Microsoft Dynamics NAV News & Tips
Managing Your Inventory: Are Greater Discounts a Greater Bargain?
Inventory is a critical concern of distributors and manufacturers alike. How that concern manifests itself will certainly change between periods of economic expansion (do I have enough?) and contraction (do I have too much?), but it remains the critical concern throughout.
Given the economic situation, even prosperous companies are implementing a more conservative inventory strategy these days. In an effort to boost sales, many suppliers are reducing their free freight minimums (e.g., free freight on orders of $1,000 or more) and/or are offering even deeper discounts (e.g., take an additional 2% on orders of $1,000 or more). How can you tell when these promotions are justified?
Free freight is nothing more than a discount offered at a specific quantity and can be analyzed in the same manner as all discounts, assuming you have a stable pattern of purchasing with that vendor to provide a standard to compare against.
The real question is this: Does the additional expenditure make the total cost more than it would be if there were no discount offer? Total cost includes direct and indirect costs such as freight and carrying cost. To put it in simpler terms, what is the “best buy”?
Although this appears to be a straightforward concept, it is not - far from it, in fact. There are numerous pieces of information to be analyzed, such as cash flow, the value of money, lost opportunities (real and potential), and even if this vendor’s product line is the right one to be investing in.
Assuming this vendor’s product line, or at least several items within it, is one of your top sellers and that you have determined it’s in your best interest to review the discount offer in earnest, you now have some very straightforward calculations to make.
First you must gather some critical information from Dynamics NAV. For the purpose of this article, we will use version 5.0. If your version does not offer the same functionality, please email your ICS Support NAV team for assistance.
1. Monthly Carrying Cost (Annual Carrying Cost /12). Many experts believe carrying cost is too difficult to calculate and recommend using a “default value” of 25%. However, carrying cost can range from 18% to 35% - and possibly even higher! Therefore to truly determine the impact of discounts and special offers from your suppliers, it is well worth the effort to calculate carrying cost and understand the factors contributing to it.
2. Average monthly cost of sales for this vendor’s product line. This represents the monthly supply required from this vendor.
The Analysis Reports option of the Sales & Marketing menu provides an excellent place to view the monthly costs of goods sold by vendor:
Notice that the Sales Turnover column is blank - this is because the Source Filter has been set to vendor, which only records the cost side of the transaction.
To determine the actual monthly costs, the “31” (or monthly) trendscape time period button in the lower left should be set. The month displayed can be determined on the General tab, and you can scroll through the periods using the Previous/Next buttons:
We recommend drilling down a little further when determining the average monthly supply from a vendor to understand the item mix. Does the monthly supply represent a number of items or is it limited to one or two? If it’s the latter, you may want to perform all of the calculations, including the carrying cost, using information for just these few items. In addition, this situation represents a selling opportunity in that you may want to offer an incentive of your own to your customers, or simply ask for a forecast and/or purchase commitment.
3. To analyze Free Freight offers, you will also need to know the average cost of freight per purchase dollar (what it costs for your vendor to send you a shipment).
a. If your vendor includes freight on your invoice, this is a straightforward exercise.
To view the vendor’s invoices, select Vendor Ledger Entries from the dropdown Vendor menu on the Vendor card, and filter on Document Type: Invoice.
Once a line is selected, you can Navigate it to view the actual invoice document and determine the actual freight amount. Divide freight by the dollar amount for the shipped merchandise to get the freight cost per dollar.
b. If freight comes from a third-party you must dig a little deeper - or contact a freight company for an estimate (recommended).
Armed with this information you can now begin the calculations as Jon Schreibfeder, author of Effective Inventory Management, has outlined in the two articles listed below.
To fully understand the opportunity your vendor is offering, you will need to perform the calculations on several different scenarios for comparison purposes. For instance, calculating the total cost of a free freight offer is meaningless unless you compare it against your standard purchase with that vendor. For an even greater evaluation, you might want to calculate total cost using the vendor’s minimum order point as well.
The results of identifying the “best buy”, or the purchase that provides the lowest total cost, can be surprising.
Your feedback is welcome! If you have tips/tricks you’d like to share on how you are using Dynamics NAV to make better inventory decisions, please send them to mikep@ics-support.com at Integrated Computer Systems Support.
The real question is this: Does the additional expenditure make the total cost more than it would be if there were no discount offer? Total cost includes direct and indirect costs such as freight and carrying cost. To put it in simpler terms, what is the “best buy”?