Think prices are the domain of brands and retailers? Think again. Supply chains are quietly determining product costs behind the scenes. Many of the costs you pay are determined by logistical elements, procurement, transport, warehousing, and more, which consumers aren’t always aware of when purchasing a product.
There’s a reason why a product is considered high priced or low priced. While its value starts with the raw materials and the production of the product, that isn’t the only factor in determining a final selling price. There are many steps from raw material sourcing to final distribution, and it’s during these steps that costs start piling up, eventually leading to a price that may be seen as either too high or too low depending on who you ask.
The price of a product doesn’t necessarily start with its final retail price but with the sourcing of its ingredients. The price of the raw materials, the price of producing them, or the price of contracts between manufacturers and their suppliers can all have an impact on a product’s final selling price.
The production of a product is also not always the end of the cost chain; a product also has to be stored, transported, distributed, and sold. The cost of doing these things is a factor that must be factored into the price the consumer pays. If any link in the chain is weak and a product is stored longer than needed or shipped on a route that is inefficient, it all affects the final cost of the product.
Procurement decisions have an impact on product pricing, too. If a decision is made in the supply chain to buy products from the cheaper supplier or a more expensive supplier, it all impacts the supply chain. A cheaper supplier may offer lower production costs but also carry greater delivery risks, for example. A more expensive supplier may carry higher costs but be much more reliable with deliveries.
How much a product costs will also depend on the logistics that go into transporting it from its origin to the final destination where it’s ultimately delivered or sold. There are many factors here to consider, including the distance the product will travel, what kind of transport is being used, and the current fuel costs.
Air freight is more costly but quicker, while water shipping is cheaper but slower. It’s up to the supply chain managers and the procurement department to make the decision on which kind of transportation to use when shipping out a product or shipment of goods. If a bad decision on the transportation type is made and there is a rush order for a product, for example, that could increase the price of a product.
Another factor in determining a product’s price is how long it is stored. Some products are transported directly to the consumer, while some need to be sent to warehouses, distribution centers, etc. The longer the product sits there waiting to be processed, the more it will cost. Warehousing comes with its own costs, including space, staff, equipment, and energy costs. This is why having an efficient inventory rotation plan is so important.
There’s also the global economic climate to consider. If there is a surge in fuel prices, for instance, it could have a dramatic effect on product pricing for products that are being shipped across long distances or countries. If there are supply chain disruptions or political issues at the ports or manufacturing facilities, that too will influence the price of goods.
It’s not just the local market but the state of the global economic climate that plays a role in how expensive a product is. Efficiency matters, too. There’s an old adage that says “there’s more than one way to skin a cat.” In the same way, companies have a choice of how to get a product from Point A to Point B.
One way of shipping it might be faster than another way or might be cheaper, but in terms of efficiency. Companies who have better supply chain processes in place will be able to offer lower prices for the same product while still maintaining good margins.
In conclusion, supply chains are the driving force behind pricing. We don’t think of the price of most products as being determined by supply chain factors, but behind every product that’s purchased, there are many logistical factors at work. It’s the procurement process, the transport process, the warehousing process, and more all coming together that makes a product affordable. Supply chains make the world of products available to us. The supply chains in place determine the price of goods, the availability of goods, and other market dynamics at work. Understanding supply chains helps us understand the world of products, from their production to when they’re delivered right to our doorsteps.