Tag Archives: supply chain management

What is Working Capital and Why Does it Matter?

Posted on by
Share
Tweet
Share
Find the right level of working capital to grow a healthy business

Find the right level of working capital to grow a healthy business

Working Capital is an important financial metric for understanding your company’s operating liquidity (the ability to convert your assets into cash for the purpose of paying the bills). Knowing your amount of working capital can also guide your inventory strategies, leading to smarter buying decisions.

By the book, the definition of working capital is:

Working Capital = Current Assets – Current Liabilities 

In other words, it’s the cash you have left over once all payments due to you are collected and your bills are paid.

If your company maintains an inventory of goods that you sell to your customers, the formula can be expanded to:

Inventory Value (value of items for sale and items used to make goods for sale)

+ Receivables from Customers (cash owed to company for sales)

+ Rebates from Suppliers (Discounts for buying a certain value, quantity, or within a certain timeframe)

– Payables to Suppliers (cost of inventory)

= Working Capital.

What’s considered a healthy working capital varies from industry to industry – but in theory it should be as low as possible.

A low working capital is a strong indicator that your company is finding the right balance between what you have on your shelves, the revenue you are generating, the investments you are making in your future, and the debts you owe.

A high working capital can be a sign your business is booming, but it can also mean you’re missing investment and growth opportunities.

Another Insightful Approach

In the business world, working capital is usually measured not by the cash figure of assets minus liabilaties, but by what’s known as your current ratio, which is:

Current Ratio = Current Assets / Current Liabilities 

According to Investopedia, your business should aim for a current ratio between 2.0 to 1.2, but this varies by industry; here are some average current ratios for industries you’re likely in, according to CSIMarket:

  • Internet, Mail Order, & Online Shops: 1.12
  • Wholesale: 1.29
  • Food Processing: 1.26
  • Miscellaneous Manufacturing: 1.55

A ratio higher than 2 is a sign that you’re not properly using your funds – either in the form of carrying too much inventory or not capitalizing on extra cash by investing in growing your business, while a ratio lower than 2 may make it difficult to find the cash you’ll need to pay your suppliers and other debts.

The metric changes as quickly as you make sales, pay suppliers, or increase your inventory – but by understanding how the decisions you make affect it, you can take control of your working capital instead of letting it control you.

Here are some aspects of your operations to consider as you create your working capital management strategy:

Turn Down Supplier Discounts

Just say no (sometimes)! Avoid the temptation to take advantage of supplier discounts when they mean ordering more inventory than you need right now.

Sure, you could buy three times the materials to reduce your per item cost by 75{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3}. But unless you can actually sell that inventory, you risk filling your shelves with stuff that can quickly become obsolete, broken, or buried.

By collecting data to understand your what your customers want and when, you can better decide when it’s the right time to take advantage of these discounts.

Achieve Negative Working Capital

There are two ways to look at negative working capital – one way is a signal of financial distress for a company indicating you have spent more money than you have.

A more positive definition involves a strategy that requires careful thought and planning.

By setting terms of payment with your suppliers that give you enough time to collect from your customers before you pay for the raw materials of the items you sold – you are in essence borrowing cash from your suppliers to free up more money for your day to day operations.

This strategy requires an in-depth understanding of your customer demand cycles to ensure its possible to sell all your inventory and collect from your customers prior to your invoice due dates.

Negotiate your payment terms with your own billing cycle in mind. Be sure to give yourself an overlap period where you have cash payments in the bank, but no invoices due for the products and materials you just sold.

For example, let’s say you made $100 in sales for product X and have collected all payments due from your customers.

You owe your suppliers $50 for the raw goods you used to make product X, but the invoice isn’t due for another two weeks.

Because working capital only factors in supplier payments that are currently due, your working capital is a $100 ahead instead of only $50 – which is what it would be if you had to pay your supplier at the same time you collected payment.

Maintaining a negative working capital balance frees up cash to take advantage of opportunities to spend money on growing your business and reducing debts.

Control Inventory Levels

Inventory reduction plays a major role in achieving an ideal working capital – the less inventory on hand, the less you owe to suppliers, tipping your working capital in your favor.

Take control of your inventory levels by putting your sales and purchasing history data to work helping you predict the optimal levels of inventory necessary to operate.

The goal is to use that data to find the right balance between demand, production, and ordering raw materials or stock.

Order too much and you’ve tied up cash resources in product or materials that aren’t making you money. Purchase too little and now you run the risk of losing sales to your competitors who do have the product available for sale.

If this all seems like an elaborate guessing game, you’re not alone. Learn more about inventory reduction in our earlier post. From “lead times” to “just-in-time,” it covers the basics you need to know to get started.

Find the Balance, Achieve Results

Businesses of any size can find a healthy balance of inventory, taking advantage of supplier discounts, and payment cycles by leveraging inventory management software thanks to cloud-based tools like DEAR Inventory.

 

Want Better Data to Make Better Decisions?

Experience the tracking and reporting power of modern cloud-based inventory management software by starting your free 14-day trial of DEAR Inventory today!

Try DEAR for Free

No Credit Card Required

 

Share
Tweet
Share

3PL Providers Can Make Your Business More Profitable

Posted on by
Share
Tweet
Share
3PL Providers Increase Profits by Making Logistics Easy

3PL Providers Increase Profits by Making Logistics Easy

3rd party logistics or 3PL services are rapidly becoming a crucial asset to businesses who want to be more efficient and productive by focusing on their core competencies.

A 2016 study revealed that 70{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} of businesses who use 3rd party logistics say that it has contributed to improved customer service, and 75{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} of all businesses polled say that 3PL providers offered new and innovative ways to improve logistics effectiveness.

And according to consulting firm Armstrong & Associates, 86 percent of domestic Fortune 500 companies use a 3PL provider.

Despite the growth the 3PL industry has seen over the last few years, many companies – perhaps yours included – are still confused about what exactly 3rd party logistics has to offer and are concerned it may not be the best fit for their business.

So we’ll give you a brief overview of the benefits of outsourcing your logistics to a third party and a few steps for finding and hiring the 3PL that’s right for your business.

But first, let’s make sure we’re on the same page about what exactly a 3rd party logistics provider is.

What Is a 3rd Party Logistics Provider?

A 3rd party logistics provider can handle anything related to logistics in your supply chain, such as:

  • Warehousing
  • Picking and Packing
  • Packaging
  • Transportation
  • Freight Forwarding
  • Inventory Management

3PL services can specialize in one of these in particular, or they can offer a bundle of them.

But is hiring a 3PL firm right for you?

Like so many things in business, it depends.

Most major companies do outsource at least some of their supply chain management. If you have a large stock, or you’re a retailer with a quickly growing business, then handling tasks like warehousing, packing, shipping, etc. can become way too much to handle internally.

If you’re a smaller company or lean startup, then a 3PL may not make sense financially, yet. Spreadsheets are cheap and may get you by for now, but as your business grows in size and complexity, you may want to take a second look at outsourcing to a 3rd party logistics service.

But, if you think a 3PL might be the right solution for your business, let’s look at some of the benefits they have to offer.

Benefits of 3PL Providers

The 3rd party logistics is growing so quickly because large and small companies alike recognize the need to reduce non-essential and inefficient in-house operations and processes. And 3PLs can help you do just that!

Let’s check out a few benefits of using a 3PL provider.

They Reduce Overhead and Labor Costs

This is the big one for many companies.

If you handle all your logistics in-house, you’ll have to pay for:

  • Employee hiring and training
  • Worker’s compensation and liability costs
  • Warehouse space
  • Transportation vehicles and fleet maintenance

But with 3rd party logistics, you pay the provider a single agreed upon rate to handle any and all of those details.

And since 3PL providers are experts at what they do, you won’t be spending money on costly mistakes made by inexperienced employees or operational failures caused by wear and tear on your equipment and facilities.

They Offer Lower Rates for Shipping

3PLs also have access to a large network of distribution resources. Since they ship thousands of packages each year, it’s essential for them to develop close relationships with other service providers to operate their business as efficiently as possible.

And a huge part of this is negotiating lower freight rates, lower shipping costs, and better discounts on the services they use.

It can take you years to build up the same network that an established 3PL provider already has by yourself, not to mention the opportunity cost of dedicating your time and attention to more important activities – which means outsourcing your logistics is a sure way to save on shipping costs.

They Have a Distributed Network of Warehouses

Even a relatively small 3rd party logistics service could likely have warehouses in California, Illinois, and Florida.

This puts them in a position to more efficiently distribute your stock for faster shipping throughout the states.

And if you find a 3PL that has warehouses in other countries, they could help you break into new markets through lower overseas shipping rates and more effective expediting of packages when needed.

They Allow You To Focus on Your Core Competencies

The rise in 3rd party logistics is being driven by the need for newly launched and established businesses alike to become leaner by focusing most of their efforts on core competencies.

Hiring a 3PL allows your team to focus on what you’re best at whether that’s manufacturing, marketing, selling, or all of the above, that doesn’t likely include logistics.

And by narrowing your focus, you’ll be able to provide better products and services through more efficient operations.

3 Steps for Hiring a 3PL Provider

3rd party logistics companies can differ dramatically from one another; this isn’t the case where you can take a relative shot in the dark and expect the majority of the benefits 3PLs can provide.

To find a 3rd party logistics service that truly maximizes your ROI by catering to your unique business needs while also adhering to industry standards, follow the steps below!

1. Choose the Right Kind of 3PL Service

Your business’ particular needs – the products you sell, where you sell them, and how fast you need your products shipped – will all determine which type of 3rd party logistics company you should choose.

  • Some are warehouse specific companies that also provide trucking services
  • Some are strictly freight shippers who also offer warehouses.
  • And others handle the managerial and technological aspects of your logistics while outsourcing shipping to a different 3PL

To help you find a logistics company that will best cater to your needs, check out this helpful list of 3PL providers in your area.

2. Request a Quote on All Services Provided

Once you have a list of 3PL providers you’re interested in, you’ll need to send a request for a quote.

The company you hire should be able to handle every requirement you have at a price you can afford, which means you’ll need to gather a list of requirements from your team to send to your potential 3rd party logistics providers.

Make a list of everything you think (or better yet, know!) makes sense to outsource and the details related to these, which might include:

  • All of the facilities that you’ll need to ship to and from.
  • Your average number of shipments per month.
  • Your current warehousing capacity.
  • Any special transportation requirements.

This list should be as detailed as possible. By giving a potential 3PL provider as many details as you can, you’ll be able to get a more accurate estimate and begin to build a strong working relationship.

3. Integrate Their Services with Your Systems

All 3PL providers have particular operational processes to maximize their efficiency, but you’ll also likely want them to adopt some of your systems in order to satisfy your unique requirements.

The best 3PL providers will use a “mix and match” strategy that identifies your current issues and works with your existing procedures while blending in their own strategies for success.

Perhaps most importantly, they should fully integrate with your inventory management systems so both of you know how much has been shipped, how much needs to be shipped, and how much you have in stock to ship.

To streamline this integration as much as possible, you should invest in a cloud-based inventory management system that makes it easy for both of you to automatically track orders and integrate your sales processes with their distribution systems.

With the right software, you’ll be able to easily send any orders you receive directly to your 3PL when they come through and they’ll be able to begin the fulfillment process in the shortest possible time.

Finding and integrating with a 3rd party logistics provider won’t be without its headaches, but for many businesses, the benefits far outweigh the costs.

And by following the steps we’ve listed here, you’ll be able to find a 3PL provider that helps you save money, improve efficiency, and expand your business.

 

Get Your Business Integration Ready

With a cloud-based inventory management system that automatically tracks all your sales, purchases, and stock levels, provides you real-time reports, and easily integrates with top business services, you’ll see time and cost savings both now and when you’re ready to bring on your new 3PL provider.

Try Dear for Free

No Credit Card Required

 

Share
Tweet
Share

Choosing the Right SCM Software for Your Wholesale Business

Posted on by

Share
Tweet
Share

A recent analysis of supply chain professionals in a variety of industries and business sizes, business software consulting firm Software Advice discovered a staggering 34{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} of them still rely on manual methods and legacy systems for their supply chain management (SCM) needs.

Software Buyers’ Current Solutions for Supply Chain Management

If your wholesale business only has a handful of suppliers, distribution channels, and team members, you may be able to get away with time-consuming pen and paper or clunky spreadsheet methods.

But as your business continues to grow, the limitations of these manual methods will quickly become a pain, standing in the way of the efficiency you’ll need to expand.

That’s where modern SCM software comes in.

3 Reasons Your Current SCM Solution Needs Replacement

As your customer demand begins to overwhelm your current supply chain systems, it can be incredibly tempting to implement quick-fixes to keep up without investing the time into finding a proper SCM solution – one that’s easy to implement and able to support the continued growth of your business.

Whether you’re stuck using manual systems or outdated SCM software, a few key reasons you’ll want to consider upgrading include:

It’s Too Much

Perhaps your current SCM solution works well for you, with all the bells, whistles and features you need.

But was your company sold on a fancy system overloaded with features you’re never going to use?

If that’s the case, finding new SCM software that more exactly meets your needs presents a great opportunity to streamline your operations and lower your IT and management costs.

It’s Not Enough

Perhaps your current SCM solution isn’t enough – either you’re using manual methods like spreadsheets or relying on outdated software.

You might even have a modern platform that’s worked so far – top business apps like Shopify and Xero usually contain modules to support inventory and warehouse management.

But often these types of systems work well until your business reaches a certain size, after which they continue to cause headaches and inefficiencies as you struggle to keep up with increasing demand.

In this case, switching to modern, specialized SCM software can save plenty of time and money – both now and as you continue to grow.

Its Support is Lacking

The best supply chain management software in the world is useless if it’s constantly breaking or hard to maintain.

And with the ever-expanding number of highly useful business management applications, being able to properly integrate and tailor SCM systems to your business’ needs is crucial to staying competitive.

That’s why highly-skilled, quick-responding customer support is an essential part of the best SCM software.

How the Right SCM Software Can Improve Your Business

Software Advice also found that the key factor driving the switch to a new SCM solution was modernization, meaning two things:

  • Increased automation of business processes
  • Closer integration of business systems

Software Buyers’ Pain Points With Existing Solutions

SCM Software Pain Points

Automation

Automation may be the buzzword of the day in the supply chain management world, but that’s for good reason – being able to quickly and efficiently manage your production from component purchasing to sale fulfillment can make or break a growing wholesale business.

Too often businesses rely on inefficient practices like manually syncing supplier invoices from their ordering system to their accounting system – which not only leads to overspending on labor but also increases the risk of costly errors.

Automating these repetitive tasks to save time and reduce errors is a key benefit of modern supply chain management software.

Integration

With the increasing move to software-based business systems, integrating everything from sales portals to fulfillment systems, production lines to accounting software is key to maintaining your business’ ability to expand.

Because these business systems are often managed by individual applications, the ability to glue them all together and manage everything from one easy-to-use platform is an important feature to look for in new SCM software.

Business Growth

Ultimately, the goal of upgrading to modern, fully automated, completely integrated supply chain management software is to support the growth of your wholesale business – both now and in the future.

A growing business is a great problem to have – but it comes with its share of headaches and challenges.

In many cases, growth means adding more warehouses, vehicles, and production lines to your business, all of which can quickly overwhelm your current solutions which until now have been able to handle a single warehouse or small fleet.

This means more growing businesses are starting to tie their continued expansion to improving their IT infrastructure.

If you’re actively focusing on growth, investing in improving your IT systems (including industry-leading supply chain management software) can add the scalability and flexibility you’ll need to support it.

Which is why cloud-based SCM systems are becoming more and more popular as they’re typically well supported, consistently updated, and offer flexible pricing based on your business size and needs.

3 Questions to Ask When Choosing New SCM Software

So how do you know which SCM software system is right for your wholesale business?

Ask yourself these three questions as you begin your search:

  1. What do we need it for?
  2. How compatible is it with our business?
  3. How reliable is the vendor?

What do we need it for?

The first and most important question to ask yourself when choosing the right supply chain management software is “What will I be using the software for?”

As you’re well aware, supply chain management is a complex process with different factors and needs depending on the particular demands of your business and industry, ranging from planning and strategy to manufacturing and logistics.

As a result, SCM software tends to fall into two categories:

  1. Software applications designed to automate the planning and organizing aspects of SCM, including choosing the best carriers and means of transportation, providing an overview of the supply chain, and mapping out production processes.
  2. Software applications designed to automate the execution of SCM related tasks, like determining product price and availability or alternate product logistics, and ensuring raw materials and components are available when and where they’re needed.

So take some time to consider the unique needs and goals of your business by asking yourself questions such as:

  • What are my business objectives?
  • Do I want an SCM solution that handles a specific task or one that covers all my basic SCM needs?
  • Do I need to choose software that’s compatible with my existing SCM software and those of my suppliers and partners?
  • What are my current bottlenecks and where could my company benefit most from automation?

Once you’ve answered these questions you’ll be able to more accurately evaluate which of the many available SCM applications is best for accomplishing your supply chain management goals.

How compatible is it with our business?

Next, you’ll want to consider how compatible your new SCM software options are with your existing software and business processes – including related activities like sales and accounting.

This can be a huge issue of resistance for many companies as employees are accustomed to doing things a certain way, and choosing software that requires a complete overhaul of your existing systems can be a costly investment.

So you’ll not only want to ensure your new supply chain management software truly makes your employees’ jobs easier, but will also be easy to retrain on and integrate with your business.

To that last point, all new software implementations will have challenges, which is why you’ll also want to ensure the vendor you choose has a highly qualified support staff to help you quickly resolve any issues as they arise.

How reliable is the vendor?

The final question you’ll want to ask when choosing an SCM software solution is “how reliable is the vendor?”

In this case, reliability essentially means two things:

  1. The company has been around for a while and will continue to be around.
  2. They offer the support you’ll need to implement, maintain, and upgrade the software as it improves and your business grows.

When it comes to B2B software as a whole, finding reliable, service-oriented vendors is a must to prevent costly downtime due to malfunctions.

And because supply chain software is such an integral part of your business, it’s especially important that your chosen vendor offers best in class support.

As a general rule, the longer a provider has been around, the more established they are in terms of clientele, and the size of their reach (local/national/global) are all important factors when considering your supply chain software vendor.

And whichever provider you choose, you should always have a “Plan B” backup in the unfortunate event that they close their doors.

When evaluating your top choices, be sure to find reviews from reputable sources and consider a few of the following questions:

  1. Is the company willing to modify the software when needed?
  2. Do they provide source code and documentation?
  3. What kind of personnel and resources are required to operate the software?
  4. Is the software user-friendly? How big is the learning curve?

Grow Your Business with the Right SCM Software

Hopefully now you’re better prepared to choose the right new SCM software for your wholesale business – including a better understanding of why it’s a worthwhile investment and essential questions to consider when choosing an SCM software solution.

Many businesses today are paralyzed by clunky, out-of-date SCM management systems, whether it’s legacy software that hasn’t been updated in years, or a painfully manual pen and paper or spreadsheet-based system.

The latest SCM software solutions can help you keep up with demand and prepare for future growth by streamlining your backend processes through integration and automation.

And when you partner with the right vendor, supply chain software can reduce your headaches and keep you competitive for years to come.

 

According to research from GetApp Lab, 55{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} of businesses are saving more than 5 hours a week with SCM software – so now’s the time to make the switch!

Get started with your free 14-day trial of DEAR Inventory today!

Try DEAR for Free

No Credit Card Required

 

Share
Tweet
Share