Primarius reducing the cost of Goods Sold
 
 

"The cost of capital is the
opportunity cost of
investing in an asset relative
to the expected return on
assets of similar risk.
By far the largest risk in
holding inventory is
that its value reduces
over time."

Reduce the Cost of Goods Sold

Primarius helps clients to –

Reduce Operational and Product Costs

By -

      1. Working with suppliers to reduce product landed cost (our Product Sourcing solution)

      2. Reducing operational costs associated with holding inventory (OMS Inventory Optimisation solution)

      3. Reducing labour and administration costs by efficiently managing the warehouse
          (Warehouse Optimisation)
      4. Reducing transport costs by routing product delivery more efficiently (Vehicle Routing Optimisation)


Reducing Product Landed Cost

Primarius’ Product Sourcing solution seeks to provide companies with a holistic sourcing solution – suppliers and customers collaborating closely for the supply of product at lower total cost, in shorter lead-times and with improved supply reliability.


Reducing Operational Costs

Inventory costs money to hold. The more stock held and the slower it turns, the more money it costs to hold this stock.

Inventory Holding Costs comprise -

Non Capital Costs

Cost to Warehouse

+ Obsolescence

+ Stock Losses

+ Damage

+ Insurance

+ Rates and Taxes

+ Management and Administration costs

+

Capital Costs

Inventory Value

X Cost of Capital
___________________________________________
= Inventory Carrying Cost

The cost of capital is the opportunity cost of investing in an asset relative to the expected return on assets of similar risk. By far the largest risk in holding inventory is that its value reduces over time.

Primarius’ experience is that for industries which do not have short life cycles (such as the electronics industry), it can cost a business 25% of the inventory's value in annual holding costs.

The largest contributor to increased holding costs is slow moving stock.

The slower the stock turn, the higher the risk of obsolescence. As more product is held in stock, the cost to finance that inventory increases. Warehousing costs, management costs and administration costs rise proportional to the level of inventory.

The lower the stock turn, the greater the cost to hold.

Examples of the Impact on Profit by Slow Moving Stock

In the following example, stock is bought in a Minimum Order Quantity of 1000 pieces. Three different sales rates are analysed -

     1. A baseline 100 units per month,

     2. 75 units per month, and

     3. 50 units per month (in this example the impact of discounting the stock by 25% to clear the stock at 125%          of normal sales is factored in).

Inventory holding costs of 25% per annum are factored in to ascertain ‘true’ margin – i.e. the gross margin once the costs to hold inventory are removed.

Selling 100 units per month, the ‘real’ gross margin is 33.8%, a drop of 6.2%.

Selling 75 units per month means the inventory takes 40% longer to sell and the costs to hold that inventory erode profit by 9.2%.

Selling 50 units per month and then discounting sales after 12 months will mean that the effective margin is 22.5%, a margin degradation of 17.5%.

Halving the sales rate has reduced margin by 11.3% and this ‘hidden’ profit bleed explains why companies are not achieving their budgeted margins – the cost of holding inventory, once exposed, explains how profit margins are being leached.

When business tries to work out where the profit has gone, examining the impact of high MOQs and slow stock turns will show the hidden impact on profit.

Primarius works hand in hand with Chartered Accountants to determine the cost to hold inventory and examine the financial impact on business by these costs.

Warehousing and Distribution Costs

It costs money to pick, pack and ship customer orders. Every time a backorder is held on a customer order the business loses money. Once the first order is shipped, the cost to process backorders, pick products, pack them and then ship them to the customer is absorbed by the business and erodes profit.

It’s essential to fill orders on time, in full, first time. Primarius’ OMS solution is geared to maximising the in-stock position of products and minimising stock-outs.

To reduce inventory-related costs, companies need to -

      • Hold less inventory

      • Reduce lead-times which reduces safety stock

      • Reduce Minimum Order Quantities

Primarius’ OMS Inventory Optimisation solution assists to achieve these goals.

 
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