Carrying Costs of Inventory (What It Is & How to Calculate It)
Gaining a deeper understanding of your carrying costs of inventory can increase profits overall, but the task is easier said ...Read Post
In the midst of this global pandemic, many distributors are frantically reviewing their business plans and finances to determine their next steps. An immediate struggle for many is the sudden slowdown, or even halt, on their incoming cash flow due to delays of projects, struggling customers, general economic distress or healthcare-related shutdowns.
One of the most common ways distributors tend to tie up excess cash is in inventory, both consigned customer stockroom inventory and distribution center inventory. Paying too much to stock more goods in a warehouse or stockroom than what’s actually being used is a common issue, but the effects will be far more harmful in today’s conditions.
You can also help your customers find cash by showing them how to optimize their customer-owned inventories using the Min/Max Tuning Dashboard in the eTurns TrackStock App. You’ll not only be providing greater value as a partner to your customers in these uncertain times, but you’ll strengthen your own position for the long-term.
Right now, cash is king.
Removing cash from customer-owned inventory is a quick-fix inventory management solution that can endear you to your customers in this environment. Customer-owned inventory requires the customer to pay for items as they leave your dock. Real-time usage data in inventory replenishment apps like eTurns TrackStock, along with the ability to tune minimum/maximum levels based on recent usage offers a strategic opportunity to improve demand planning in the very short-term. Because demand has likely shifted drastically, this can help expose areas where customers can cut inventory up to 73% now, and remove annual carrying costs that mean ongoing savings. What a great way to build loyalty.
Consigned inventory is inventory that resides in the customer’s stockroom and the customer is billed for it when they use it. It’s a great strategy that makes a distributor indispensable to customers, but stocking more inventory than a customer actually uses wastes a distributor’s cash. ERP software doesn’t track on-hand quantities in your customers’ stockrooms or service trucks and it can’t track your customers' actual consumption in real-time, therefore, it can’t find cash being wasted in consigned inventory.
That’s where eTurns comes in. With the eTurns TrackStock Automated Replenishment App with the Min/Max Tuning Dashboard, after just 45 days of gathering data, distributors can optimize consignment inventory — and remove unnecessary stocked inventory altogether for one-time cash savings. The percentage reduction in inventory also gives distributors annual cash savings from reduced inventory carrying costs, which typically ranges from 25%-40% of inventory value. Using the right technology to manage consigned inventory can help ensure customers aren’t overstocked — a common challenge even in good times. Today, this is critical.
Another place to find a treasure trove of cash is in distribution centers belonging to distributors that have no real idea what inventory customers are using, only what customers are ordering. To reduce forecast error in this unprecedented time, don’t just base your demand planning on historical sales. Include actual real-time usage data from your customer’s point-of-use. After all, just because a product was sold to a customer doesn’t mean that it was used. No demand planning software could have foreseen the precipitous drop in demand caused by COVID-19, but TrackStockPDP identified the drop off in demand immediately, allowing inventory managers to immediately adjust demand plans. Result: It saved cash.
eTurns TrackStock analytics in the Precise Demand Planning® Solution can tell distributors WHICH products WILL be ordered on WHAT date in WHAT quantity.
The key? eTurns TrackStock looks at 45 days of customer consumption data at the point of use in stockrooms and trucks from a distributor’s top customers, updated in real-time. It calculates optimized minimum/maximum levels, as well as quantity on hand and average daily usage. The analytics can then be sent directly into the distributor’s ERP system or sent in an email alert to inventory managers for review. This TrackStock Precise Demand Planning® data is essential to reducing forecast errors that result from using typical demand planning software, which bases forecasts on historical aggregated sales. TrackStockPDP enables a distributor to react more quickly to changing demand, rebalance distribution center inventories, and save cash.
Reducing annual inventory carrying costs is a big part of how eTurns helps distributors and their customers save money because while reducing inventory creates great one-time savings, reducing carrying costs saves you cash on an ongoing basis. Annual carrying costs include things like renting warehouse space, cost of capital, insurance, inventory perishability and shrinkage from theft, damage or human error and typically range from 25%-40% of inventory value.
To reduce carrying costs, determine which inventory items are essential, and minimize your stock of the rest based on actual usage data. And for products that haven’t moved in a long time, rather than watching it waste away on your shelves, get that cash moving by selling it at a discount or even recycling it.
Determining which items are essential is practically impossible without data about actual customer usage. The eTurns TrackStock Automated Replenishment App helps by delivering usage data, with which distributors can optimize distribution centers and distributor’s customers can optimize stockrooms and service trucks, using simple calculations from quantity on hand, average daily usage, and minimum and maximum levels. In some examples, this can translate to as much as a 73% reduction in cash spent on inventory and annual carrying costs.
Another way to reduce costs is with consolidated and batched orders and billing of consigned inventory. eTurns can automatically track and replenish inventory as it is used, while also consolidating invoices and sending them at a later date. This avoids the flurry of single invoices or purchase orders that can bombard distributors with multiple purchases, which cost an average of $35 to create. This can create stress and thousands of dollars of unnecessary costs a month. The TrackStock App provides three options for billing: 1) send the transactions immediately, 2) batch transactions by holding multiple individual orders and then sending them in a batch at a later date, 3) consolidate transactions into one order and send that one order for all items at a later date. These options can decrease invoice costs and increase satisfaction for both the customer and distributor.
The truth is, no one has money to waste right now. Distributors want their distribution centers to run as lean and optimized as possible. Customers don’t want to be making unnecessary purchases. The eTurns’ TrackStock App tracks customer usage data, not just order data like an ERP or warehouse management system, lending a unique ability to eliminate forecast error, optimize distribution centers, optimize stockrooms, and save cash.