What does it take to excel in supply chain management? More importantly, how does a company go about improving its supply chain visibility when it comes to managing vendor’s performance and lowering purchasing costs? Managing vendors is an involved process. It is never as simple as just demanding lower pricing. Companies must be able to lower their month to month inventory holding costs, pursue lower prices on material and parts, all the while lowering their per-unit costs on incoming freight. Several companies employ multiple approaches to not only managing their inventory, but also towards managing their supplier’s performance. So, what are the essentials of supply chain management?

Month-To-Month Inventory Holding Costs

For companies that want to improve their supply chain visibility, it amounts to understanding the importance of their month-to-month inventory holding costs. Inventory is often referred to as a cost of money. Most businesses use loans and business credit lines to finance the purchase of their parts and materials. These loans have a yearly interest rate that can be broken down into a daily interest rate. Every day those parts are not sold is a cost to the company in the form of this daily interest rate. The longer parts remain in the warehouse, the higher the costs. Companies must be able to properly ensure that the parts they put in inventory have a high probability of sales.

Per-Unit Freight Costs

Inventory is never just the cost of the parts on the shelf. Included in this cost are the aforementioned month to month holding costs and the costs to get those parts in and out of the warehouse. Freight is a huge cost of inventory and many businesses ignore these costs completely. When companies need to improve their supply chain practices, they must understand the impact of freight. Strategies to reduce freight costs include increased purchased volumes and constantly trying to mitigate freight costs with competitive bids.

Liquidate Slow-Moving Stock:

There really is only one solution to dealing with outdated inventory. Liquidating obsolete and slow-moving stock is essential to lowering daily costs. Several businesses try to hold on to product regardless of whether it Is outdated or not. The mindset is to retain that inventory and hopefully sell it at full value. However, every day those products are held and do not sell is a cost of to the company. When companies immediately liquidate slow-moving stock, they effectively lower their month-to-month holding costs and dramatically reduce their daily cost of money.

Supply chain professionals are often caught in the middle of either buying too much or too little. To be successful, they must have solid inventory forecasting tools and a sales team able to immediately sell outdated stock. When everyone works together, a company can drastically lower its cost structure and improve its inventory turnover rate.