Saturday, November 8, 2008

Inventory Purchases

The part time CFO needs to make sure their client is considering all factors when deciding on which supplier or vendor to purchase inventory. This is a CFO Service that is sometimes forgotten, but can mean many dollars saved for the client if all considerations are factored into the decision.

When considering what supplier to purchase inventory from the following is what needs to be considered:

1. Price
2. Price breaks
3. Terms
4. Freight costs
5. Turnaround time
6. Minimum quantities
7. How does the vendor stand by their product
8. Restocking charges
9. How efficient is the product to handle
10. How efficient is the product packaged
11. How efficient is the product to use
12. What type of support are you getting from the vendor to help sell the product.
13. How flexible is the Vendors credit department
14. What products do the competitors sell
15. Can orders be cancelled without penalty

Looking for the best price is obvious, but understanding where the quantity discounts or price breaks are compared to other suppliers is important. Some suppliers offer free freight, so if you are not getting anywhere negotiating prices with the vendor ask for free freight.

Understand what the turn around time is and how quickly you can get product once ordered. Clients with Cash Flow Problems need to time their inventory receipts more precisely so turnaround time plays a greater role. What are the minimum order quantities? Once again this plays more of a role with clients with Cash Flow Problems because sometimes you just need small quantities.

It is very important that a vendor stands by their product. If something is wrong with the product either quality wise or technically the client must have assurances that the vendor will issue proper credit upon the products return. Understand what the vendor’s restocking fees are for product incorrectly ordered. Unless the client is in an industry where there are a lot of special orders, vendors should wave restocking charges.

Efficiency in handling the product is important for the receiving department. Remember, anywhere you can save costs throughout the entire process must be considered in the decision from logistics to manufacturing to merchandising/packaging to how efficient the product is to use. One of my clients is in the insulation business and although the pink panther insulation is more expensive, it is much easier to install making up for any increase in the price of the inventory.

The type of support that you get from the vendor to help you sell the product is a big plus whether they are free displays, marketing materials or coop advertising programs these programs tell you that the vendor is really interested in working with you. In the event the client runs into a cash crunch it is always nice to know that the vendor is willing to work with the client and that their credit policies are flexible enough to work through shifts in the economy or industry downturns.

Another consideration is what the competitors sell. Sometimes you can work a better deal with a vendor who is not with a major competitor because that vendor does not have much market share in the market the client serves.

One last rule: Do not over buy inventory as it is one of the most common reasons why businesses get in trouble. This is especially true for retailers. The flexibility to cancel orders without penalty helps prevent you from overbuying.