The Value of Purchasing Metrics

Buyers' Training
October 22, 2012 — 1,083 views  
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The Value of Purchasing Metrics

Lowering inventory and warehouse management costs is critical to increasing a company’s profit on sales, lowering its financing costs and improving its bottom line. Today’s enterprises are constantly trying to reduce their costs of managing inventory. Success involves coming up with a series of purchasing metrics. These inventory metrics should focus on measuring the company’s costs of carrying inventory, the company’s costs of financing, its costs on pricing of raw materials and finished goods, and finally, its costs of freight. It’s a tall order, but companies must track their purchasing department’s ability to lower these aforementioned costs. So what are some of the most important purchasing metrics companies should track?

• Carrying Inventory Metric: The best way to measure the costs of carrying inventory is by tracking the incidence of damage. There is one essential rule to follow: When companies retain inventory for long periods, they increase the likelihood that inventory will become damaged. This inventory metric should track the incidence of damage, its total costs to the company and the types of inventory counts most likely affected by poor handling practices.

• Financing Inventory Metric: Every company must finance its inventory. Again, the longer the company holds inventory within its warehouse, the higher the company’s costs to finance its purchases. This inventory metric should focus on tracking interest rates on bank loans and credit lines relative to the length of time inventory is held within the company’s warehouse.

• Raw Materials & Finished Goods Pricing Metric: A company’s costs of inventory ownership are ultimately defined by the price paid for raw materials, consumables and finished goods. This metric should track pricing over time for different inventory classes. It’s a good idea to identify raw materials and finished goods that have stable prices, versus one where pricing fluctuates over time.

• Freight Costs Metric: A company’s costs to get product in and out of its warehouse is an extremely important inventory metric. In essence, a company’s freight costs on incoming shipments directly affect its gross profit by increasing, or decreasing, a product’s costs of goods sold or “COGS”. Companies must track the costs of inventory on raw material and consumables coming into the warehouse and track the freight costs on finished goods leaving the warehouse.

These inventory metrics all point to the importance of maintaining a high inventory turnover rate on finished goods. When companies have a high rate of sales, they are able to reduce their costs of managing inventory. Fast moving inventory means companies don’t have to cover financing as long, don’t encounter damage as often and don’t incur high freight costs for rush shipments of raw materials and finished goods.

 

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