boost your Contribution Margin III (CM III), this case study is for you. We'll break down the calculations and show you the financial benefits in a simple, easy-to-understand way.

Executive Summary

This case study (derived from a real customer case of VOIDS) explores the financial impact of reducing lead times from 12 weeks to 8 weeks for a fashion brand. By switching to a new supplier, the brand can release capital, reduce overstock costs, and reinvest the savings into marketing. This results in a 16.37% improvement in weekly CM III and an annual improvement of €212,849.This demonstrates the significant financial benefits of shorter lead times and efficient capital reinvestment in inventory management.

Case Study: Changing Suppliers to Reduce Lead Times

Let's compare two scenarios for a fashion brand:

1. Long Lead Time: 12 weeks with the current supplier
2. Shorter Lead Time: 8 weeks with a new supplier

We'll also consider the impact of reinvesting the capital saved from reducing lead times.

Key Metrics & Assumptions

• Selling Price per Unit: €125
• Cost of Goods Sold (COGS): 20% of topline revenue
• CM III: 20%
• Units Sold per Week: 1,000 units
• Return on Ad Spend (ROAS): 3.5
• Weighted Average Cost of Capital (WACC): 16% (Mix of Shortterm Debt e.g. Wayflyer and Longterm e.g. bank loan debt)
• No Batch Size Planning: This Brand does not yet work with Re-Order Batch breakdowns, but orders as 9/10 ecom Brands for the whole leadtime cycle.‍
• Leadtime Improvement: This was the result of fastening the avg. production time from 8 weeks to 4 reducing the total leadtime to 8 instead of 12 weeks.

1. Weekly CM III for Long Lead Time (12 & 8 weeks)

First, let's calculate the weekly CM III for the long lead time scenario with the current supplier.

• Revenue per Week:
  • Units sold per week * Selling price per unit
  • 1,000 units * €125/unit = €125,000
• CM III:
  • 20% of €125,000 = €25,000

2. Financial Impact with WACC and Reinvestment

By switching to a new supplier and reducing the lead time from 12 weeks to 8 weeks, you can release capital and reduce overstock costs. Let's calculate the financial impact.

Capital Released

This capital is released because shorter lead times mean you don't need to hold as much inventory. With a 12-week lead time, you need to order more stock to cover the longer period, tying up more capital. Reducing the lead time to 8 weeks means you can order less stock, freeing up €5,000 in capital.

‍Detailed Calculation:

• 12-week lead time:
  • Total order volume: €300,000
  • Average capital on hold: €300,000 / 2 = €150,000
• 8-week lead time:
  • Total order volume: €200,000
  • Average capital on hold: €200,000 / 2 = €100,000
• Capital released: €150,000 - €100,000 = €50,000

However, considering the weekly impact and the average capital released over the period, we simplify this to an average of €5,000.

Overstock Cost Reduction

• Overstock Cost Reduction: €847.50

Overstock costs are reduced because shorter lead times improve your forecast accuracy (FCA). With better FCA, you can more accurately predict demand and avoid over-ordering. In this case, the improved FCA reduces overstock costs by €847.50. The avg. FCA improvements which lead to lower risk of overstocking from the mean (e.g. 75.73% FCA would result into a relative overstocking of 25,73% in 50% of the cases) result from the shorter leadtimes and according FCA avg. improvements. Check the FCA benchmarks applied at the end of the article.

‍Detailed Calculation:

• Initial overstock cost (75.73% FCA):
  • Overstock units: 500 units * 25.73% = 128.65 units
  • Cost of overstock: 128.65 units * €25/unit = €3,216.25
• Overstock cost after FCA improvement (68.95% FCA):
  • Overstock units: 500 units * 18.95% = 94.75 units
  • Cost of overstock: 94.75 units * €25/unit = €2,368.75
• Reduction in overstock cost:
  • Cost reduction: €3,216.25 - €2,368.75 = €847.50

Total Capital Released

• Total Capital Released: €5,847.50
• This is the sum of the capital released from ordering less stock (€5,000) and the reduction in overstock costs (€847.50).

3. Reinvestment in Topline Revenue

Assuming a Return on Ad Spend (ROAS) of 3.5, let's calculate the additional revenue generated by reinvesting the released capital.

• Additional Revenue:
  • Total Capital Released * ROAS
  • €5,847.50 * 3.5 = €20,466.25

4. New Contribution Margin III with Reinvestment

Adding the additional revenue to the new system's revenue:

• New Revenue per Week:
  • €125,000 + €20,466.25 = €145,466.25
    • €125 x 1000 = 125,00€
    • €5,847.50 * 3.5 = €20,466.25‍
• ‍New CM III:
  • 20% of €145,466.25 = €29,093.25

Weekly CM III Comparison

To make the CM III results comparable on a weekly basis:

• Long Lead Time (12 weeks):
  • Weekly CM III = €25,000
• Shorter Lead Time (8 weeks):
  • Weekly CM III = €25,000
• Shorter Lead Time with Reinvestment (8 weeks):
  • Weekly CM III = €29,093.25

Relative Change Calculation

Calculation Steps

1. Calculate the difference between the new and old values:
   • €29,093.25 - €25,000 = €4,093.25
2. Divide the difference by the old value:
   • €4,093.25 / €25,000 = 0.1637
3. Multiply by 100 to convert to a percentage:
   • 0.1637 * 100 = 16.37%

Annual Financial Impact

Assuming the brand makes a total revenue of €10 million per year, let's apply these metric improvements to see the annual financial impact.

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Annual Improvement

Conclusion

By switching to a new supplier and reducing the lead time from 12 weeks to 8 weeks, your fashion brand can release €5,847.50 in capital and reduce overstock costs by €847.50. Applying a WACC of 16.1%, the financial impact is €941.45. Reinvesting the released capital with a ROAS of 3.5 can generate an additional €20,466.25 in revenue. The new Contribution Margin III, after reinvestment, is €29,093.25 per week, compared to the long lead time scenario's €25,000 per week. This results in a 16.37% improvement in weekly CM III and an annual improvement of €212,849.This demonstrates the significant financial benefits of shorter lead times and efficient capital reinvestment in inventory management. By understanding and applying these principles, your (fashion) brand can boost profitability and stay ahead in the competitive market.

Additional Note: Forecast Accuracy (FCA) Reduction Over Time. Shorter lead times also improve your forecast accuracy (FCA), which helps in better demand prediction and inventory management. Here's a table showing the FCA reduction over time, leading to higher costs of overstocking and WACC due to overstocking costs caused by uncertainty:

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