How to Control Your Landed Costs

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Many Distributors who have outdated Computer Software have difficulty keeping track of their inventory availability and the landed costs associated with it. 

Not having good control of the inventory landed cost will result in a domino effect of business disruptions resulting in financial losses. 

The Issues Purchasing Departments Face

Working with computer reports rather than real time information, the Purchasing Department doesn’t have the current status of pending orders and inventory in the warehouse. This results in the following issues: 

  • After the reports are printed and given to the purchasing agents, the computer files are often updated with orders shipped and new inventory received in the warehouse.
  • The purchasing agents will not know what the current orders and inventory status are until new reports are printed and given to them, resulting in their buying on “gut feeling” and past experience.  
  • Buying from the vendor who has the lowest price can be a double-edged sword. If the vendor does not deliver the merchandise on the promised date, it can result in orders being canceled. 
  • Not having a good handle on the landed costs creates an additional issue. The product’s initial cost is increased after getting the US custom and brokers fees, as well as freight bills.
  • Not being able to keep track of these various costs associated with the products can result in their being sold at too low a price, lowering the profit margin. 

Domino Effect of Returned Inventory

  • Customers will return the merchandise when incorrect products or quantities are shipped.  
  • Returned Inventory can become excess inventory because the purchasing agents already bought new inventory after the products were shipped. 
  • Retuned inventory carries additional freight costs.  
  • Incorrect shipments result in disputed invoices that are not be paid until credits are issued.
  • The accounting departments that get bogged down issuing credits often miss the vendor window for early payment discounts.  
  • Misplaced inventory may not be found until the physical count in the warehouse is taken at the end of the year.

Case Study of Landed Cost not Being Tracked Properly

A large distributor who imports from the Far East didn’t have a good handle on his inventory’s landed costs. Every year after the auditing was done, his accountants asked the president to replace his outdated computer system with modern ERP Software because the company didn’t have a good handle on the landed cost. Refusing to do this, the president told them, “At the end of the day the landed cost will balance itself as it always did in the past.” This scenario worked well when the market was less competitive, the dollar stronger than other currencies, and the company had a high gross profit margin.

A few years later in a more competitive market with a lower gross profit margin and not as strong a dollar, the president had a rude awakening. When the yearly auditing was done, the accountants notified him that the company lost a substantial amount of money selling many products below cost. This finally prompted the president to purchase new ERP Software from the company we represent. 

The Benefits Gained from Having Modern ERP Software

  • The purchasing department has real-time information of the open orders and inventory in the warehouses.
  • New inventory is purchased from vendors who deliver on time, not necessarily from vendors who provide lower prices but have unreliable delivery time.
  • Cash flow improved resulting from having less returns and charge backs.      
  • The accounting department, not so bogged down issuing credits for returned merchandise, is able to takes advantage of vendor early payment discounts.  
  • Inventory arriving on time in the warehouse results in orders not being canceled.
  • The computer allocates the orders against inventory in transit. 
  • When the inventory arrives at the warehouse, the allocated orders are shipped off the warehouse loading dock. 
  • The remaining inventory is put into the warehouse resulting in lower labor costs because the allocated orders were not put on the shelves and then picked for shipping.

The new ERP Software provides the management team with analytic information using the computer data in real time mode. The dashboard information provides the view of every aspect of the company’s activities:  sales, purchasing, inventory level in the warehouses, customer buying trends and current financial status. The computer information can be instantly downloaded to an XL Spread Sheet for further analytic uses.

About SMC & Dani Kaplan:

Since 1980, Dani Kaplan has worked with manufacturers, distributors food distributors and food processors as the trusted advisor helping them lower their operating costs, stream line their operation and control the inventory.

Dani can be reached via SMC – http://www.smcdata.com/contact