Many of us shop them. Their large open rooms filled from floor to ceiling with everything from bulk goods to appliances, televisions, jewelry computers, and more. Of course, I’m talking about the warehouse membership stores. We know their names but the names aren’t important. What is important is that you can buy a case of anything, a pallet of other things and save. Save if you need that much.
Warehouse membership stores are promoted as a way for consumers to buy in bulk and because of that bulk, save money. Not only do they offer a bargain to the individual for just about anything they need for home, but they also promise a bargain for business owners and all of the things they need or want. But how much do you really save when you buy in bulk?
When business owners purchase anything from office supplies such as pens, printer ink, paper, to bulk goods like fertilizer, paint, motor oil and so on it is inventory. Something you buy today to support your product or service now or in the future. It is no different than if you bought lumber, bricks, pipe, electrical wire, sheet metal or anything else you use in your business.
Now I like a good deal as much as anyone else. So when I see a pallet of printer paper with 4 cases of paper at ½ the price I would pay if I bought the cases individually, I see savings. I could very easily be wrong. Sure, the cost per ream is about 1/4th of the regular cost when I buy in bulk. I can easily see that this is less than I would spend buying them individually. However, when I buy in bulk, I have to consider all of the inventory costs. Some business owners struggle with that. All they see is I bought 100 of something at $100 and if I bought 10 of that same thing it would have cost me $25. Therefore they cost me $1 a piece instead of $2.50 a piece. Seems logical.
The Business Dictionary defines inventory cost as “The cost of holding goods in stock. Expressed usually as a percentage of the inventory value. It includes capital, warehousing, depreciation, insurance, taxation, obsolescence, and shrinkage costs.” In other words, inventory costs are more than just what you paid for them. It should be plain that when you buy inventory that you do so with the intent to use it.
It is when you don’t use it quickly that your extra costs could rise up and bite you. Consider the storage costs (warehousing). You pay for that space. If it is in a building you heat or cool, you pay for that. As it sits on a shelf waiting to be used it could be damaged by water, insects or rodents, aging, mishandling, etc. Once it is damaged, you may not be able to use it. Now what you have is waste. You wasted the dollars you spent thinking you were getting a great deal and you wasted whatever it is you bought. Waste is a huge cost to any business. The challenge you always have is:
You can miss out on sales when you don’t have enough inventory on hand but can tie up your cash with too much inventory.
Determining how much of something you need depends simply on how fast you will use it. Remember, the quicker you use it, the lower your cost. This speed of use is called inventory turnover. The average small business owner doesn’t need anything fancy or complicated to determine this. They simply need to use this formula:
Inventory Turnover = Costs of Goods Sold (COGS)/ Average Cost of Inventory on hand.
If your Cost of Goods sold in a year is $50,000 and your average inventory on hand is $5000 that means you turn your inventory over 10 times a year. It is as simple as that.
Now, how does that help you determine how much inventory you should have on hand? This is where knowing your industry comes into play. The more you know, the better you can manage. If the average number of times is 10, then you are doing good If the average number of times is 20, then you have excess inventory.
Business research has always shown that having less inventory is better for your business than having too much. By showing an understanding of inventory management and improvement, you will be contributing greatly to the growth and sustainability of your business. Keep track of your inventory turnover by calculating it at least monthly. The formula is simple and you have the other information to complete the simple formula above.
So whether it is a Big Box Store or another provider, buying in bulk isn’t always good.