Is Buying in Bulk the Right Move for Your Business?
If your business requires aluminum extrusions, it is likely you have considered purchasing direct from an aluminum extruder. “Cutting out the middleman” is a common milestone for growing companies who believe paying the lowest price for their raw materials is an essential step to scaling their business. Most companies soon find out raw-material cost is not restricting their growth and buying in bulk can be more constraining to growth by tying up resources like capital and floor space.
These “inventory carrying costs” can be difficult to quantify and often overlooked, but typically range between 20-30%. Here are a few costs that you need to consider before pulling the trigger on buying direct.
Cost of Capital
Capital Cost is the largest component of inventory carrying costs. Buying in bulk will require an initial outlay of cash that will be locked up until the raw material is manufactured and sold as a finished good. If the capital used to purchase inventory is borrowed, then there will be an interest cost. If on hand cash is used to buy inventory, then there is lost interest or gains from other investments that should be considered.
There is also an opportunity cost to purchasing inventory. Companies that tie their money up in inventory might miss opportunities to increase sales by investing in new equipment, hiring more employees, or increasing their marketing budget.
Cost of Storage
Bulk buys are going to require space in your warehouse to safely organize. This space has hard costs like rent (price per square foot) and more variable costs such as utilities, manpower, and equipment to handle. Space used to store inventory is space you are not using to produce your goods. This loss in potential production is another cost of carrying inventory.
Cost of Service
Inventory carrying costs include inventory service costs. Service costs include any insurance you may pay that is tied to the inventory value and/or taxes. Service costs also include the cost of inventory control like IT hardware or software required to manage the inventory, as well as the personnel needed to manage and complete cycle count.
Cost of Risk
Simply having inventory on hand presents risks which can turn into costs. Aluminum is a relatively soft metal that can easily be damaged, even when precautions are taken. When items spend too much time in the warehouse, there is a risk of aluminum extrusions getting lost or stolen. There is also risk of a shift in customer demand or product design which could create item obsolescence. The costs of risk can be hard to project but are very real and should be part of the inventory carrying cost consideration.
So, is buying in bulk the right decision for your business?
Step 1 – Determine how much you are spending on inventory carrying costs.
Step 2 – Compare your inventory carrying costs to the savings you expect from buying direct from the extruder.
If carrying costs exceed the expected savings, then you should keep your business at a service center like O’Neal Steel.
At O’Neal Steel we have been efficiently managing our customers’ inventory for nearly 100 years. We have worked hard to understand and minimize inventory carrying charges for ourselves so we can pass this value along to our customers. If you are looking for a partner to help you eliminate your own inventory carrying costs, connect with us. We would love to help you free up the capital and floor space to allow you to focus on the things needed to help grow your business!
