How Low Can You Go? Master the Carrying Costs Limbo
How Low Can You Go? Master the Carrying Costs Limbo
How Low Can You Go? Master the Carrying Costs Limbo
Aug 18, 2022Shannon Sickmon
Consumer goods importers and distributors know that the costs of carrying inventory represents a major portion of assets. And, with delays in production and shipping, as well as skyrocketing freight costs, you need to understand the true costs of your inventory.
Getting the correct balance on your inventory is tricky at the best of times. There are hundreds of factors you must consider. You need to account mainly for breakage and shrinkage, and as you add new products to your repertoire, you need a reliable tool to manage hundreds, even thousands, of SKUs.
In this article, we’ll discuss what carrying costs are and outline several solutions that will help you keep those costs down.
What Are Carrying Costs?
Carrying costs, also called "inventory holding costs" or the "cost of inventory", is the total cost of holding unsold goods in stock. In general, the industry estimate is that carrying costs total about 20-30% of the total inventory cost.
If 20% doesn’t sound like much to you, think about this example. If you have $5 million worth of inventory in your warehouses, that means you’re paying out about one million dollars in carrying costs. What could you do if you could reduce those costs by even ten percent? That would give you $100,000 to put back into your business, and in today’s volatile climate, that is a boost everyone can appreciate.
Inventory management is one part of an overarching supply chain management strategy; the difference is that this aspect of the strategy is one which you have some control over. You can’t regulate freight costs, customs fees or tariffs, but you can keep tabs on how much you are spending, where those charges are going and ultimately slash those expenses.
The constant supply chain disruptions, rising costs and evolving consumer trends are challenging to be sure, but with the right software, you’ll be prepared for whatever comes your way.
Know Your Costs: Profitability Scorecard
As we stated previously, you need to know your exact costs in order to lower them. Understanding your profitability is complex, but with the right tools, you’ll understand your company's true profitability without hours of manual reporting. Aptean Distribution ERP comes with a built-in profitability scorecard, which lets you conduct a profitability analysis of all your clients and vendors so that you understand which products are performing well.
You’ll also get a detailed analysis of your strongest products, so that you can keep those items in stock—and offload poorly performing items. Once you know which products are your top performers, you can work with your suppliers to ensure you have the right amount of product to meet demand which reduces inventory carrying costs.
The profitability scorecard offers you a real-time, 360-degree view of all your costs. This includes landed costs, retail allowances and chargebacks, commissions, royalties, operations costs and more. Moreover, every user can define the fields they need to create reports in minutes and track the costs that are impacting the business. Comparative views enable you to analyze results from multiple customers, suppliers or products.
Know Your Inventory: Warehouse Management
Today, customer expectations are higher than ever, but lead times on your orders keep getting longer. You want to stay competitive, so you’ve been ordering products earlier than usual to avoid the inevitable shipping delays. Then, you end up with excess product while you wait for sales to catch up. You may even have to rent additional warehouse space to house the excess supply. In addition, you’re having trouble hiring qualified warehouse workers.
A warehouse management system (WMS) helps you make the best use of the resources you already have. If you have warehouse management capabilities built into your ERP, even the most complicated, multi-fulfillment channels will realize improved efficiency and productivity. You’ll make the best use of floor space based on your specific characteristics that you set.
Your team won’t waste time trying to locate products because they’ll always know where everything is on the floor. With a few clicks of a mouse, or the swipe of a handheld device, you’ll have an accurate, real-time picture of inventory levels even across multiple warehouses. The system has automated processes to enhance pick, pack and ship accuracy, and you’ll get full visibility of all orders using lot, batch and serial numbers.
You also have the visibility for employee productivity, too. The system has tools that let you monitor and measure employees by tracking productive time through input and output numbers. You get real-time labor analytics to track employee performance which holds your team accountable for completing their daily tasks and ensures a more productive group.
Make Accurate Plans: Demand Planning
Right now, so many consumer goods importers are struggling with excess inventory and creating accurate forecasts. Or, you’re finding that sales have slowed down due to rising costs. You want to make smarter purchasing decisions based on solid data, not on instincts. Here’s a tip—you need a distribution ERP with a fully integrated demand planning module.
Configurable tools enable you to set up rules and workflows based on your specifications. You’ll get automatic alerts as orders are altered, updated or require attention, which means that you can fix orders proactively. The demand planning tool reacts to all transactions and notifies your team if there will be excess inventory or if there will be shortages. That way, you can instantly validate your current orders against the reported forecasts in real-time.
For example, if you want an accurate idea of upcoming sales, you can delve into historical figures and see what might be coming up. If one of your customers consistently orders 700 units of a product and then their order jumps up to 1000 units, the system will send an alert. At that point, the order goes on hold until you can verify the increase.
Demand planning tools help you avoid shortages, protect your inventory and make informed decisions about order shortfalls. When you do have excess inventory, you’ll know ahead of time and can make plans about discounting the product, finding the best places to offload or try selling the excess to discount retailers and keep more profits intact.
Make the Most of Your Inventory: Inventory Management Tools
Managing inventory is data-intensive, and if you are using rudimentary manual processes, spreadsheets or disparate systems, chances are your counts aren’t accurate. Aptean Distribution ERP has inventory management tools built right into the software. Granted, many ERPs have some inventory management capabilities, but most of them are not able to effectively manage hundreds, let alone thousands, of SKUs. Even worse, when it comes to back-order allocation, inventory reserve or sales restrictions, you still must create and manage dummy orders to make a series or manual notes to ensure that your retail customers get the items they requested.
Back Order Allocation
With specialized toolsets that allow you to reserve, restrict and allocate inventory, Aptean Distribution ERP with built-in inventory management guarantees that the right orders go to the right customers at the right time. Your inventory flow often requires processing back orders; you then need to ensure that when product arrives it goes to the correct retail customer. This is a great problem to have because it means that your products are selling, but it does mean that you need to have the right tools to complete the orders correctly.
With back-order allocation, you decide which customers are getting the back-ordered items first, then you simply build out a rules hierarchy in the toolset. This lets your team know the sequence in which orders get filled. You can build the rules based on order attributes like customer, order type, order dates or even ship dates. Then, the system updates the allocations automatically and in the correct processing and fulfillment order.
Right now, you might be dealing with shortages of your most popular items due to long lead times. You want to be able to fulfill your customer orders, but your current system won’t let you reserve inventory without making dummy orders to hold the items. Then, you must revise the order once the inventory comes in, so your team doesn’t ship it out. It’s a tedious, manual process and it can easily collapse like a house of straw.
If you’d like the capability to reserve inventory for select retail customers, you need a specialized inventory reserve module. You’ll never lose a sale again due to shortages because the inventory reserve tool allows you to allocate goods to a customer to save them for an incoming order.
That means you can keep your commitments to your retail clients—you simply mark incoming items as sold with the reserve, and the system updates accordingly. Then, when the items do arrive and the sale goes through, the inventory reserve depletes automatically. With other ERP systems, you must manually revise the hold order to release it into the inventory.
Additionally, with Aptean Distribution ERP you can even set up alerts for future reservations, so you’ll know to set aside more product even if the goods aren’t in your warehouse.
Sometimes, due to state or federal regulations, you cannot sell an item to a customer. Aptean Distribution ERP has automated sales restriction tools which prevent an order from taking place.
Let’s say you can’t sell a particular item to customers in California because it’s not compliant with Proposition 65 regulations. The system notates that restriction, and when an order from California comes in, the system will prevent the order. Your team gets an alert and then all future orders coming from California won’t process. Your service team can then explain the situation and discuss alternatives with the customer. You stay compliant and avoid fines.
If you’re tired of rising costs, inventory overages and manual order processing, then an industry-specific distribution ERP with built-in tools for inventory management, warehouse management and profitability analyses is your one-stop shop to crush carrying costs. Aptean Distribution ERP was created by industry experts for distributors, so that you can reduce costs and boost efficiency and productivity.
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