Purchase planning for a wholesale distribution operation is a critical issue. Since purchasing is linked directly to stocking levels, it can mean the difference between profit and loss. In wholesale distribution, stock is sold at a unit cost very close to the purchase price, so overstocking will immediately have a negative effect on profits.
When purchasing, order points are critical: it is essential to order enough stock with each order to reduce carriage costs and take advantage of bulk discounts, but over-ordering can result in overstocking, so a balance should be struck to maximize profits. Purchasing managers need to consider whether to take a reactive or proactive approach to purchase planning by weighing the different advantages and disadvantages of each.
A reactive approach to purchasing, such as a “just in time” (JIT) approach, means that the business only purchases stock as and when needed. This approach reduces working capital tied up in stock. However, delays by suppliers may result in stock outages and reduced customer confidence, leading to reduced sales and revenue. A proactive approach to procurement means that there is always enough stock to meet demand, but stock must be managed effectively to avoid overstocking. In practice, elements of both approaches are used to produce a strategy that serves both customer and business needs effectively.
There are four main factors to consider when developing a procurement strategy:
The customer is the first consideration for any business; without customers, there is no revenue. In the wholesale distribution of goods, the customer is often part of a wider supply chain, so reliability is essential. Procurement planning needs to ensure stock availability at all times, and this should be the primary aim when purchasing.
Ensuring a solid flow of revenue through good customer relations may be important, but the business needs to be on a firm footing to be in a position to serve the customer. Overstocking will reduce working capital, potentially jeopardizing the ability to grow and diversify. It can also lead to stock obsolescence, reducing profitability. The purchasing strategy therefore needs to balance business needs against customer needs.
Warehousing has its own carrying costs that are extraneous to core operations, such as staffing and building service costs. It is essential that the business makes full use of the facilities in order to maximize revenue potential. The purchasing strategy must also take the maximum storage capacity into account – overstocking can reduce the available capacity, so orders should fit in with demand. Similarly, the business should be able to move well-stocked items to warehouses where there is a deficiency to preserve storage space.
As well as the purchase costs of stock, the business needs to consider how supply chain support functions fit the company budget. The purchasing strategy needs to reduce costs such as warehouse staffing and HR management while core operations need to be streamlined for maximum efficiency to reduce the cost of functions that deplete profits.
In order to make purchasing decisions that take the above factors into consideration, it is essential to a have complete overview of supply chain operations. Purchasing software is essential to link customer orders with purchasing in order to inform purchasing decisions.
Similarly, purchasing software can be linked to stocking software to give real-time oversight of warehouse operations which enables stock to be moved to where it is needed, preventing overstocking and obsolescence.
This increase in efficiency will reduce the cost of support functions and increase profits. In addition, the historical data produced by the software will facilitate a hybrid approach to purchasing strategy; as well as being able to react to ad-hoc orders, historical data can be used to predict seasonal variations and peaks in demand, aiding a proactive approach to purchasing.