Hidden costs in the supply chain | ZDNet.de

Did you know that inventory management can cost you millions? The inventory of goods, sub-components and raw materials represents one of the largest assets in many companies. It ties up a large part of the freely available capital. However, the total financial burden of the goods and materials in the warehouse is only one of the cost elements in inventory and supply chain management. For a realistic cost accounting, all expenses that are incurred before the goods are actually sold or used must be taken into account. The real question, however, is whether those responsible are aware of all these costs and their impact? In order to bring more transparency into the costs and committed funds, it is worth first taking stock of the actual inventory and other associated costs.

Direct material costs Put simply, inventory can be divided into 4 main types: • Raw materials (often the most expensive area) • Goods in progress or parts of finished goods • Finished goods (depending on the industry, production only takes place on demand) • Technical Inventory for the MRO area (Maintenance, Repair + Operations - i.e. maintenance, repairs and operation)

All of these inventory items have a physical value and require special storage or handling requirements that can impact the total cost of inventory.

Hidden Costs However, there are many other factors that affect inventory costs. Some of the less obvious costs include: • Storage costs - this includes not only the actual warehouses or their rental costs, but also costs for equipment, special storage conditions, energy and the personnel costs for the warehouse employees • Depreciation - these are caused by wear and tear , damage and aging• Costs for insurance and security measures• Costs for software, licenses, certifications, etc.• Personnel and systems for order and delivery management• Exchange rates, bank charges, etc.• Expenditure on internal and external audits & market evaluations, risk management, Etc.

If the direct material value of the inventory is, for example, 20 million euros, then these additional costs usually make up another 15-25 percent of the amount. With an average value of 20 percent, that would be 4 million euros in extra costs.

Other financial implications of tying up capital An even less obvious factor is the financial impact that tying up capital in inventory and the associated cost items has on other areas of the business. Because the more cash is tied up in inventory, the less is available for the implementation of innovations, investments in projects, operational changes or marketing. This causes a lack of flexibility, so that the company can no longer react adequately to market requirements, for example.

If a company finances such measures with loans because there is not enough free capital available, corresponding borrowing costs are incurred. With an interest rate of three percent, the annual financing costs for a 20 million loan would be 600,000 euros.

“When companies make investments in innovations, new projects or targeted campaigns, they usually expect a return on investment (ROI) of 15 percent or more. In our example, that would be 3 million euros,” explains Sam Samson (MA, CPA) is Global VP and Managing Director EMEA at DSV IMS. "So that profit would be lost if a company didn't make strategic investments because the capital is tied up in inventory."

Approaches to Optimizing Inventory Management Being aware of all the parameters that affect actual inventory costs is the first step in optimizing activities while realizing real cost savings. These can include balancing cash flow, improving inventory management, and taking steps to improve a company's competitiveness.

When it comes to different parts of inventory and how to optimize it, there are several key considerations to make. The first priority for most companies is the availability of the means of production: suitable material must always be available to meet demand. This can vary greatly due to influences such as seasonal demand, targeted marketing campaigns for specific products and other market developments. It is therefore important to ensure that as little inventory as possible is kept in the warehouse for a long time and ties up capital, but at the same time that it can be made available quickly when it is needed - keyword "just in time".

Hidden costs and untapped potential in inventory management With a constantly growing number of suppliers that have to be looked after by purchasing departments and supply chain managers, this is a real mammoth task. In addition to optimizing order quantities, suppliers must also be validated and supported. In addition, the administrative side, such as purchase order management, invoicing and the management of SKUs (stock keeping units) etc. must be taken into account.

“One possible approach is therefore to focus on the core suppliers and to outsource the management of the many suppliers for non-business-critical materials to a partner. Specialized 'super-suppliers' take on the management of these non-mission-critical suppliers, as well as responsibility for the supply chain and the availability of the goods,” explains Sam Samson. “This means that they ensure that the required items are always available in the warehouses in the optimal quantity and at the optimal price. In addition, they have more tools and, if necessary, additional sources of supply to optimize the flow of goods and the associated costs. In addition, the funds tied up in inventory can be drastically reduced in order to use them instead for the implementation of important measures - from digitization to innovation developments and marketing. A super-supplier can also reduce the number of financial and operational transactions and resources required, as well as the costs associated with invoicing or making payments to many different suppliers in different regions and currencies. The goal is to consolidate the entire payment process and issue one invoice in one currency once a month. Suitable super-suppliers can offer crucial support and advice here.”