Distribution is an expensive business. In addition to the costs all companies absorb in overhead, such as rent and employee costs, distribution companies also have to consider inventory costs. Unfortunately, many companies do not manage their inventory as well as they could, and that fact can really hurt the bottom line.
How Inventory Costs Companies Money
Implementing an inventory management system will help, to a degree, because it makes sure that the company isn’t holding unnecessary amounts of goods. But not just any system will do. If a company uses manual processes, it introduces the possibility of mistakes and slows down the whole operation. To compound the issue, even if an automated process is in place, for example, in the early stages of digital transformation, duplication and the lack of intelligence such a system generates can still be a problem.
Managing Inventory Turnover
The first thing that distribution companies need to understand is that inventory is, ultimately, an expense. It costs money to purchase the inventory the company holds, and it costs to warehouse it. The inventory turnover ratio lets a firm see how often its inventory is sold and replaced over a particular time frame. Normally, this figure is compared to established industry averages for companies of a certain size, but it can also be used to analyze company performance over time.
Average inventory is calculated as the quantity of the company’s beginning inventory plus its ending inventory, then divided by two. The company’s sales are divided by the average inventory to get the inventory turnover ratio. Using the costs of goods sold (COGS) is another way of quantifying inventory turnover and could be more accurate as sales margins may vary by item, and sales prices can fluctuate.
Why Companies Keep Excess Inventory
Businesses keep excess inventory for one main reason — security. Many companies stockpile goods so that they can effectively respond to changes in customer demand. This way, those firms always have the items their customers want and can enjoy better-than-average sales when the demand for a particular good suddenly rises unexpectedly. Keeping excess inventory also helps companies guard against issues with suppliers or manufacturers, such as shipping delays. Inventory counts can be another issue. If a company isn't sure how much inventory it has or how quickly it is selling through it, stockpiling large amounts of inventory may seem like a smart idea, but it is costly.
The Importance of ERP
Luckily, excess inventory is not the only solution to handling these issues. Companies can adopt enterprise resource planning (ERP) software, such as SAP Business One. ERP inventory management systems have the advantage of reducing inventory and saving companies money as a result. The system works because it provides intelligence about the inventory the company holds and how it manages that inventory. An ERP system lets users see in real-time exactly how much inventory they have and can be configured to automatically alert them when their stock falls past a certain level. Businesses save time because they don't need to check stock levels, just their alerts. Plus, companies with multiple properties can monitor their inventory levels at different locations and warehouses, making it easy to transfer stock as business needs demand.
Ultimately, inventory is kept at the lowest levels possible so that the company’s money isn’t tied up in excess stock. ERP systems help companies understand when to purchase new inventory and to easily see how much that inventory will cost. This type of software system can also help illustrate the best locations to store the inventory the company does maintain and provide insights into how that inventory should be stored to allow for easy access.