What can a retailer do to reduce their inventory investment?
Glad you asked that question. The answer is IMPROVE YOUR PURCHASING PROCESS. How can that be you ask?
Let’s start with defining all the steps that happen whenever a retailer decides to replace their sold inventory.
1. Decision is made on what to order, how much and which vendor to get it from.
2. A Purchase Order is issued from the retailer’s accounting system and emailed, or someone goes to the vendors website and places the order.
3. Product comes in and the employees responsible for receiving move it off the truck and into a storage place.
4. The accountant’s must somehow be notified of what is received in order to schedule the vendor payment.
5. The actual payment is eventually made depending upon the terms.
This is the bare minimum of steps and for most retailers the process is typically more complex because it involves multiple departments and dispersed locations. This leads to a lot of telephone calls where the remote locations are calling the Purchasing Department asking, “did you get my order?” and “where is my stuff?”. All these activities have a cost which can be calculated and divided by the total number of PO’s issued to come down to a per PO cost.
Now here is the magic. If you can improve the efficiency of that process so that your cost per PO is reduced, you can afford to issue more PO’s for the same total cost. If you can order more often, then you can order in smaller quantities. Smaller quantity orders mean your inventory turns over more often in a year. If you inventory turns improve, the amount of cash invested in inventory naturally goes down and moves back to your bank account.
So how do you improve the Purchasing Process? Mostly it’s a question of software. Software to place orders, interface with your vendors, and make it easy for your employees to follow the transactions from beginning to end. A customized web-based software package is the key to making this process more efficient will usually pay for itself in less than a year.