Do you take a supplier’s order turnaround time into consideration as well as their price and terms? If not, you should. The time it takes your supplier to fill your order has a serious affect on your cash flow. Here’s why.
Every dollar you invest in inventory is money that can not be invested elsewhere in your business. Think about your nonperishable store goods or other inventory. If your supplier takes seven days to fill an order, you are compelled to keep at least seven days of that particular item on hand. In reality, if the order-to-delivery time is seven days, you may actually keep 10 to 14 days on hand.
If, on the other hand, you have a supplier who can deliver in three days, you may keep only 4 to 5 days of stock on hand. That’s a savings of 6 to 9 days of inventory. Now, let’s translate that information to dollar savings. What does 6 to 9 days of inventory mean in terms of cash flow and profits?
First, if you could cut back 6 to 9 days of inventory, what would that mean to your company’s cash flow? The answer to this question depends upon your company’s size. One day’s supply of inventory is equal to one day’s cost of goods sold.
For a family business with $5 million in annual revenue, a 6 to 9 day inventory reduction would mean a cash savings of between $72,508 and $199,180. For a family business with $100 million in annual revenue, the inventory reduction would save cash of up to $2 million! Now, let’s translate that cash into bottom-line profits.
Most family businesses have working capital lines of credit with their banks to help support their inventory. If we assume for simplicity that these businesses are borrowing at 10%, we can easily translate the inventory cash savings to saved interest expense.
For the $5 million family business, the 6-day inventory reduction would save them $7,250 per year in interest or $604 per month. A 10-day inventory reduction would translate to a savings of $11,918 annually, or almost $1,000 per month!
For the larger family business, the savings get more dramatic. At 6 days reduction, the savings is $137,016 annually, or over $11,000 per month. A 10-day reduction amounts to almost $20,000 per month in interest savings!
Now, if you are in the very fortunate position that your company doesn’t borrow a dime, your savings could be calculated using a 5% money market account interest. The savings would be exactly half of the figures for the 10% loan interest.
Whether you borrow or not, the point is that excess inventory due to slow supplier delivery time costs your company precious cash. The next time you review competing suppliers, be sure to factor in the supplier’s delivery turnaround time in addition to price and terms.
Many suppliers are cognizant of the impact of their delivery timing on their customer’s inventory levels and are taking active steps to reduce the delay.
Automating inventory control takes an incredible amount of precision by the supplier. When you begin ordering by the day, the supplier must be able to have the right product on the right truck at your location at the right time. If your current supplier has trouble fulfilling your order correctly, don’t hold your breath for them to get just-in-time supply! Start shopping vendors.
