It might seem odd, but rebates defy the laws of good inventory management.
Let’s say you work in building materials wholesale and need more CAT5e cable. You normally order 2,000 feet at a time, but it’s near the end of the quarter so your supplier is offering you a percentage of your order back on quantities of 5,000 feet or more.
At first glance, it makes sense for suppliers to offer you incentives for ordering more stock. Salespeople know that offering rebates or large discounts is a sure-fire way for them to hit their targets. After all, who wouldn’t free money?
But are rebates really good for you? Not when they result in excess stock.
When ordering up to a rebate level, many businesses fail to do any real analysis into whether it is worth the additional investment. As a result, mistakes are made and the business is left with far more stock than what they actually need. The issue becomes costly if, for instance, you order 2,000 feet more cable than you need and afterwards competitors start offering sale prices you must match to stay competitive. Or what if your customers move to CAT6 cables?
Regardless of the cause, if the stock is still sitting in the warehouse months or even year’s after the original order was placed, no one will remember the financial rebate.
Rationalize Your Rebate Orders
Before you place a big order, take a moment to reflect on the following:
1) Risk of excess - If you order to the rebate level, how much excess stock will you have to hold? How many days of inventory will this leave you with?
2) Holding costs - Look at the overall total holding costs: Are the costs of holding the excess more than the rebate on offer?
3) Order multiple products - Can you spread the risk across multiple products?
4) Smart negotiation - Can you re-negotiate terms that suit you? Can you agree on a more favourable payment schedule or can deliveries be spread so everyone wins?
LOT SIZE AND BREAKING BULK
What order quantities do you place from your vendors? While it may not always be foremost in your mind, the costs related to lot quantities add up quickly.
Lot quantity costs can include the cost of preparing a purchase requisition, the cost of creating a purchase order, the cost of reviewing inventory levels, the cost of receiving and checking items from a vendor, and the cost of preparing and processing vendor payments once the invoice has been received.
Since the total variable costs can be made up of so many different cost types, they can significantly increase the total lot quantity costs.
Fewer Orders, Higher Savings
The best way to determine your total ordering costs is by determining the amount of time you spend on ordering for a replenishment or preparing a lot quantity for production. If you typically sell 10,000 steel 16D nails a month, but your supplier only has them available in quantities of 1,200 then you’ll have to either risk running low and making an extra order, or having too much and incurring the costs of excess stock.
Order costs are often overlooked by business managers as they perceive the actions of employees - such as checking inventory and quality checks of incoming materials - as a part of their daily routine. However, when calculating the actual cost of the whole ordering process, they will discover that it actually costs money to have an item or material ordered and in stock at their warehouse. This often comes as a surprise, since they often forget that it costs much more to create ten purchase orders for five items each, than buying fifty items at once from one vendor.
If you do need to reevaluate your order quantities but like the supplier you currently use, it can be worth it to talk with them about finding an amount that works better for both of you. Often, they will be willing to work with customers who buy from them consistently. If such an arrangement can’t be made and your analysis shows that continuing to order at those levels will cost you money in the long term it might be time to look for a new vendor.
The ability to find out whether or not certain rebates and order quantities are right for you requires having detailed knowledge of your inventory. Slimstock helps companies optimize their inventory by taking a complete look at your inventory strategy and adjusting stock levels according to factors like location, market differentiation, seasonality, promotions and even weather. Talk to one of our helpful inventory consultants today and see how we can save you money by lowering excess tock while increasing service levels.
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