For electronics buyers, inventory control tends to be one of the most challenging aspects of procurement and supply chain management. Making the hurdle especially cumbersome is that fact that purchasing agents are often responsible for costs, contracts, negotiations, supplier selection and market knowledge while inventory managers ensure that products are available on time when needed and with as little investment and risk as possible. With two different departments heading up the chargeThe amount of electricity present upon the capacitor's plates. Also, the act of forcing of electrons onto the capacitor's plates. See CoulombA coulomb is the unit of electric charge. It is named after Charles-Augustin de Coulomb.1 coulomb is the amount of electric charge transported by a current of 1 ampere in 1 second. It can also be defined in terms of capacitance and voltage, where one coulomb is defined as one farad of capacitance times one volt of electric potential difference.., the path to inventory reductions can be tricky, at best.
"It can be a lot like herding cats," says Rich Rafdahl, founder and president of Chicago-based procurement consultancy Cost Reduction Specialists, Inc. The fact that every organization has its own unique perspective on how inventory should be managed can also hamper reduction goals, he notes.
For example, a highly profitable organization may want to invest in additional "safetyClass X capacitors are used in "across-the-line" applications where their failure would not lead to electric shock. Class X safety caps are used between the "live" wires carrying the incoming AC current. In this position, a capacitor failure should not cause any electrical shock hazards, rather, a capacitor failure "between-the-lines" would usually cause a fuse or circuit breaker to open. stock" to maximize fill rates and service levels whereas a firm with cash flow limitations is apt to scrutinize every dollar spent on inventory. "Obviously," Rafdahl points out, "the latter scenario is by far the more challenging."
Wanted: More favorable terms
"Typically, cash flow limitations are the primary issues for businesses that carry sizeable inventory to service their organizations," says Rich Rafdahl, founder and president of Chicago-based procurement consultancy Cost Reduction Specialists, Inc.In many cases, procurement agents are in the perfect position to take over the inventory reduction cost-cutting reins. Two of the most effective ways to reduce inventory investment and save procurement dollars are by working with suppliers to negotiate more favorable payment terms and/or negotiating with them to reduce minimum order requirements. Neither idea is revolutionary, but when combined the two strategies work in tandem to create a more cost-conscious approach to purchasing.
"Typically, cash flow limitations are the primary issues for businesses that carry sizeable inventory to service their organizations," says Rafdahl. Assuming that the buyer's company is in "good favor" with its suppliers, one of the best ways to tackle this challenge is by requesting extended payment terms. For example, if your firm is currently paying its invoices net 15 or 30 days, Rafdahl suggests asking for 60 days or longer.
"If you have been using a particular supplier for a while, it will often accommodate such requests to maintain its position with your company," says Rafdahl. And even if you are only able to secure net 45 terms, "You have now delayed the payment to your supplier by 15 or more days, which may significantly help relieve the cash flow pressure," says Rafdahl. This strategy can prove especially useful when your customers are demanding similar extensions. "If you don't negotiate terms with your suppliers," he adds, "there will always be a cash crunch."
Lower minimums, please
The next step is to negotiate reduced supplier minimums – a strategy that many buyers overlook when initially setting up contracts with new suppliers. In many cases, any dollar- or volume-based minimums can push a company to procure more product than it needs, thus increasing inventory (and related costs). "If your company has a good reputation in the industry and has paid its bills in a timely fashion," says Rafdahl, "then requesting reduced minimums is an excellent strategy."
And even though phrases like "$5,000 minimum order" may appear to be written in stone on the contracts you initially signed, Rafdahl says there's always room for negotiation on this key point. In most cases, he says the sales rep or a sales manager will be able to infuse some wiggle room into the terms, but in other cases, you may have to work with the company's management to spell out the desired terms. "Look at how much you're buying from that supplier over time," says Rafdahl, "and come up with a win-win agreement over just how big or small your minimum orders should be."
The end game
Rafdahl says effectively negotiating extended payment terms and minimum orders are practices that will sit very well with the typical CFO. These approaches can also help position the buyer as a cost-conscious professional who isn't solely focused on bottom-line pricing. "A lot of times, buyers get so focused on price that they overlook any other potential for soft savings," says Rafdahl, "and forget the other components that go into improving the overall financial health of their organizations."
