Sunday, August 17, 2008

"Free" inventory

The same as there is no such thing as a free lunch, there is no such thing as free inventory. Just because the vendor issues a credit for any unsold material at the end of a season doesn't mean that the distributor doesn't incur costs in carrying the stock in their warehouse for the remainder of the year. These are the costs the distributor will experience in carrying this stock:
* Moving material from the receiving dock to the proper bin location and shifting it to other warehouse locations as necessary (such as to bulk storage at the end of the season and back to the picking area at the start of the next season).
* Insurance on the inventory. If it is in your warehouse, you are probably responsible for it.
* Rent and utilities for the portion of your warehouse used to store material. The material takes up space that could be used to store other products, sublet to another business, or not rented in the first place.
* The cost of physical inventory and cycle counting. If you don't buy it, you don't have to count it.
* The cost of inventory shrinkage. If it is in your warehouse, someone may steal it or it may be broken.
* Opportunity cost of the money invested in inventory – that is, how much could you make if the money tied up in inventory was invested in a relatively safe, income-producing investment. Or, if you finance your inventory purchases, the amount of interest that you pay the bank. Note that the distributor will only experience the opportunity cost during the popular season, as they will get their money back for any unsold material when the season ends.

The one typical cost of carrying inventory that this firm won't experience is product obsolescence. They won't have to sell some of the material below cost, or throw it out, because it has exceeded its expiration date or fallen out of fashion.
Yes, because of the vendor's special credit policies, the distributor should purchase more inventory. But, they should be careful not to get carried away and fill up their warehouse with material that won't contribute to the company's bottom line. There is, after all, no such thing as free inventory. Remember this to make you inventory management effective!

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