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.