How to reduce stress and save money as a purchaser
The alarm goes off, and you hit snooze, dreading getting out of bed. On your commute, instead of enjoying the radio or singing along to your favourite songs, you’re running through your too-long to-do list, knowing that there aren’t enough hours in the day to get through everything.
You’ve barely taken your coat off when you’re asked why there isn’t enough of product X to give to an important customer. You just about have time to grab a coffee to get you through the mountain of spreadsheet printouts you have to check.
You’re spinning so many plates and wearing so many hats that you’re dizzy. That’s just part and parcel of working in procurement, right? Wrong.
We know that the life of a purchaser isn’t plain sailing, so in this blog, we look at daily purchasing challenges and offer tips to overcome them, so you can get on top of your inventory management, reduce stress, and save your company money. The definition of win-win!
Challenges
Getting accurate demand forecasts
You’ve built the best spreadsheet. It’s colour-coded and has formulas on formulas, but your forecasts don’t seem to add up. Every month, it’s the same story; you’ve got piles of some items that just won’t sell, while you can’t meet demand for others. Forecasting is hard. It’s even harder when you’re using manual processes, rolling averages, and static reorder points.
Rolling averages only consider the timeframe you’ve selected. So, using a monthly, two-month, or even quarterly rolling average doesn’t account for trends or seasonality. You also won’t be able to track demand volatility, outliers or special projects.
If your demand forecasts are off, then inventory management is impossible. You’ll be struggling with overstocks and stockouts, customer complaints and poor supplier relationships. If you’re struggling with inaccurate forecasts, you’re probably spending a lot of time placing rush orders with suppliers or trying to figure out what to do with piles of excess stock that keep arriving.
Managing complex supply chains
You’re tasked with reducing costs while maintaining product quality, which means you could have a supplier list as long as your arm and suppliers spread across the globe. For instance, you might have suppliers in different countries with varying lead times, minimum order quantities, order values, and shipping routes. You’ve also got to contend with never-ending supply chain disruptions, such as supplier shutdowns, natural disasters, climate issues, and geopolitical issues. Wars and sanctions have closed transportation routes, increasing lead times and shipping costs.
Global supply chains have been pivotal to cheaper products and expanded product ranges; however, when trying to stay on top of global issues, monitoring lead times, tracking orders, and promising delivery dates to customers can feel like herding cats while trying to find a needle in a haystack. If you don’t have visibility into shipments, you’re constantly at risk of letting your customers down, which can lead to lost sales, customer defections, and reputational damage.
Cost control and budgetary constraints
When you’re trying to keep costs down and reduce shipping costs, you don’t need rush orders needing emergency air freight to meet demand, but you don’t always have a choice. When your forecasts are off, you don’t know what to order, so when you have a half-empty shipping container, it’s tempting to fill it with random items to avoid surcharges, but filling it with the wrong items can be just as costly. So, how do you balance saving money while ensuring supplier reliability? Rather than cutting costs across the board, you need effective budget management strategies to reduce inventory costs efficiently.
Supplier risks and reliability
When it feels like you’re constantly chasing your tail, it’s hard to keep on top of supplier performance. If you don’t have accurate lead times, you can’t tell whether suppliers are meeting expectations. If you don’t know how well they’re performing, you won’t understand how reliable they are or be able to spot and mitigate risks. You also won’t be able to develop your relationship, negotiate better terms, or determine whether you need to find alternative suppliers.
Data management and manual processes
You get out what you put in, but as there’s never time to clean the data, you’re stuck in a perpetual loop of bad data. For instance, inaccurate data might lead to ordering the wrong product quantities, resulting in unnecessary costs and stress.
With all the manual edits to your spreadsheets by various team members, the formulas are broken, the information is out of date, and items you no longer sell are still showing as in demand. You’ve lost track of supplier performance, and your strategic planning is out of date the moment it’s written.
Manual ordering processes open up many doors for error. Whether it’s raising a paper requisition form that needs to be entered into an ERP system or creating a purchase order that’s on a different system, when you’re in a hurry, it’s easy to make mistakes. One simple error, such as a misplaced decimal or an extra zero, could cost your company thousands.
Analysing large datasets without proper analytical tools takes too long and is too complex. You end up tearing your hair out trying to get the information you need to make data-led, strategic decisions, but have to rely on gut feel and guesswork to get anything done.
Sustainability, compliance and regulatory issues
The impact of climate change is having a knock-on effect on supply chains. The pressure to reduce your carbon footprint is coming from all angles. Not only are customers becoming more socially responsible, but environmental, social and governance (ESG) regulations are becoming more prominent.
If you’re importing goods, you’ll have to comply with the new European and UK CBAM regulations, meaning you’ve added another job to your ever-growing to-do list. Not only that, but you’ll need your suppliers to share accurate information to ensure your compliance and avoid fines and penalties. Poor data management will lead to compliance issues, making high-quality data even more critical.
Solutions
The life of a purchaser is tough, but the good news is that there are some ways to make it easier. Not only can you reduce stress, but more efficient processes will save money, increase margins, and boost competitive advantage.
- Take stock – literally
It should be reassuring to look at your full shelves and think that means you’ve got enough stock. However, if that stock doesn’t have demand, you’ve got shelves full of excess stock tying up cash.
While poor stock control is causing you headaches, it’s incurring costs for storage, insurance, shrinkage and handling. Not doing anything will cause you more stress as you continue firefighting.
It’s time to understand how well you know your inventory. We know finding the time is hard, but getting a real, up-to-date picture of the stock you hold is the first step in taking control of your inventory. That might mean starting a new spreadsheet and going into the warehouse to count stock, but it will give you a true inventory picture. Split this with colleagues so you can do it quickly before the information becomes outdated.
If you feel overwhelmed with the number of items you have to check, pick your top 20 by sales, customer requests or cost, depending on what you want to optimise. Starting small, will make it easier to tackle.
Once you’ve got a clear picture of your stock situation, it’s time to analyse the data. You’re carrying thousands of products, but they don’t all hold the same value to your business. So, where should you prioritise?
The first things to investigate are items that haven’t sold in 6 months, 1 year, or 2 years, and which items are driving 80% of your sales. This will help you prioritise the items. You can also do a simple ABC analysis to help get you on the right track.
Find the quick wins. Not everything has to be a long process. There will be some things you can do immediately to save money, such as:
- Identify and clear dead stock
- Tackle bulk deals from suppliers
- Reduce safety stock where it’s too high
- Free up space
Don’t cut stock recklessly. Cut waste and protect your service levels on your most important products.
- Set your KPIs
How reliable are your KPIs? If you aren’t using accurate information to track them, they might not be telling you the truth. This makes it hard when you’re reporting to the board. If you can’t provide accurate stats and reports, you don’t know where you can improve.
It’s time to properly track them and collect valuable data to support your inventory management.
There are many KPIs you can monitor, but we recommend starting with these three essentials. Stock turn, Service level (or stock availability) and GMROI (Gross Margin Return on Inventory Investment).
Stock turn (cost of goods sold/average stock value) tells you if you’re stocking the right items to meet demand. Low stock turn means you’re overstocking the slow-moving items, tying up your cash for too long. Fast-moving items should have a higher stock turnover than slow-moving items. Aim for six turns on fast movers and three to four overall.
Service level (orders fulfilled in full/total orders) tells you how often you are providing what your customers want from the stock you hold. You should aim for 95%+ for core products.
GMROI (gross margin/average stock value) calculates how much margin you earn for every £1 you have invested in stock. Anything above 1.0 is healthy, while anything below 0.5 is a warning sign.
We have more information about KPIs in our blog, 10 inventory KPIs to improve inventory management efficiency, and our eGuide, six inventory KPIs you can’t be without.
- Get a handle on demand
You can never be 100% accurate with forecasts, as things will change, but it shouldn’t be complete guesswork or based on out-of-date data. Combining good quantitative forecasting data with your gut feelings and qualitative data provides a solid basis for planning and improving forecast accuracy.
If you can, start by pulling two years of sales data and highlighting peaks and troughs. Check for seasonal patterns and any anomalies or outliers.
Next, speak to your sales teams and see if any of your customers have any big projects coming up or if the team are planning any promotions. Are any of the seasonal trends coming up? Are any of your suppliers shutting down for periods?
You’ll also need to ensure that your supplier lead times are up to date, so you aren’t guessing when shipments will arrive and can meet demand.
To cover any supply disruptions, set sensible safety stock levels so you always have enough to handle unexpected demand surges without risking excess or dead stock. There are different ways to calculate safety stock, including fixed safety stock, time-based calculations, average/maximum calculations and statistical calculations. We explain these in more detail in our calculating safety stock eGuide.
Using spreadsheets for forecasting is fine when you don’t have many products, but they become unmanageable and error-ridden as you add more items and multiple users. If you’re the only one who understands your spreadsheet, you’ll always be the one sorting out issues. If you’re struggling with inaccurate results, it might be time to invest in software.
Specialist software can automate demand forecasting based on sales history, seasonality and other factors. It will also calculate safety stock and reorder points for you faster and more accurately than your spreadsheets can.
- Optimise stock levels
Armed with accurate forecasts, lead times and safety stock levels, you can now confidently optimise your stock levels. This ensures you reduce inventory costs and minimise the risk of overstocking. You can optimise your stock by forecasting demand and managing supply variables while adjusting stock rules and inventory parameters. If that sounds complicated, take it back to basics and work out your minimum and maximum stock levels to help calculate your reorder quantity.
- Minimum stock level – also known as the reorder point, which tells you when to place your next order. The minimum stock level formula is (Average demand x lead time) + safety stock.
- Maximum stock level – which provides the order-up-to point, and the maximum level you should ever hold. To calculate the maximum stock level, you first need to know your review cycle. The review cycle is the number of periods in a year divided by the number of orders in a year. The maximum stock formula is reorder point + usage during review cycle
- Reorder quantity. When your stock levels hit your minimum order quantity, you need to place an order. Don’t go above your maximum order quantity.
- Connect with your suppliers
Once you take control of your inventory, you need to ensure your suppliers are on board as well; otherwise, everything will unravel again. By working with them as partners, you can turn supplier relationships into a competitive advantage.
Don’t get pulled into accepting deals that don’t benefit your business. While a bulk deal might seem like it’s saving you money, if you don’t have demand for those products, you’re tying up cash that could be spent elsewhere.
Review your supplier performance, and if they aren’t meeting their contractual expectations, see if you can renegotiate terms. Good supplier relationships create flexibility, reliability and support. Set up regular supplier reviews so you can negotiate with data and always get the best deal for your business.
Sharing your forecasts with suppliers helps them better prepare to meet your needs. They can raise any issues with you early so you can find solutions rather than going without. It might also be time to see whether there are alternative suppliers who can better meet your needs, and to consider whether your supplier locations still do. For example, you might need to consider reshoring or nearshoring your suppliers to reduce lead times.
- Get the right tech
Connecting new software can be daunting, especially when investment is needed. However, the right technology can support strong inventory management, reducing admin time, eliminating errors, and providing data visibility. While it might seem like an additional cost, the return on investment often eclipses the outlay.
Once you’ve outgrown your spreadsheets and found that your ERP system can’t provide the functionality you need, the next step is a specialist inventory optimisation tool.
These tools integrate with your ERP system to enhance its functionality. This enables you to take advantage of advanced forecasting algorithms that consider seasonality, trends and other factors. You’ll be able to automate reorder points and safety stock levels that track changes in demand forecasts and dynamically update so you’re only ever ordering what you need.
You’ll also be able to maximise space in shipping containers and meet MOQs with stock you know will sell, rather than adding random items.
Inventory optimisation software also supports supplier management. When you have more than one supplier for an item, the system compares lead times, unit prices, and MOQs to recommend the most cost-effective supplier who can deliver on time to meet demand. You can also use order calendars to enter supplier shutdowns, such as the Chinese New Year, or order dates. The system will then bring forward orders to ensure you aren’t caught short.
- Review, improve
Once you’ve found the best and most appropriate processes and practices for your business, don’t stop there. Continual improvement and checking for best practices to support your role will ensure that you stay ahead of issues and do what you do best – purchasing.
Further information
To find out more about how adopting inventory optimisation practices with EazyStock can help reduce stress and save money, get in touch with our experts.
