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Here’s what’s inside this exclusive eBook:

  • Gain big-picture strategies to better manage your inventory
  • Find tips on how to minimize or eliminate retailer chargebacks
  • Get insights on critical wholesale sales and management tools
  • Understand the pivotal role of your inventory aging report(s)
  • Learn how to overcome the challenges of inventory valuation
  • Learn how to overcome the challenges of inventory valuation

Excerpt

When you’re a wholesale business owner, inventory control can be one of your most challenging tasks. It is not a challenge solved all at once, requires continuous attention, the implementation of smart business processes, and ongoing concerted efforts to evaluate and improve those processes. When these are absent your margins and profitability suffer while your retailer relationships sour.

The purpose of this ebook is to provide you with a real-world no-nonsense guide into what you should do to improve your inventory’s accuracy across several areas that impact your wholesale company’s growth, profitability, and success.

  1. Inventory management: Big Picture Strategies

As a wholesaler business owner, you should ask yourself some simple questions. Do you know your available-to-sell position well in advance? You know what you’ve ordered from your factories. You should know what you’ve sold. Then why are you often surprised with inventory shortages —  right when you’re ready to ship?

Your inventory management is one of the most important aspects in running your wholesale business. On the most basic level you need to consider the actual costs and penalties of bad inventory management. From increased warehousing and storage costs to inventory pilferage and chargebacks, if you’re not managing your inventory, the costs can be high.

On another level the costs can be even higher. Your inventory represents cash flow, potential accounts receivable and the opportunity to invest in product, design, brands, sales, or other areas that can help you grow your business. To fund these areas that are the core of your business and the potential for real growth you need to manage inventory well.

Ask yourself: Are we managing my inventory correctly? Can we improve?

If you’re managing your inventory well, you’re going in the right direction. But what if you’re not? What should you do? Can you get back on track?

Have controls at the inventory level

Let’s face it. You’re working in a challenging environment. However, if you’re doing things right, you’re working more effectively with less effort and avoiding serious issues like short shipping that cause more retailer chargebacks. If you are not working properly, you can affect your relationship with a critical vendor.

This is why is crucial to have controls at the inventory level. You should look to these areas:

  • Inventory aging
  • Inventory reporting
  • Reporting processes
  • Shipping and fulfillment

If you have these controls in place, you can reduce inventory markdowns by carefully watching inventory aging at the style or item level. Fine-tuning your inventory reporting and processes will decrease various kinds of risk and minimize the chances of errors that can throw a strike into how your company operates.

Likewise, when shipping and fulfilling goods into a ninth inning, these threaten your wholesale business. You need to act quickly so your company becomes stronger with the next order.

The issue with chargebacks

Compliance chargebacks can be costly, many times running into thousands or hundreds of thousands of dollars per shipment that impacts your bottom line. All too often, they’re caused by any one of or multiple inventory inaccuracies.

Some of these inaccuracies can come from the following, but the list is surprisingly extensive:

  • Late/missing/invalid ASN
  • Missing/inaccurate/defective/un-scannable/improper placement of GS1-128 (UCC128) labels
  • Order fill rate
  • Early or late shipment
  • Choosing the wrong carrier
  • Incorrect shipping location

Essentially, a chargeback happens when the vendor claims you made a mistake. Why was the mistake made, if any? As a wholesale business owner, you need to find out if there were production issues, a systems issue, a sales team problem, lost freight, or a simple data entry error. Sometimes good software helps but it isn’t always enough. You need more.

Chargebacks are never a good thing. In order to prevent them, it’s important to know how inventory inaccuracies suddenly arise. Not only is there the potential for chargebacks, but this can have a knock-on effect with your borrowing base, negatively affecting your cash flow in a big way.

All of this spells the need for critical organization. This is where your inventory control and support come in. These 3 big picture ideas will help you maintain inventory accuracy.

  1. Provide teams with the tools they need

Look at your teams who manage the physical inventory. Do they have what they need? 

There are ways for improving inventory inventory accuracy: user-friendly tools and adequate training.

Good software should include an easy-to-use interface for your employees. It improves inventory accuracy which means better productivity. It removes the mistakes that can affect your profits. A technology solution that’s difficult to get to grips with impacts your company as a whole, especially with logistics and operations management. Company efficiency essentially goes out the window—as does your inventory management.

  1. Automation and alerts

People are people. They get overloaded with work, forget, and make mistakes (Not in your company!). Because of this, there should be the ability to accurately forecast your future item availability. This means transparent software that features automation. This immediately alerts all necessary parties when delivery delays impact order delivery windows. This lead time can be used to make adjustments and avoid chargebacks, dissatisfied buyers, and lost future business.

When inventory alerts and strategic reporting encourage lean inventory levels, this will cut down on what’s sitting in your warehouse. This helps increase cash flow and maintain healthier margins. Overall, it will also help you achieve better distribution and more accurate order fulfilment.

  1. Use consulting and outsourcing power

Many wholesale companies lack in-house power to get many processes done. As a result, they go to outside consultants and service providers like 3PLs, accountants, and back office outsourcing companies. However, before you enlist their help, you should learn about how they work.

Outsourcing specialists and consultants are often the magic pill for the wholesale business. However, they can also work negatively on inventory accuracy. You should find out if they have the necessary tools and knowledge to support your wholesale business. Are they really cost-effective? Or do they have their own interests in mind?

When you do go with consultants or outsourcing specialists, be an active partner in the process. That way gain more from these individuals and companies. Don’t take a passive or backseat role and let them do all your work. Brainstorm with your teams internally—this enables you to build a basis before taking on outsourcing or consulting professionals.

Another thought: Consider using Enterprise Resource Planning (ERP) system. However, most wholesalers aren’t able to use an ERP to its full advantage. If you don’t have the time to learn your ERP system and what it offers, outsourcing this process to a trusted service for your company can work to your advantage.

  1. Inventory Accuracy: The Fundamentals

The power of inventory management

If poor inventory management can affect big-box companies like WalMart, Target, and H&M, it can happen to you too. When you’re unable to manage your wholesale business well, you’ll experience problems across the board in a knock-on effect. If it’s done right, you’ll see improved sales, healthy accounts receivable, increased cash flow, vendor satisfaction, and improved profitability. If it’s done wrong, there are a large number of problems such as:

  • High costs of carrying inventory
  • Lost accounts and dissatisfied retailers due to short shipping
  • Chargebacks
  • High inventory to working capital ratios
  • Large factoring costs
  • High amounts of obsolete stock
  • Significantly reduced sales
  • Consistent stockouts

Turn bad inventory management into successful inventory management

If your wholesale business’ inventory management is poor, you can turn things around. These are some do’s and don’ts you should take on board right away:

  • Don’t oversell, or if you do, have a system in place to make timely allocation decisions.
  • Pad your factory ETD dates to account for production delays.
  • Pad your ETA dates to account for clearance and inspection delays.
  • Make sure your sales team knows when product delivery dates change.
  • Prioritize and segment your factory and sales orders. For example, goods for an FOB China order aren’t available to fill a landed goods order.
  • Maximize the impact of your software with keys alerts and quality reporting.
  • Focus on key inventory ratios like average turnover, the average days inventory is held, and the average inventory conversion period.

Unexpected areas that can help manage your inventory

In order to successfully manage your inventory, here are some underrated, but there are key areas that can help:

Master your 4 master files. These files are the backbone of any good software implementation.

The first of the master file at work with is known as the item master. This contains items such as, but not limited to:

  • Style or item numbers
  • Cost of goods (COGs)
  • Descriptions
  • Master content
  • Product category
  • UPC numbers
  • Weights and dimensions
  • SKUs
  • Master carton quantity

When you use a good Electronic Data Interchange, or EDI software processing, having an accurate item master can help successfully manage and move your inventory.

Next comes your custom master. This data includes basic customer details, billing and shipping addresses as well as billing, payment, credit, and delivery terms. Be sure to also keep your Ship to DC up to date. And keep your customer master current so you don’t face delays when it comes to shipping time.

Your vendor master is similar to your customer master, but its information involves your vendors. Here, you should take care to maintain this file to avoid duplicate entries. You should maintain information like wire transfers carefully and in advance. Because when delivery schedules are tight, you don’t want to lose a day because you missed a bank’s wire transfer cut-off when it’s time to ship your goods.

Your routing master includes routing requirements for each vendor like their routing date, label requirements, electronic files required, and pickup or delivery terms. Routing is time sensitive, so it’s crucial to have this information updated well before you ship. When you have a current routing master, this not only keeps you in compliance with your vendors to avoid chargebacks, costly retailer renegotiations, or even getting stuck with the goods.

These master files are important to your business. They help maintain accurate data get your goods out quickly and efficiently without any negative issues. It’s highly recommended that you take them on board.

Maximize your software

You want your software to work hard for you. In order to maximize that software, there are several steps to do:

  • Design your database with your teams in mind
  • Organize your real-time reporting to keep data organized
  • Establish processes for the users who are inputting data or accessing information
  • Provide your sales teams with data that’s in a usable format

And most importantly, use that information to make your critical decisions in a timely manner.

Here are a few more tips that can help you maximize your software to manage your inventory:

  • Use your software to help you accurately forecast your Available to Sell for each item for current and future time periods.
  • See to it that production delivery data changes reach your sales team in a timely manner.
  • Always review your inventory on a regular basis.
  • Set up system alerts that notify you when future orders will not have sufficient inventory.

End your frustration of bad inventory management

The takeaways? As a wholesale company executive, there’s nothing worse than not knowing the real cost of having bad inventory. What things can happen? Try:

  • Lost sales
  • Chargebacks
  • Vendor dissatisfaction 
  • Tight cash flow
  • Missed borrowing opportunities
  • Decreased profits

Clean and up-to-date your master files

You should make it a point of always maintaining clean and up-to-date master files to prevent any headaches later. This goes a long way to improving your inventory management. Don’t wait until it’s time to ship your goods. It’s already too late. Stay ahead of the game. You don’t want to make it to the 9th inning with the bases loaded … and you’re losing.

Get your software up and running

Use your software. That way you’ll organize your data properly, and reduce the risk of current and future problems, including using those rogue spreadsheets. Your software has enormous power to help you solve inventory management issues. Use it to avoid problems, increase sales, deliver transparency, and increase your margins.

  1. Inventory reporting: Critical sales and management tools

Do you have problems with your inventory reports? How well are you using them? Why is it so difficult to get a usable and readable inventory reports for wholesale executives and your sales teams? After all, the inventory report is a critical important sales tool. Most software systems and ERPs have all the data you need. So, what’s up with this?

It’s time to re-evaluate your inventory reports.

Rogue spreadsheets

At many wholesale companies, rogue spreadsheets are the bane of their existence. They’ve brought down some major companies over the years due to some pretty minor inputting errors, so you don’t want your business to be one of them. 

What’s wrong with these spreadsheets and why do we call them rogue?

Many times, the spreadsheet is not delivering. You may have multiple teams using different spreadsheets in their specific areas of your business. Not everyone is seeing the most recent data. Spreadsheets contain many cells and formulas that are subject to increased rates of human error. Even if it’s an error that’s as simple as an incorrect number—or even a plus or minus sign—that’s been inputted, this will affect the entire spreadsheet, causing countless man hours to locate and fix. So even if a single spreadsheet is used, the chances are pretty strong that the data is compromised. That’s not a good thing.

If errors(s) remain undetected, can cause detrimental effects on your wholesale business. It lacks transparency, creates double work—and is not subject to the most important aspect—full accountability.

There’s also no centralization of the data these spreadsheets contain, so you’re unable to make proper informed decisions. Plus any errors can result in wrong goods shipped, chargebacks, vendor dissatisfaction, and a host of other problems. Is there a theme going on here? 

There’s also the lack of transparency. The most useful information isn’t shared with all interested parties. Your production people should use spreadsheets your sales teams and allocators may find useful. Allocators may have spreadsheets that sales and finance may find useful but don’t. In moving away from the rogue spreadsheet and using your ERP software, you have access to data that doesn’t wreak havoc with your wholesale business.

An inventory as a powerful tool

You and your salespeople are getting ready for a buyer presentation. Ahead of the meeting, you see your sales team spending an inordinate amount of time exporting data and images into spreadsheets they are manually manipulating (spreadsheets again!). The data already exists in your software. In fact, they pulled the information from your system. So what’s the problem?

Most software systems don’t give users enough flexibility in the way they collect and filter data. They may require customization in order to filter, sort, and manipulate data that’s functional in the real world. For example:

A buyer from TJMin is coming into your showroom. You want to select a number of items within 2 product categories to show them. You don’t want them to see all of the other items, nor do you want to show them everything product category.

You also don’t want your buyer to know that you have 20,000 units in stock. Why? Chances are you’ll get hammered on the price. So you want to show no more than 5,000 available units.

On top of that, you want your “selling price” to reflect a 45% margin, rounded up to the next nickel or quarter. Get as much as you can. After all, it’s all about your profitability.

Of course you want to have all that data plus more that include landed cost on your own version of the same report. This way you can work the meeting easily.

That’s why your salespeople may go rogue. They may feel like they have no choice. But all of that data is available in your system and it is a time suck to manipulate. Seriously.

Think about it. Wouldn’t your salespeople be more effective if they could gather their information in 15 minutes instead of up to 3 hours? Why not invest in the ability to deliver usable information instead of data within those rogue spreadsheets.

Delivery reports

Let’s get real. There are tons of factors surrounding orders. Do these sound familiar?

  • Factory delivery dates constantly change. 
  • Safety inspections cause production delays.
  • Your factory went ahead and jumped another product ahead of yours on its production schedule. 
  • You don’t want to ship a partial or half a container, so you wait to consolidate your goods to fill a 40’ container.
  • Somebody screwed up on your production team (Heads will fly).

The reasons—and sometimes excuses—are as numerous as the stars in the sky. Let’s face it. Everybody should know when delivery dates change. Even more important is the fact that everyone should know what orders are affected.

Too often we see rogue spreadsheets come into play again when there’s only stale information (not to mention potentially wrong) available for salespeople. By then, it’s too late in the game. When your salespeople don’t know if the first container is filled or delayed by the second delayed container, you’re in trouble. They won’t know if they should pad the shipment for air or ocean freight, customs clearance, and warehouse turnaround.

If they have the right software in place, sales teams can be alerted automatically with relevant information. The system would calculate which orders might be affected, well in advance of shipping. They can make proper adjustments and make decisions that reduce the possibility of compliance-related chargebacks. But if they’re unable to do so, they won’t know if orders will be late and by how many days.

There are also other important and very useful inventory reports:

  • Oversold reports
  • Available to ship reports (On hand or current period orders)
  • Available to ship reports by time period (Future inventory on hand + Period’s receiving orders)
  • Inventory valuation aging

Making reporting useful in the real world

Naturally you have to periodically reconcile your inventory. It’s good practice to add automation. This is key to your inventory report process and definitely worth the investment. But most often, a system inventory will get you 85% or more of the information you need. It’s that least 15% that makes the information really useful, but it’s that final percentage that’s the most difficult to navigate.

  1. The Inventory Aging Report: Underrated and Critical

For the wholesale executive, the aging report is a critical tool. When used effectively, it serves as an important indicator of your company’s financial health. When not used well, you’re getting flushed down the tubes. Your factors watch your inventory age. You should too. The aging report helps you anticipate cash flow problems and reduces your company’s risk.

Calculating inventory age

Your inventory aging report may look similar to the more commonly used receivables aging report. Rather than monitor your outstanding invoices from vendors, inventory aging assigns each style product or other areas into an aging “bucket”. These are categorized according to their aging units and costs.

For example, your aging “buckets” of inventory may be broken down as customer payment terms and where they are in their payment cycles. For example:

  • 1 to 30 days – These are either payments just received or the “check’s in the mail”.
  • 31 to 90 days – Start chasing these down.
  • 91 to 180 days – Start hammering on doors in a big way.
  • 181+ days – Initiate collections.

Items found in your aging report can include the details of the following:

  • Style or item number 
  • Warehouse 
  • Quantity
  • Pending transactions
  • Available to sell
  • Cost
  • Extended cost of available to sell 

You should regularly review your critical aging report. This allows you to monitor your dollars invested, the cost of having too much inventory, and most importantly, your ROI.

Fast changing items … and times

Many goods are seasonal in nature, so you need to keep your products current. Invest your cash in inventory that has the greatest potential for profits rather than being hung up with the old stuff. Want the biggest bang for your buck? Use your aging report to its fullest. It works to identify:

  • Slow moving items by inventory value and age rather than by quantity
  • Product categories where you have over-invested
  • Weak-performing divisions
  • Inventory caused by retailer cancellations or late factory deliveries

With knowing where your money is tied up, you can take action to move these specific goods out. It is not an ideal situation to have slow moving inventory or repeated retailer cancellations. Make the necessary adjustments now before you have the proverbial monkey on your back.

Replenishment business and repeating staple items

For those regularly selling items in your inventory, you should examine other metrics besides your straight aging. Consider the possibility of forecasting based on the inventory’s seasonal selling history. In doing so, you can segment your repeat items out of your typical aging report.

Next, identify what items have the lowest inventory average age that were considered in-season. Should you have too much inventory coming in, try to delay the next incoming shipment. Repeating items have more flexibility in that you can renegotiate delivery times with your manufacturers and factories. Your end goal here is to prevent a stockout and minimize your cash flow risk, while monitoring your days sale of inventory or DSI.

Inventory average age

It makes sense to view your wholesale company’s aging  inventory in order to see your inventory aging at the summary level. Not only can you see the big picture at this summary level, but enables you to calculate your average inventory age weighted by its value and then compare it to last year’s. Is your inventory moving faster or slower this year?

Besides those calculations, here are your next steps in the order you should do them:

  • Calculate your inventory average age in ratio to sales in the last several years. 
  • Compare your ratios to your forecasted future sales. 
  • Determine if that ratio of your sales to inventory is increasing or not. 

You’ll find that you’re tying up significant cash for what’s a small increase in sales. Plus, you get an additional check on your inventory’s health, cash flow, and profitability when you monitor the increase or decrease of your inventory age.

Benefits of monitoring inventory age

Hanging on to older inventory is usually a sign of financial risk. But when you have healthy inventory, this can bring your wholesale company a wide range of benefits:

  • Reduced warehouse storage costs
  • Less opportunity for lost or missing freight
  • Increased cash flow
  • Reduced risk of factor borrowing reductions
  • Increased margins
  • Reduced risk of hidden losses

As a wholesale executive, you want to squeeze as much juice as you can from the money tied up in your inventory. Of course you don’t want to take painful financial hits on slow moving inventory. If you monitor your average inventory age, you are forced to determine how your inventory is impacting your cash flow. You’re then able to use this freed up cash for the next business opportunity.

It’s possible that you’re already borrowing against your inventory with your factor. This agreement may stipulate that your older inventory be excluded from the borrowing formula.

Monitoring your inventory’s age can help you avoid the pain of lost sales, a potentially strained  relationship with your factor, and other costs from unexpected cash crunches.

Margins and markdowns

Finally, if you don’t know your markdowns, this distorts gross margin calculations. A current inflated inventory’s book value then makes last year’s look inflated as well. Make sure to record your inventory before closing your books and preparing your financials.

Final points on the benefits of monitoring inventory age

The average inventory age helps identify additional key areas that not only impact your wholesale company’s profitability, but helps with warehouse cost reductions and even loss or theft of your freight. Besides that, you’ll be able to anticipate any adjustments in your borrowing base.

Finally, when you add it all up, inventory aging works in a multitude of ways. It can increase your sales, improve your cash flow, reduce expenses, and increase your margins.

  1. Inventory Valuation and Costing: Margins and More

Are you frustrated with your wholesale inventory cost valuation and not knowing your true margins?

You aren’t alone.

Evaluating inventory can be a tricky proposition. You’re juggling a lot of moving parts, and all of the information is needed at the same time. You still have to manage your inventory and know its value if you want to increase your wholesale company’s profitability.

Why inventory valuation is critical to your wholesale business

You’re operating in the dark when you don’t have a proper inventory valuation. Don’t think your wholesale business is as profitable as you first thought. In fact, it may even be a lot less than you expected. If you’re in that position, your margins are greatly impacted and not in a good way. It will find its way into your cash flow. Having said that, tight cash flow may be caused from other factors, so you can’t rely solely on that to guide you. You need quality information—and quickly. You’re then able to adapt when it’s relevant.

Here are 3 areas where inventory valuation is critical:

Overall business profitability:

Wholesalers are most familiar with this area. At this point, you’re now working with your accountant to create financials and hopefully close out the year. Calculating your inventory has a significant impact on your cost of goods sold. Should you record a higher valuation in ending inventory, this leaves less expense charged to the cost of goods sold and vice versa. Thus, inventory valuation has a major impact on your reported profit levels.

Borrowing:

Many wholesalers borrow against their inventory. Often factors will lend as a percentage of inventory value. As a result, you need to report your inventory value on an ongoing basis. Be sure to keep a record on your end.

Margins and selling:  

You might not consider this an inventory valuation issue. This is perhaps even more critical than the first 2 areas just mentioned. But here is when the rubber meets the road.

Think about it. You’re trying to make a sale. Can you answer these questions:

  • What is the value of the item?
  • If you’re evaluating a specific product line, was it profitable?
  • If you’re reviewing a major account, did you actually make money?

These smaller evaluations serve the basis for your daily work. Practicing these on a regular basis will eventually lead to overall profitability.

The challenges of inventory valuation

When you keep track of your inventory item costs, you’re well and truly ahead of the game. The problem is that often you don’t know the true costs of a particular item until weeks after it’s shipped.

Now in comes your duty rate. It’s normally established early on—unless trade negotiations are in play. Ocean freight isn’t known until your goods are packed in cartons.

Then there’s inspection costs at the port of entry. Another worry: What about the costs incurred when the goods aren’t picked up from the port in time? It’s because of these that wholesalers work off Estimated Landed Costs until the time when invoices are received. So it’s not uncommon for an item to be sold, shipped, and invoiced before you know the true cost.

Because of these factors, many wholesalers build a “load” into their inventory cost structure. This works by padding the cost of the item to account for any unexpected costs. It might be a fixed dollar amount or a percentage of the FOB price. The method you use depends on the product categories or company divisions. If you’re dealing with licensed items that involve royalty payments, wholesalers will often build on higher loads as compared with generic goods.

Since your financials operate off actual costs, all of these complexities may not impact your overall year-end profitability calculations. However, estimated cost strategies and their crucial implementation will very likely impact other highly critical areas: your borrowing and margins.

Choosing a strategy

When you know your goals surrounding your inventory cost valuation, you can develop numerous strategies to obtain the information you need. Here are a few tips to keep in mind for the 3 areas we mentioned above:

Overall business profitability:

Your accountant or CFO will likely carry the ball here. Using general accounting principles and procedures enable you to arrive at your actual overall costs. That said, you can still be taken down the wrong road about your margins if you don’t take a realistic look at your older inventory. Old inventory is a terrific way to hide any losses. 

Make sure you take a hard look at your inventory aging, but be prepared to take a hit on those goods that are worth less than you paid. It’s painful to think about, but it’s far better to realize your mistakes and losses rather than find out your margins aren’t as high as you thought.

Borrowing:

Theoretically, your goods are in-house prior to knowing their actual costs. However, if your ERP software allows you to choose one cost per report, then work off those estimated costs for borrowing. However, if your ERP report lets you choose an actual item level only when it’s available, go with the estimated cost when the actual cost isn’t yet completed, your lender might prefer that report.

Margins and selling:

An easy way to think about it is to use estimated cost when looking forward and actual cost when looking back.

In addition, many wholesales might choose to use estimated costs for selling purpose. When it comes to reviewing product categories or account profitability, then actual costs are the way to go. Estimated costs give you the luxury of a load factor built in. Use your last estimated costs rather than your average cost of FIFO when it comes to receiving multiples of the same item. The last cost reflects the new costing reality.

But if you plan on product and account reviews, use your actual costs. They’re the preferred way to go. But if you decide on actualizing costs, know that this takes time in an already busy schedule—you may need to run reports that cut off several weeks earlier.

What’s next? Perform semiannual reviews to evaluate your success in how well your estimations are doing. You might find that you’re consistently overestimating costs in one category but underestimating in another. Make adjustments in your estimations going forward. Just make sure your reporting reflects your choices.

Your inventory valuation success

Part of running your wholesale business is calculating your inventory cost value. Among your many challenges, this is one of your main tasks.

You can’t afford to get your inventory valuation right, or you’ll be operating in the dark. Turn on the lights when you get it right, and you know your company’s health not only in particular areas, but in its overall health. You may want to use different methods, depending on your goal at a particular time.

  1. LDP: Breaking down the costing components

Landed Duty Paid, or LDP, is the final price that a retailer or brand pays for goods, particularly apparel, that are being imported cross-border. The price includes delivery, shipping, insurance, duty, and customs clearance.

Duty paid is well known in advance, so you have a pretty good idea what to pay when goods arrive at the port. Unfortunately, elements exist where total pricing is only estimated. It is common for you to make a sale prior to receiving the product, but an estimated LDP must be calculated to establish a profitable sale price.

Calculating duty

Product content and type make up the Harmonizing Tariff Schedule, or HTS code. Apparel fabric is a good example to look at when seeing how HTS works.

Let’s use polyester as an example. This fabric has a higher duty rate than cotton. To throw a spanner in the works, say we have an outfit that has a cotton top and a polyester bottom. The duty rate is calculated on each fabric type rather than the entire outfit. Most of the time, you can negotiate a price with the factory for the set as a single unit. The best way going forward is to determine the values of each piece rather than rely on the customs brokers to do it.

HTS is subject to change by trading partners and negotiations. This schedule is the replacement for the former Tariff Schedules of the United States. It’s comprised of a specific, hierarchical structure that describes goods in trade for quota, duty, and statistical reasons.

This structure is based on the Harmonized Commodity Description and Coding System. It involves a unique 8-digit rate lines for the U.S. and non-legal statistical reporting categories that are 10 digits long. Goods classification is done in compliance with the General and Additional U.S. Rules of Interpretation. 

An online tool is offered by the United States International Trade Commission Trade Commission. The tools make finding current HTS rates easy.

There are many manufacturers who quote Freight on Board (FOB) pricing. Higher volume retailers generally prefer FOB purchases. As a wholesaler, you prefer FOB sales, but you have to bear in mind that your margins are usually tighter. That said, these sales do eliminate warehousing and the uncertainties involving cost. And at the end of the day, most wholesalers still do much of their business selling landed goods. What you have to bear in mind is making sure that the duty rates actually paid are the same as what’s estimated.

When figuring estimated LDP, take these on board:

  • Do your calculations as close to the actual cost as possible.
     
  • Put certain systems in place to make sure the customs broker is using the same duty rates on each item or component in the customs declarations as you are using to calculate the estimated cost. 

Then if the right systems aren’t in place, you may have pre-sold products that could inadvertently price the products too low.

Why figuring Landed Duty paid is important

Some elements of pricing aren’t realized until later in the production process. These include freight, insurance, and customs clearance. You have to estimate these at first. Once the sale process is complete, you need to actualize the cost so you can determine your gross margin actually made on the product. This way you learn from any assumptions and see to its future estimates are more accurate.

The solution

Your goal is to establish accurate LDP estimates, establish better systems and processes, and verify actual costs after the fact. Naturally, you want your pricing profitable. When you have proper automated systems and tools in place, you can make more accurate estimates, reduce any human errors, and eliminate inconsistencies with customs brokers.

  1. Shifting the Risk: FOB, POE, DDP, CIF, and CNF 

Wholesalers use several purchasing and sales strategies to help minimize inventory risk and retailer cancellations. Sales of landed goods typically have the biggest margins, but they come with risk. That’s why smart wholesalers add FOB overseas and POE sales to the mix. Smaller sized wholesalers can benefit from DDP purchases as well.

FOB and POE

FOB is typically followed by a port city name. Retailers assume responsibility at that port, including freight and duty costs. As mentioned earlier, margins are tighter for FOB sales. Most FOB sales are high volume and have a very limited time when wholesalers have responsibility for the goods.

POE is also typically followed by a port city name. Retailers assume responsibility for the goods at the domestic port. Wholesalers avoid warehousing costs on with POE sales.

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 commercial invoices, but can result in fewer overall headaches. 

The good thing is the inventory doesn’t touch your warehouse. There’s no calculating your associated variable costs. You have your costs locked in well in advance, so you know your actual profit margin when you write the order. You also don’t have to wait for goods to clear, pass through inspections, get transported to the warehouse, received, labeled, routed, and turned back around. The best thing is if you use a factor, your sales can immediately turn into cash. You’re in a win-win situation.

Delivery Duty Paid

Delivery Duty Paid occurs when a seller fulfills an obligation to deliver available goods to a buyer that is in another country. The costs and risks are the responsibility of the seller, which include taxes, duties, charges for delivering the goods, and importation clearance.

You can still use DDP even if some of the seller’s costs are excluded. Take for example, Value Added Tax, or VAT. This can be removed from the seller’s responsibilities. It would then be called “DDP, VAT unpaid”. Many times, though, you as the shipper is the one who pays any VAT. For example, if you were shipping to the UK, you’d get socked with their hefty 20% VAT. Be prepared to consider this when you’re determining your profit margin.

Some pros of Delivery Duty Paid for wholesalers include:

  • The buyer allows the seller to handle many of the responsibilities.
  • A third-party DDP solution company can be used to lower risk.
  • Your Landed Cost is known at the time the goods are purchased.
  • There is an absence of administrative management of the supply chain.

Some cons of DDP are:

  • The shipments are only tracked through the vendor.
  • The buyer has no control over importation or how the goods move.
  • There’s no intervention for any problems.
  • There might be hidden import and transport costs in the seller’s calculations.
  • DDP is what wholesalers can use to ensure the seller shoulders maximum responsibility for the transport of goods.

DDP requirements and specifics (Seller and Buyer)

DDP also includes customs clearance and how it applies regardless of shipping method. Since most of the burden is on the seller, the seller must do the following:

  • Provision goods according to the contract with the buyer:
  • Provide the commercial invoice or an electronic version of it as well as the goods. All points in the contract must be adhered to.
  • Take care of formalities, licenses, and authorizations. The seller must acquire the proper import and export licenses or other authorizations.
  • Carry out customs formalities where necessary.
  • Establish the contract of carriage and insurance

Goods are carried to the agreed point of delivery. In this instance, the seller chooses the point and names the destination that best suits the delivery of the goods. There is no obligation to carry insurance on the shipment unless specified in the contract between seller and buyer. Although an extra expense, insurance on the shipment may be considered due to potential loss or theft. Again, this should be pre-determined.

Once the goods are stateside, they must be delivered in a way that makes them easily obtainable by the buyer.

There are other areas that buyers and sellers must be aware of:

Risk transfer:

The Free Alongside Ship (FAS) rule is restricted to goods that are transported by inland waterway or overseas. The seller must have direct access to the vessel for risk to transfer to the buyer at port when the goods are with the vessel. FOB is when the risk transfers after the goods are loaded onto the vessel.

Cost division: 

Some costs can be divided, which is the case when VAT is unpaid.

Buyer notices: 

A buyer (in this case, you, the wholesale owner) is to be notified within a sufficient amount of time that goods have been shipped. That way you can take measures to obtain the goods once they arrive stateside.

Proof of transport:

At the seller’s expense, a bill of lading, waybill, non-negotiable sea waybill, or other such document must be provided so the buyer can take the goods.

Package checking and marking:

The seller pays the costs associated with checking package quality, measuring, counting, and weighing.

The buyer must make sure the agreed-upon price is paid and that any import licenses are obtained. There is no carriage contract obligation on the buyer side, as this is something reserved for the seller. Of course, the buyer has to have a full understanding of the risk transfer because, if something were to happen after risk has transferred, then the buyer has full financial responsibility for the losses. These costs don’t factor into delivery duty paid.

With regards to cost division, the buyer is responsible for any costs if they fail to accept delivery of the goods when they have been properly placed at their disposal. The exception comes when a sufficient amount of notice has been given to the seller that would void these costs. “Notice to the seller” terms should always  be stated in the contract. If notice is given within the proper amount of time and the seller fails to comply, it’s the seller who is responsible for the associated costs.

Once goods are received, delivery proof is done via transport document or electronic message.

The goods can then be inspected to ensure they are in good condition. Of course, the buyer can pay for pre-shipment inspection when the exporting country requires it. This is one of the costs included in DDP.

Cost, Insurance and Freight (CIF)

For CIF, the price also includes sea freight charges and insurance to deliver the goods to your nearest port. But remember, it’s only to the port. From that point on, it’s up to you to take responsibility for the shipment.

CNF Cost and Freight, or CNF  (Also known as Cost, No Insurance, Freight)

CNF is similar to CIF, except insurance is not included.

  1. Practical Tips on Managing Inventory Cost and Improving ROI

When it comes to providing optimized inventory cost control, a major aspect of optimization is managing its cost.

There are various inventory costs, including ordering and setup costs, carrying costs, and stockout costs that affect the bottom line of your wholesale business and its inventory life cycle.

You can’t just look at the pricing of warehouses or your forklift drivers or pickers, There’s also an opportunity cost to think about. Here are some ways that you can alleviate various kinds of inventory cost.

  1. Evaluate risk costs:

Evaluating your risk costs is part of complex inventory management. There are several different types based on different types of product groupings and how they are treated in a particular market.

  • Cost risk due to stolen or lost inventory – Inventory theft is relatively rare, but lost or missing inventory can have a detrimental effect that can mean lost sales or even chargebacks.
  • Cost risk of cost of reduced value – Consumer products are often seasonal, and unlike fine wine, don’t age well. When consumers don’t buy your products, time isn’t on your side, making monitoring your inventory’s age critical to your healthy bottom line.
  1. Improve forecasting for your replenishment business

Forecasting is a valued tool in controlling your inventory, delivery, and fulfillment costs.

When shipping can be predicted in terms of metrics like seasonal peaks, wholesale companies can improve planning and reduce inventory carrying costs.

However, your plans are only as good as your forecasting behind the predictive analysis. Here’s where your sensible investment in outsourced inventory management can provide serious positive returns. When you leverage quality outsourced services, you can expect sophisticated forecasting analytics that in turn sets the stage for greater efficiencies and increased cash flows.

  1. Integrate customer service in supply chain and inventory management

Some companies believe that reducing surplus labor would reduce costs by combining customer service and fulfillment operations. Integrations are critical turn out to be real game changers. APIs allow wholesalers to track whether packages are really on the move or still sitting on the warehouse floor. Automated alerts increase customer satisfaction. With shared data assets and resources, companies can keep a closer eye on inventory and fulfillment processes while serving customers. These resources may even consist of surveys, follow-up checklists, or other communications tools that tie fulfillment to follow-up and customer support.

  1. Monitor inventory precision for inventory cost reduction

Your warehouse is charging you monthly storage fees. Fair enough. Your new inventory is typically stacked efficiently and occupies fewer pallet positions. But your older goods are merely hanging around, having been picked through and are now using more pallets than necessary. Whether you are paying by the pallet or by cube you can be sure that your warehouse is charging you for the luxury of storing older goods.

On top of that, older inventory is more likely to be misplaced and harder to locate. With that in mind, companies that achieve leaner inventory models reduce these costs. You see less product sprawl in warehouses with fewer questions about where product is going along with more effective elimination of chargebacks or stockout problems.

  1. Divide and conquer

Inventory segmentation is also a key tip in handling inventory.

Not all inventory is alike. You should segment your inventory reports so you can locate and resolve current problems and watch for repeating patterns. By segmenting your inventory reports into meaningful categories, you can locate and resolve current problems and be on the lookout for repeating patterns. Ecom, FOB China, POE, and LDP goods have different operational procedures and lifecycles and should be monitored separately. Product categories and divisions may also operate with differing processes and on different cycles and so should also be monitored separately.

When you customize inventory control for every type of product, you’re able to accrue all the benefits of leaner inventory positions.

  1. Keep everyone on the same page

Eliminate the rogue spreadsheets.

When employees don’t find what they need in their ERP software, they tend to create their own worksheets. As a result, the rest of the team, including the executives, don’t have access to that information. Having employees in various departments operating from the same data set helps keep inventory control efficient and effective.

In general, investing in improved user experience for front-line staff pays off. That can mean a better understanding of tools which brings its own ROI and helps use the creative power of a broader employee base.

  1. Reduce chargebacks

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 which can amount to thousands or hundreds of thousands of dollars. The list of these compliance standards are already extensive, but are always growing and 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—or that is not letting them know at all. With enough lead time, you can take corrective action. Having a good ERP in place lets you know well in advance if you are going to be short on any orders. Alerts can be put in place so that you and your 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 June 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.

  1. Manage delivery for replenishment and ecom business

One way for you to cut operational costs is by managing delivery and tracking which suppliers provide just-in-time (JIT) delivery. You should recognize when inventory items are needed, and work with suppliers to have them delivered at the optimal time. Your forecasting tools, automation, and integrations, and help are crucial in this area. For replenishment goods, you can often have your factories hold off on shipping until the backlogs clear up.

For direct-to-consumer (D2C) 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 the unimaginable happens:

Your systems take in and process 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. At the end of the day, set up procedures to be alerted when labeled packages don’t move in the expected timeline so that they can take corrective action.

  1. 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 the time 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 you  to cut the dollar value of your inventory levels by up to 50%.

Final thoughts

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, you 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 be evaluated and reviewed on a regular basis.

Back Office Outsourcing and Inventory Management: Pros and Cons

Inventory management is an ongoing struggle, and too often it can feel like you are losing the battle. Some wholesalers struggle for years on their own with limited success. Other wholesalers choose to outsource back office services to act as an inventory management specialist and help secure the resources they need to gain the upper hand. But that solution doesn’t work for everybody.

What kind of wholesalers are outsourcing their back office to the greatest effect?

  • Smaller sized wholesalers with annual sales of anywhere from <$1m to $10m
  • Mid-sized wholesalers with annual sales from $10m-$100m
  • Mid-to-large sized wholesalers $100m-$200m in annual sales can utilize segmented services rather than the end-to-end back office services
  • Domestic manufactures of any size

If you avoid some common pitfalls, a third party back office service can substantially change how your business manages its production, inventory and shipping. For domestic manufacturers, it can also help manage your materials supply chain and help automate fabric and trim ordering, track fulfillment, and help you manage your contractors and deliveries.

With an inventory management specialist comes real cost-savings in terms of warehousing, production, fulfillment, and more. It can improve relationships with retailers, reduce markdowns and chargebacks, and improve your net profits.

Back office as your inventory management specialist

Should you jump on the bandwagon? How can an outsourced service improve your inventory management and how can they translate to your bottom line? Do they really help and can you afford the price?

Resources

The right back office solution has greater resources to devote to personnel and software than the typical wholesaler. Your core business is the design, production, and sales and so that is where you logically direct their greatest investments. It may sound silly to say it: A back office service company’s core business is back office services, so they direct their investment toward personnel, training, technology and software. A good back office service provider will also have on-staff developers improving software and creating customizations on an ongoing basis.

Expertise dealing with 3PLs and warehouses

The right back office service provider will have experience dealing with a wide range of warehouses. They can create file exchanges where appropriate, create labels, oversee routing, track pending shipments, and create easily searchable electronic archives for BOLs. They can help manage ecom and direct-to-consumer shipping by utilizing APIs and other integrations that many wholesalers struggle to put into place effectively.

Reporting

Back office service providers should deliver better reporting tools. They should have on-staff developers working to customize reporting so that you can use it in real time, efficiently and without additional manual manipulation. 

For example, inventory aging is one invaluable tool to help manage your inventory. An inventory aging is similar to an accounts receivable aging, except it ages your inventory and helps direct you to potentially stale inventory. Often your first mark down is your best markdown, so an aging can help you maintain your margins. In addition, with lenders paying increasing attention to inventory age quality reporting can help you stay one step ahead and protect your cash flow. A good back office services company will have a library of effective reporting to help you sell and manage your inventory.

Auto alerts

A good back office services company will set up a strategic array of auto alerts. Too many alerts and people stop paying attention. Too few and you risk short shipments and compliance-related chargebacks. Delivery dates change. Placed orders face shortages. When projected inventory changes, salespeople and management can be alerted automatically and notified which specific orders will be impacted. This gives you a better chance of resolving inventory issues early on.

Warehouse audits

When a warehouse reports a shortage you can’t just take their word for it. Your back office can create audit trails to your warehouse and direct them to look for the freight again. You may be surprised how often they find the freight when a well designed audit trail is presented to a 3PL.

Multi-channel

You do business in so many ways. You ship to some combinations of the following:

  • Major retailers
  • Specialty stores
  • Ecom
  • Direct-to-consumer
  • FBA
  • FOB overseas
  • POE
  • International sales

Each of these areas requires specific technological solutions and expertise. A good back office should offer quality solutions to all of these shipping challenges. They can help segment your inventory so that you don’t commit to an order when you can’t deliver. That helps you avoid costly chargebacks and maintain good relationships with your buyers.

Conclusion

Retailers make an ever-increasing number of demands on wholesalers. They have the leverage to deliver thick compliance manuals for you to absorb. You ignore them and the updates at the peril of chargebacks. Back office service providers should help turn that battle into a fair fight. They should have the resources and expertise to become your inventory specialist. The right back office partner should do all that, and do it at 50% less than most small and mid-sized wholesalers can do it on their own.