In this highly competitive economic climate, many businesses are scrambling to reduce. One expense that is often overlooked is the cost of procurement – that is, the cost of purchasing inventory for use or sale. Although the key cost of procurement is the per-item cost (the sticker price, in other words), any business will incur a number of other hidden costs when purchasing stock.
The per-item amount is the key driver of total procurement cost, particularly in larger transactions. Although there may be numerous extra expenses, the cost of purchasing 100,000 stainless steel screws is likely to primarily come down to the cost of producing a screw. Although this is the largest cost, it is also one of the most difficult to minimize. Competing firms in the market have likely reduced the per-item amount to close to the cost of production.
Like the per-item amount, transportation costs are part of the direct costs of acquiring stock. It can be difficult to reduce transportation expenses but it is possible where customers are willing to be flexible and develop a good relationship with a carrier. For example, it may be possible to ship non-urgent inventory as stand-by freight or to partner with a carrier who can transport your freight as backhaul.
Buying and selling inventory is a service which many companies outsource, creating fees that either the vendor or purchaser must bear. These include commissions, brokerage fees and even legal expenses (for example, if legal advisors are required to draft a contract). In some markets it can be difficult for sellers and buyers to connect, so brokerage fees may add up. Small businesses are often stung by procurement costs – the transition from purchasing small quantities of inventory through retail channels or distributors at an all- inclusive price to working with brokers and dealers can create unexpected challenges.
Duties and taxes
If your business is purchasing stock from overseas, it is likely that you will incur some government charges that should be counted as part of the total cost of acquiring stock. Tariffs may be charged at a variable rate depending on the type and volume of product being imported, whereas some taxes may be charged at a flat rate, such as VAT or GST. Working import taxes out can be difficult for many small or medium sized businesses, so a further cost may involve paying a customs broker to complete the paperwork and handle the customs process.
Research and negotiation
Partnering with a supplier is typically not a light decision and may involve days of research and due diligence. Even if there are no financial expenses, this still consumes management and staff time that could be used elsewhere in the business. In some cases, the research process may even involve working with third parties to verify a manufacturer’s claims. In some cases, company personnel may even travel to negotiate with a supplier – again, this is part of the total expense of acquiring stock.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.