Inventory Investment Buying (forward buying) is a strategic part of the buying role that many companies don’t realize today. The truth: Investment Buying that is based on accurate demand forecasting and effective inventory optimization processes delivers significantly higher gross margins, better GMROI, and balanced inventory levels.
Buying and maintaining inventory is often viewed as a cost center and companies struggle with these 4 basic questions:
- When do I buy?
- What quantity should I buy?
- When I buy, how can I balance inventory levels?
- A vendor has offered a discount, how much more, if any, should I buy?
Inventory Optimization is only part of Inventory Replenishment Success
Inventory Optimization increases your profits, calculating the most economical way for you to flow inventory (EOQ) and minimize costs. Inventory Optimization, in conjunction with a strong Order management module provides you an inventory policy that balances your service level targets and inventory levels while minimizing inventory carry. If you have purchased and implemented an inventory optimization solution, then you can answer these first 3 questions confidently.
If you have such a solution in place, congratulate yourself, TAKE A DEEP BREATH, and realize the fourth question has not been answered. With most solutions and companies the 4th question is not properly addressed and this last question is somewhat counter intuitive:
Do you EVER hear: ‘Go buy more inventory’ any success stories?
When shopping for yourself, if a discount is offered do you buy additional units or use the savings to buy something else? A supplier (vendor) offering a discount may not increase your profits. Today, retailers and wholesale distributors operate in an intensively competitive environment. Increased competition and a slowly recovering economy have put increased pressure on sell prices and profits margins. To help margins, suppliers and retailers are investing in price optimization solutions to identify margin opportunities to generate more profit. The supplier (vendor) then offers the customer a discount price. Buying additional units at a discount price can be an advantage so long as the carrying costs don’t absorb the additional gross margin dollars the discount offer delivered. When you are advised by the supplier of a future price increase, buying more at the lower price gives you an advantage over the competition. The key is the buy the right amount to carry that doesn’t impact shelf life or gross margin after the impact of carrying costs. This methodology helps you grow customers and increase margin dollars.
Investment Buying: Generating Margin on the Buy Side
You, as a supply chain professional, need to look also look at the buy side, where another margin opportunity exists. Your future price increases, related to ending vendor deals or general price increases, are your margin opportunity to further optimize the inbound supply chain. Hedging against price increases with sound INVESTMENT buying decisions provides you with an opportunity to make significant contributions to your company’s success and bottom line profits.
If your vendor announces a price discount on their top 3 products for the next 30 days, your profit-logic says to buy more units. It makes sense to buy additional quantities, if you have available cash, warehouse space, and c-level management approval for an investment or forward buying purchase. It will increase inventory and lower your inventory turns. How much to buy is the key question. Additional quantities might take 3 months to sell through inventory instead of the usual 30 days.
How much profit you generate from the buy is dependent on the impact to your operating cost and choices in how you sell the discounted units. Operational cost include carrying costs from holding additional inventory units, offset by fewer acquisition costs – you are creating fewer purchase orders in the short term by increasing quantities on a purchase order. You have two choices in sales – you keep your original sell price and capture more gross margin or pass some of the savings on to customers to impact longer term growth. A good inventory optimization software app can measure these pieces and correctly calculate how much to maximize profit.
That decision, of how much, requires input from many people in an organization. It also requires a company to look at people, processes and tools from a different perspective and make the right investments to realize those bottom line results.
Sound Investment Buying decisions are Organizational
Sound Investment Buying (forward buying) decisions are based upon sound financial judgment utilizing the company’s cost of money and desired return on investment along with space and cash availability. Investment buying decisions balance the difference in product costs, and the lower acquisition costs against higher inventory holding costs. To succeed, a company needs to develop an investment buying policy and develop organizational buy-in so that investment buying becomes accepted as part of everyday routine and measured performance. It might take a few quarters of increased margin to achieve full buy-in:
The concept of more inventory of any kind being good takes most organizations a while to accept.
Additionally, you need your investment buying decisions integrated into regular replenishment, optimizing service and inventory while taking into account other factors such as available shelf-life. Investment or forward buy programs can be executed in Excel with a talented macro programmer but your company will never realize inventory optimization and balance benefits without integrating those decisions with normal replenishment ordering.
For each available investment opportunity you want the right buying decision made; generating the right quantity and right delivery date for your regional warehouse, warehouse, or store. Success comes by placing a new emphasis on the buying department, hiring the right people, instituting the right processes, and supplying the right technology and tools, to support profitable buying. Click here to read more about our investment buying solution.
Inventory optimization and investment buying together benefit your inbound supply chain.
Utilizing the company’s cost factors; product costs, acquisition costs and holding costs along with the service level requirements, the system generates sound inventory buying decisions, minimizing your costs, contributing margin dollars, along with delivering a high level of service to your end customers. Click here to read more about our inventory optimization solution.
Is Investment Buying in your Inventory Replenishment Solution?
The most in-depth inventory optimization systems balance demand forecasting, lead-time forecasting, order optimization, location-SKU service level strategy, replenishment, planned promotion buying and investment buying, all within a multi-echelon network that enables buyers to generate the optimal profit for their inventory investment.
Together these capabilities reduce cost, increase sales, improve margins and raise customer satisfaction to give your company a competitive edge.
Are your ready to ‘Tighten the Links in Your Supply Chain?™’
We are here and ready to help. Contact us for a free consultation about your forecast accuracy and inventory management opportunities. You can also request a demo and see how things can really start to improve in your business in 90 days.
Copyright © Data Profits, Inc. 2013 All Rights Reserved.