The biggest challenge to wholesale owners is avoiding the myriad of mistakes and fees that occur in inventory management and get in the way of running efficient operations and maintaining a healthy profit margin. Managing your inventory is one of the critical ways to keep your wholesale operations one step ahead of the competition.
For most wholesalers, the knee-jerk reaction to high costs is to hire a 3PL provider to reduce overhead costs, which isn’t a bad start. But there is more than one way to reduce your overhead and cut wholesale operational costs.
What is Inventory Management?
Inventory management is the process of tracking a company’s stocked and incoming goods and monitoring their weight, dimensions, amounts, and location. Effective inventory management should minimize the cost of holding inventory and chargebacks by alerting business wholesalers when they are short goods, when it’s time to replenish products, and when aging inventory is decreasing in value.
It’s far from easy to balance the right level of inventory with customer demand. So inventory is often a major drag on cash flow and the source of unnecessary expense. Consequently it is one of the biggest challenges that wholesalers face.
Sell FOB and POE when possible
It’s true that FOB and POE sales often come with tighter profit margins. At the same time, wholesalers who hand off responsibilities and costs overseas or at the port of entry, avoid some of the major stumbling blocks associated with inventory management. It’s true that these sales require increased work around documentation such as commercial invoices. On the upside, the inventory never touches your warehouse. You don’t have to worry about calculating your associated variable costs. So with your costs locked in well in advance you know your actual profit margin when you write the order. Better yet, you don’t have to wait for the goods to clear, maybe pass through inspections, get trucked to the warehouse, received, labeled, routed and turned back around. If you use a factor, those sales can immediately be turned into cash.
Most wholesalers cannot rely solely on FOB and POE business to sustain their business, but a focus on keeping a healthy balance of sales outside the landed goods realm can really help manage your inventory costs and increase your cash flow. Increased cash allows you to pursue other opportunities that can create a virtuous cycle.
Chargebacks are penalties issued by retailers when wholesalers fail to meet vendor compliance standards. Mislabeling, late delivery, and incomplete orders are just a few ways a wholesaler can be slapped with an expensive chargeback, but the list of compliance standards is always growing, and ever-changing.
One of the most common chargebacks is for shipping short. There is only one thing worse than letting your buyer know at the very last minute that you are short goods — and that is not letting them know at all. With enough lead time wholesalers can take corrective action. With a good ERP you can know well in advance if you are going to be short on any orders. Alerts can be put in place so that executives and salespeople know far in advance when a short or late shipment is looming. Maybe there are some other orders that you can delay. But that only helps if you have enough time.
Take this example:
You have an order to ship 500 units to company ABC with a Jun 15th start ship. You have an order to ship another 10,000 units to XYZ company with a June 22nd start ship. You find out on June 1st that the factory short shipped you 500 units. If you wait until the goods come in and allocate as orders come due you will ship ABC company 500 units and end up short shipping XYZ company. The income from the shipment to ABC company may be offset by the chargeback incurred by XYZ company, so you are giving the goods away for free. On top of that, XYZ Company may be a new account or even an established critical account that you wanted to prioritize. If your systems had alerted you in advance you could have made a better allocation decision.
Standard operating procedures and a suite of inventory management software can help to prevent vendor compliance chargebacks. Wholesalers can minimize the likelihood of chargebacks by establishing strict compliance parameters with their warehousing staff and logistics partners.
Manage Delivery for Replenishment and Ecom Business
One way for wholesalers to cut operational costs is by managing delivery, and tracking which suppliers provide just-in-time (JIT) delivery. Wholesalers should recognize when inventory items are needed, and work with suppliers to have them delivered at the optimal time. Forecasting tools, automation, and integrations are critical in this area. For replenishment goods, wholesalers can often have factories hold off on shipping until the backlogs clear up.
For direct to consumer business, good systems are even more critical. As a wholesaler you are trying to crack into one of the large retailers. They agree to bring you in as a direct to consumer partner. You are happy to have secured a vendor number. If you deliver with ecom, brick and mortar orders may follow. A lot is at stake and so you really want to avoid any mistakes. You think you have it covered and then this happens:
Your systems take in and processes a direct to consumer order. The warehouse picks the order and provides you with a tracking number. A few days later you receive customer service complaints that they never received their orders. Your team checks the tracking and sees that the label was created but that the carrier doesn’t show that it picked up the package, let alone delivered it. What good is it for the warehouse to create a tracking number if the goods are just sitting on the warehouse floor? Good software systems continuously monitor package movement. Smart wholesalers will set up procedures to be alerted when labeled packages don’t move in the expected timeline so that they can take corrective action.
Prioritize Your Valuable Products
Wholesalers can reduce inventory costs by grouping inventory into A, B and C categories to determine where inventory issues are located and take corrective action.
A – New or pre-sold goods.
B – Average aged goods.
C – Older goods.
Creating different buckets of inventory aging can help focus you and your sales team. Older goods tend to be losing value all while they are increasing your storage costs. And the longer the goods are in the warehouse the more likely they are to get lost or to occupy more pallet positions. Newer inventory is usually stacked high. Older inventory tends to be broken up.
When done correctly, prioritizing your valuable products and timely cycle counts can enable wholesalers to cut the dollar value of their inventory levels by up to 50%.
Optimize Back-Office Operations
Inventory management is arguably the best way to cut wholesale operational costs, but one facet that is often overlooked is back-office operations. Wholesalers can’t manage the critical aspects of their business or focus on inventory management, if their back-office operations are inundated with inefficient manual processes, and plagued by costly mistakes.
By optimizing back-office operations, wholesalers can save money by reducing the likelihood of mistakes, and focusing on difficult challenges like keeping up with retailer compliance.
Once you begin to dig into the deeper facets of your operation, you can determine where cost-cutting measures are needed the most. As you implement these strategies you will likely discover other ways to cut costs in related areas.
When conducting your evaluation, keep in mind that every wholesale business is different; some of the strategies you implement may not work, while others may provide massive gains over the long-term. But problems don’t get solved in perpetuity. A process that worked a few months ago may longer be working well. Your wholesale business is always changing so processes need to evaluated and reviewed on a regular basis.
Wholesale Executive Insider is a publication dedicated to helping owners of wholesale companies stay up-to-date with the latest industry insights to improve their operations and increase their bottom line.
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