Five B2B Strategies That Balance Inventory Carrying Costs and Low Inventory Counts

Purchasing is constantly struggling to find that balance between high inventory carrying costs and lost business due to low inventory levels. On the one hand, purchasing is called upon to reduce warehouse management costs, while on the other they're asked to maintain the right amount of inventory to close sales. It’s fair to say that sometimes that middle ground is hard to nail down. However, there are some things you can do to make it a simpler process. Here are five B2B strategies to help you find that all-important balance.

1. Long-Term Contractual Agreements: Contracts don’t just mean sustained revenue. They also mean that you’ve been able to allocate a large portion of your inventory to your customers. In this case, it’s inventory that’s already spoken for. Regardless of whether you pursue Kan-Ban or blanket order agreements, do your best to lock up as much of your inventory as possible. However, make sure that these agreements cover your costs of holding inventory. It’s a good idea to stipulate terms and conditions based on the length of time that inventory remains within your warehouse. Your customers must come to understand and appreciate your carrying costs. If you hold inventory for too long, then there must be some carrying charges for your customer.

2. Stronger Vendor Agreements: Don’t just use agreements with your customers; focus on using contractual agreements across your entire vendor base. This allows you to reduce prices and freight on incoming parts by using your economies of scale. In addition, when your vendors hold inventory on behalf of your company, they help to reduce your costs of damage, obsolescence, theft and handling. The simple rule states that as long as your vendors hold product on your behalf, you won’t incur costs relating to these aforementioned inventory cost drivers; they are costs that are predominantly borne by your vendor. However, don’t try to make your contracts one-sided – make them balanced for both parties by splitting these carrying costs. The first table below shows carrying costs without contracts (3% in your warehouse) versus costs that are shared between you and your vendor.

The above table is taken from the post: Reducing Your Inventory Holding Costs with Contractual Agreements 

3. Inventory Liquidations of Slow Moving and Outdated Inventory: One of the biggest mistakes I see companies make with respect to their inventory of outdated finished goods is that they tend to hold on to these goods in the hopes of one day selling the inventory at full value. It doesn’t work. Don’t do it. It’s the law of diminishing returns: The longer you hold outdated inventory, the more costly it becomes and the higher your costs are relative to financing, damage, theft and counting. Your primary goal should be to measure your costs of carrying inventory relative to your gross profit on sales. The longer you hold that inventory, the more it reduces your potential for profit.

 

The above video is from the post: The Customer Demand & Inventory Gap: The Bell Curve

4. Asset Management Strategy (Inventory Analyst Position): The best inventory and sales strategy is to manage your finished goods as assets. Taking an asset management strategy towards the products within your warehouse means aggressively eliminating damage and obsolescence by tracking how a product moves from high gross profit on sales, to low gross profit on sales. Faster selling inventory means profit is higher because financing, damage and theft aren't as prevalent. Slower selling inventory means profit is lower because those aforementioned cost drivers are more prevalent. Incentivize your sales people by paying a higher commission for increasing inventory turnover rates.

The above is taken from the post: Small Business Inventory Asset Management: Using an Inventory Analyst

5. Measure Procurement's Performance on Gross Profit: Finally, start measuring procurement on gross profit objectives by focusing on strategies that reduce damage, obsolescence and theft within your warehouse. In this case, it’s about understanding that there are two ways to generate profit on finished goods. The first includes sales and marketing defending price, while at the same time capitalizing on business opportunities. The second includes procurement reducing costs in inventory management. However, don’t just focus on the price your company pays for materials and consumables. Combine these efforts with strategies that reduce all costs. Again, reducing the incidence of damage, obsolescence and theft must be a core focus of your procurement team. In addition, reducing your per-unit freight costs on incoming parts is yet another way to reduce costs and increase profit.

Finding that balance between high inventory carrying costs and low inventory counts is extremely difficult. Unfortunately, far too many companies approach it form the mindset that only procurement can control inventory costs, when in reality, it’s the job of both sales and procurement to reduce these costs. In essence, sales drives inventory through its sales forecasts. In turn, procurement tries its best to match its inventory counts of finished goods to these forecasts. However, both functions have a role to play in maximizing your company’s gross profit on sales. Focus on getting them to work together by giving sales and procurement the same gross profit objectives, ones that are tied into how long inventory is held and how quickly it’s sold. This will help your company find that much needed balance.