What is paid to the supplier is only part of the true cost of holding stock. Businesses that purchase stock, both for production and direct re-sale, will be familiar with the term ‘carrying cost’, which is the sum of:
- Purchasing the stock
- Damage and loss
Purchasing the Stock
There are many hidden costs with purchasing stock. The more obvious ones are missing out on economies of scale by not ordering in bulk or far enough in advance. The opposite, which can have an equally negative impact is purchasing more stock than needed to avail of a special rate.
Less obvious costs may include finance charges and opportunity costs. This is either the interest charged on finance borrowed to purchase the stock or the investment opportunities missed because money is tied up in under-performing inventory.
Stock needs a shelf to sit on and it doesn’t get there by itself. Whether you own or lease a premises, mortgage/rent, insurance, electricity, heating and security are just some of the typical costs you are guaranteed to have, as well as furnishings and equipment for moving stock. If your product requires specialist storage, such as refrigeration, the cost may be greater.
Warehousing costs increase with area size, so it makes sense to only store what is needed for the foreseeable future.
Handling and Delivery
A poor warehouse layout reduces productivity. Identifying fast moving stock and storing it at easily accessible locations will reduce unnecessary internal transport, people movement and repetitive tasks.
Likewise, inefficient use of warehouse space and shelving may result in a bigger area being needed.
Damage and Loss
The longer that stock is held, the greater the risk of depreciation or becoming obsolete. Accurate calculation when ordering is vital for reducing the risk of deterioration of stock.
For accountancy purposes, ‘carrying cost’ is broadly accepted as being fixed at a percentage of stock value, that nothing can be done about. However, smarter stock management enables businesses to reduce these costs and significantly impact the bottom line.
Implementing a stock management process eliminates excessive, obsolete, or underperforming stock that is wasting money. It also ensures that in-demand items are sufficiently stocked so that sales can be completed promptly and cost effectively.
Download our ebook to learn some of the best practices for achieving purchasing efficiencies through better stock management, involving all relevant departments in the process.
Globalisation has changed the playing field for businesses, in particular manufacturing companies. There is the opportunity to reach customers in foreign markets and supplier relationships are now on a global scale.
However, this brings with it the added risk of external factors such as natural disasters, political instability and currency fluctuations.
Now, more than ever, businesses are sourcing multiple suppliers for the same products/raw materials. This reduces the reliance on one or a few suppliers but it introduces the complexity of managing a diverse supply chain.
Here are some things to consider when dealing with multiple suppliers:
With shipments coming from all over the world, there is a vast range of delivery times and associated costs for each product from each supplier. For example, Supplier A in China may be able to deliver Product A within three weeks but Product B may take six weeks to arrive from the same supplier. Knowing and managing this information is crucial to a business’ purchasing efficiency and stock management.
If the quality of goods from each supplier is equal, the most important considerations thereafter are price and lead time, depending on the urgency of the customer.
If suppliers know that they do not have exclusive contracts with a business, this may motivate them to offer quality goods at competitive prices. They may even engage in ‘price matching’ with the other supplier(s).
A supplier’s order turnaround time may be its unique selling point and therefore allow it to charge more than its competitors.
A supplier’s capacity to deliver large orders may be a deciding factor in choosing a provider. If a business gets a large customer order, it needs to be sure it can deliver it in the timeframe quoted. It is important to know the scale and size of suppliers’ operations. (If however, each individual supplier of the same item cannot meet demand, this is where it is beneficial to have multiple suppliers.)
Purchasing departments must consider all of these factors before placing an order with a supplier. An automated approach is the most time-efficient method of doing this. Flowlens provides detailed sales information about the quantity of materials required and the timeframe allowed for production. This automatically calculates the delivery time afforded and in turn, selects the most relevant, cost effective supplier to order from.
If you are currently struggling with managing multiple suppliers, Flowlens can help your business.
We’ve combined the most popular features of our Sales and Operations modules to create a starter solution for businesses taking the first step to creating a more efficient Sales Ordering, Stock Management and Purchase Ordering process.
Our manufacturing software is cloud-based, so you are assured of reliability and availability across devices, with no hardware upgrade costs, or expensive per-user licensing.
Every business needs supplies, whether it be day-to-day necessities like photocopier paper or materials for manufacturing car parts.
Ensuring that the key components that a business relies on are available when needed is the responsibility of the Purchasing Department. Businesses strive for ‘purchasing efficiency’, whereby materials purchased meet required quality standards at competitive prices.
In the long term, purchasing efficiencies can help an organisation to make considerable financial savings, while protecting goodwill by meeting orders on time.
The effectiveness of the Purchasing Department largely depends on accurate data sharing between many other business functions. Many businesses use a mixture of spreadsheets, databases, accounting packages and other various software applications to manage sales, purchasing, stock and production. This is usually fragmented and cumbersome and fails to provide an integrated real-time overview of what’s going on in the business.
The existence of disparate systems and manual procedures often leads to data duplication and/or gaps. There is potential for human error and the time taken to generate worthwhile reports could be much better spent doing higher value tasks.
Some areas where businesses encounter problems when managing their sales, stock and purchasing include:
Sales quotations and orders are often stored in emails, spreadsheets and standalone CRM systems. Forecasting sales is not easily achieved with accuracy and therefore production scheduling and stock purchasing are not as efficient as they could be.
Businesses with no automation of minimum stock alerts can expect to run out of materials for production without warning, resulting in delays and associated costs.
- Sourcing Supplier Quotations
Lack of notice means that purchasing departments may not be getting the best deals as they don’t have time to get multiple quotes from suppliers.
- Receiving and Allocating Stock
Opportunities for discrepancies occur mainly at the inward delivery and production stages, as well as a result of breakages, loss and theft.
Manual integration of sales quotations/orders, purchase orders and stock management can result in unstructured data and insufficient business reports.
Using spreadsheets to track and manage stock is laborious and can often result in inaccurate stock level reporting as manual updates get delayed, missed or carried out incorrectly.
Failing to forecast demand efficiently is one of the main contributors to inadequate stock management. Without a clear view of the sales pipeline, businesses may have too much, or too few materials for production demand.
In our ebook, ‘6 Stock Strategies to Increase Your Profits’, we look at how to avoid:
- Insufficient Stock
- Rush Orders
Download this ebook to learn some of the best practices for achieving purchasing efficiencies through better stock management, involving all relevant departments in the process.