Purchasing inventory is a necessary part of your business operation but how you go about it will dictate whether your business runs smoothly and profitably. It’s a careful balancing act to calibrate inventory quantities on hand to turn the gears of production to continually meet demand while avoiding overages that could spoil or sit on your shelves.
In some industries, although there are costs involved in storage, the products can sit on shelves and still be saleable. In others, such as clothing or furniture, they quickly become outdated and must be discounted. Perishable products, on the other hand, must be sold while they are still fresh. How long you can keep raw materials or finished products greatly influences your inventory purchasing behavior.
Purchasing and Inventory Planning
- If your business model works with products that can be stored for long periods, you can take advantage of volume discounts from vendors. Usually when you buy in bulk, you can lower your cost per unit. If you have good communication and your vendor is reliable, this is a big plus, because you will be able to reliably obtain your materials at a lower price.
In the event communication is shaky and you find lead times vary, the risk of running out of stock may be too high a price to pay for that discount. Ideally, you’ll want to interview a few different vendors, so you have alternative in case of a supply chain disruption, but also to make sure you’re not taking a big chance for lack of options.
Naturally, you will need storage to hold large quantities of inventory. The cost of storing product must be considered when determining whether a savings can be realized by buying in bulk. Ultimately, the cost of the finished product will include the overhead for storage and must be calculated into total costs.
2. On the opposite side of the spectrum, some businesses keep the least amount of inventory on hand as possible. Customizable products, such as furniture, may be produced as sales orders come in.
3. Purchasing raw materials to create perishables, such as food and chemicals, depends on the expiration dates. Lead time, production, fulfillment, and delivery time must all be factored in to ensure that only fresh finished products are provided to customers.
4. Another way of purchasing inventory is to collect the money from the buyer and turn the order over to a drop shipper, completing avoiding the acquisition of materials or involvement with manufacturing. Some companies do this exclusively and others try out drop shippers to see how the product performs before committing cash flow to the inventory to produce it.
Benefits of a Purchase Order System
Inventory consumes the majority of a business’ cash flow, thus keeping physical inventory at the lowest amount possible to meet demand is often the aim of every business owner. When that job can be automated to submit purchase orders at just the right time to replace inventory that has sold, there is less room for human error and it easier to streamline the production process.
No matter which method of purchasing inventory works best for your business, SOS inventory was designed to manage the purchasing process and integrate it with other areas of your business so you can make informed decisions about product acquisition, save on labor, and perform deep analysis into product performance to optimize earnings on your inventory.