Is Your Inventory Costing You Money? 3 Mistakes Wholesale Distributors Make

Part of managing a warehouse and operating as a wholesale distribution business involves inventory analysis. This includes regular analysis of existing inventory, purchasing history, customer demand and the market in which you’re selling. Holding inventory that you can’t sell takes up valuable space in your warehouse and not stocking high volume items can result in lost sales and unhappy customers. It is important to have a handle on your inventory and maintain processes for managing inventory levels, with the ability to react quickly to changes from customers and/or suppliers. This is particularly important for wholesale distributors who import and export product – where fluctuations in market prices, shipping and import and export tariffs can drastically impact your company’s bottom line. To best manage inventory, it is important to implement proper warehouse inventory software and to put someone in charge of inventory management – someone who is accountable for any inventory issues and losses and who is proactive in making purchasing decisions to maintain demand. When it comes to warehouse inventory software, make sure to find a solution with features for setting min/max levels, for managing different pricing contracts and volume discounts, a system that can properly track and account for landed costs and a system that supports bin and shelf locations and barcode scanning. Below we examine some common inventory management mistakes that could be costing you money.

Poor Management of Excess Stock

Excess inventory can be a result of over-delivery from a supplier, poor inventory and order management or some other factors, and can have a big impact on your bottom line. It ties up your capital and physical storage space that could instead be used to stock more profitable, fast-moving items. When dealing with excess stock, most wholesale distributors end up having to return product to the supplier where applicable, liquidate items to other companies, sell at a deep discount to customers, donate to a charity or try to incentivize sales reps to sell the excess. Most options lead to a loss for the company and the risk of having excess stock is amplified in industries that deal with perishable items or where seasonality is a large factor.

Proper inventory management requires accurate management of fast-moving and highly profitable items, and slow-moving, less-profitable items. This means it is important to organize your warehouse and corresponding bin and shelf locations based on inventory turnover. As a starting point, inventory turnover ratios help to determine how often your company sells and replaces specific inventory items during a certain time period. This allows you to make better decisions about pricing, purchasing, warehouse layout and marketing. Proximity to packing and shipping areas, for example, is important for fast-moving items, whereas slow-moving and less profitable items can be kept in hard-to-reach places.

High Volume of Obsolete Inventory

Obsolete inventory is product that has reached the end of its product lifecycle. This could happen for a variety of reasons including:

  • Market changes where customer preferences have changed
  • New advances in technology that render certain products obsolete
  • Enhancements or improvements to existing product in the market – new version releases
  • Entry from a new or existing competitor that can offer a similar product that is deemed of better value

Once you’ve determined that inventory is obsolete, even if you’re not able to sell it, it still needs to be removed from your warehouse as to avoid further losses. As a general rule, inventory items become obsolete when they have not turned over for at least a 12 month period and are not expected to be sold in the future. When this happens, it is important to remove these items from your warehouse to offset any carrying costs and make room for new product. Similar to when dealing with excess inventory, your options for getting rid of obsolete items include donating, trying to sell at a discount, etc.

Although inventory obsolesces are a normal part of any wholesale distribution business, there are ways in which you can mitigate the risk of holding obsolete inventory with proper warehouse inventory management software as discussed below.

Lack of Seasonality Planning

Seasonality in inventory management refers to the awareness around how customers make purchases based on seasonal changes. For some businesses, these seasonality patterns are obvious – for example, wholesale distributors who sell baby and children’s toys and deal with an increase in demand around the holiday season.

One consideration with seasonality is that a drastic increase in demand for product is usually followed by a drastic decrease which can make the inventory management process extra complicated. Not only do you want to avoid carrying excess stock, but also understocking items and therefore missing out on sales. Trying to follow market trends, reviewing historical data or looking to international markets are good ways to try and stock up on items that you think will be in high demand – for example, stocking what experts predict will the “it” toy of the holiday season.

For some businesses, seasonality changes require that they take orders from customers months prior to shipping goods. This allows them to avoid storing inventory until it is ready to be shipped and then stock up on those products in high demand when the time comes. In preparation of seasonality spikes, it is important to dump any obsolete and excess stock to make room in your warehouse and depending on the industry, consider adding complementary and alternative products to your inventory and equip sales reps with the appropriate tools to upsell or offer alternatives.

Other consequences of managing seasonal inventory are around resource availability. If you anticipate a higher demand in the summer months, it might be a good idea to consider hiring part-time employees or students to help in the warehouse. Warehouse inventory software that allows for bin and shelf locations and barcode scanning tools can help with quickly getting new employees up-to-speed.

Warehouse Inventory Software

Warehouse inventory software provides multiple features for proper inventory management to avoid the costs associated with holding too much or too little of an item.

  • Forecasting tools provide insight into inventory sales and projected sales based on previous projections, history and patterns
  • Barcode scanning and mobile handheld picking ensures every item in your warehouse is accounted for – thus reducing the need to manually check for items when customers place orders and removing the situation where inventory gets “lost” and becomes obsolete
  • Barcode scanning also allows you to quickly receive, pick, pack and ship orders with minimal errors during times of high demand
  • Min/max reorder points help you determine when is the right time to order product and how much to order – taking into consideration leads times on getting items to your warehouse
  • When mix/max levels are set, the system automatically alerts users when certain items are getting too low or too high
  • Real-time reporting functionality helps you to see purchasing and selling patterns to identify opportunities and threats
  • Pricing contracts and volume discounts help to entice customers and sales reps to sell the excess stock or obsolete items by easily providing heavy discounts and purchasing incentives
  • Landed cost tracking allows your business to accurately track the true costs of inventory – to determine exactly how much is made on a sale (or how much is lost with excess stock)