The Power and Profits of Working Directly with Suppliers

There are several financial and non-financial benefits when companies cut out middlemen and source directly from their suppliers. Combine this with selling directly to customers and a company can invent their own game.

Happy Tuesday Friends,

Last week we discussed the power of selling direct through creators vs traditional retail and Amazon. This week we will shift to the production side and explore the benefits of sourcing directly from suppliers. Magical things start to happen when companies go direct with both their suppliers and customers.

The Middleman Economy 👭👬👭 

The development of global supply chains over the past 30 years have driven companies to outsource their production to lowest-cost geographies. As a result, many products currently go through an endless maze of actors along the way that includes processors, consultants, brokers, and distributors, before arriving to the final customer. Here’s the thing - everyone takes their slice along the way and it adds up. Below is a simple diagram of the parties involved in a traditional global commodity supply chain alongside a shortened supply chain when companies go direct to the source.

We see companies often save 20% - 40% in their input costs by sourcing direct. In some cases, it can go as high as 80%. Beyond money, the presence of multiple intermediaries has led to a more precarious situation - companies often lack knowledge about many of their suppliers or the origins of certain inputs. 🤷 ❓️ 

We were at a conference not too long ago and heard a shoe manufacturer that works with several major brands spit out this stat:

This happens because everyone along the supply chain needs to earn a specific margin until it reaches the end consumer. Apparel and fashion is notorious for having extreme markups, especially on the more luxury end of the market. While this is not as extreme in other industries, the concept remains the same.

Retail empires like Amazon, Home Depot, and Walmart have grown into extremely large middlemen and are the backbone of modern day capitalism. This also happened over the past decade on the smaller end of the market with the explosion of direct-to-consumer startups that are de-facto marketing companies. They outsource all production and supply chain functions and focus on acquiring customers through paid advertising. The good news is this playbook no longer works, but that’s for another time.

Benefits of Working Directly with Suppliers

If you create a system to shorten supply chains and remove multiple parties in the middle, the benefits go well-beyond immediate cost savings. We have listed a few below:

• Bypass the gatekeepers - most supply chains are controlled by a few large companies in the, ‘messy middle’ that dictate pricing and regulate supply. By working directly with suppliers companies can control their costs and develop a deeper level of trust and resilience along the supply chain.

• Fulfillment and meaning - direct exchange with suppliers creates a stronger emotional and human element to the products being made. This translates into a deeper connection among employees and customers when they know the product goes beyond making money and is about something bigger. This all translates into business value over the long term.

• Support local economies - working directly with suppliers creates more margin for them to reinvest in their own farms, factories, operations, and communities.

Aligning with Consumer Trends

As consumers have access to more information and endless options to buy stuff, they are increasingly seeking brands and high quality products that match their values. Working directly with suppliers enables companies to create this value-alignment with their customers. It allows them to be more transparent with their business practices and have more resources to invest in other areas of their company. This can include ensuring the men and women who participate in making the product are paid a living wage. The interesting point - not only is this the right thing to, it’s the smart business decision. We see companies who employ these more transparent, fair business practices starting to hit the cultural zeitgeist and win in the marketplace (Example👇️ ). But, working directly with suppliers is much easier said than done. There are no shortcuts. You actually have to care.

On to an example of a footwear company with $300 million in annual revenue that pays their suppliers 5x more than the industry standard.

The French Sneaker Brand that Has Invented it’s Own Game By Going Direct 👟 🇫🇷 

Veja is a $300 million-a-year sneaker brand with a presence in over fifty countries. They have sold 12 million pairs of sneakers since its inception all without traditional advertising. The best part - they did it with no outside investors.

🍿 Synopsis: Let’s look at the sneaker industry. Common industry statistics show that about 30% of the cost of a shoe goes toward raw materials and production. The remaining 70% goes to marketing and communication. That is not the model Veja uses. Veja is a French sneaker brand with a cult following that has grown close to $300+ million a year in revenue with no outside investment. They did this by flipping the traditional model completely upside down. How? The company does not do any traditional advertising. Instead, they work directly with their suppliers and allocate this budget to raw materials, production, and fair trade wages. As a result, it costs Veja 5x more to produce a pair of sneakers than other brands. But, by eliminating much of the 70% in marketing costs, they deliver shoes at the same price as their competition. Every part of the company’s shoes has a story and they are super transparent. Sustainability and more equitable supply chains is a part of everything that they do, but that is not the point of this post. The point is they make a shoe that people love at a competitive price with other major shoe brands.

📚 Learnings: You would think that a company that spends 5x as much on producing a pair of shoes and zero traditional marketing spend has no chance to be successful. Veja has proven this assumption wrong. They have made ethics a core part of the business by working directly with their farmers and suppliers and building a regional supply chain from the ground up. The cool thing? People want to be associated with the brand and mission. Celebrities like Meghan Markle, Emma Watson, Kate Middleton, Emily Ratajkowski, and many more regularly wear Veja sneakers and proudly showcase them on social channels without being paid for it. Many people who wear the brand aren’t aware of their ethical credentials - they just love the shoes.

Veja is a great example where working directly with suppliers and transparent business practices can drive free advertising and word-of-mouth marketing at scale. A quick online search yields countless posts across social channels from celebrities and creators who love the shoes and want to be a part of the brand. This results in powerful network effects that create significant sales and value for Veja. But, instead of putting those additional profits into their pockets, Veja chooses to give it to their suppliers so they can reinvest in their own businesses and local communities. It turns out the way to build a globally successful sneaker brand is to not really try to build one at all.

👀 Learn More: check out this interview with Veja’s CEO & Co-Founder Sebastien Kop:

There is not a second case study as we weren’t able to find creator-led brands working directly with suppliers and building their supply chains from the ground up. Hence, why we started this newsletter altogether.

Please share any examples you know in the comments.

Build with love,

Jordan & Scott