For many companies in the technology industry, being asked to do more with less has become standard. Department leaders are expected to identify and implement ways to reduce costs and extend the life of capital investments. To that end, parts and equipment inventory is often the largest single asset on the balance sheet. It is also often the largest expense item on the Income Statement. Excellent inventory management is expensive, and the true cost of inventory extends far beyond the cost of the items and the cost of managing the inventory.
The complete cost of inventory management varies depending on the industry and the field. One benefit to explore within the technology sector is the value of using a third-party vendor to support inventory management. Below are some recognized and not-so-recognized costs of inventory management in the technology sector and the benefits of using a third-party inventory management vendor.
Capital and Finance:
The upfront capital required to purchase inventory and maintain a sufficient level of in-stock items for operations can be heavily burdensome for an organization. It is one key reason larger companies turn to third-party vendors. In competitive markets, third-party vendors often buy large quantities of inventory well in advance of service orders. These companies are betting on future orders in anticipation of new business. It’s a risky, yet strategic move in an effort to improve their chances of acquiring the client through highly competitive pricing. Another factor to consider is the cost of financing the purchase, which may mean a gap between payables and receivables that is financing the inventory.
Benefits from using a third-party vendor: The vendors often specialize in a niche market and have a larger client base of companies and therefore better access to inventory, parts and competitive prices. A third-party vendor can help reduce total cost of ownership and inventory procurement costs and the savings can then be passed onto the clients.
Storage and Warehouse Overhead:
The cost of storing inventory may seem manageable because it is a relatively fixed cost, especially when considering rent, utilities, taxes, insurance and associated costs for the facility. But what should also be considered is the lost opportunity cost. How else could the space be used? Could the warehouse space be sold for profit? Alternatively, could it be rented out to another company for their inventory storage and thereby produce a revenue stream?
Benefits from using a third-party vendor: Outsourcing to a third-party vendor can provide the convenience of a single point of contact and significantly reduce administration costs. It’s rare that all equipment and parts will come from one manufacturer, and using a third-party vendor streamlines the process. The vendor absorbs warehousing and storage costs associated with managing the inventory.
At first glance, the material handling expense may be viewed as the process of receiving the inventory, stocking, and order processing. However, there are the hidden costs of the employees’ wages, insurance, and benefits. Other expenses to consider include the cost of the equipment used for inventory management, from equipment purchase to the ongoing repair and maintenance. There are also expenses from supplies related to storing inventory, such as pallets, plastic coverings, labels and related items.
Benefits from using a third-party vendor: The vendor relieves the company of high costs associated with materials handling and frees capital for use to support other areas of the core business.
Operating Costs from System Downtime:
The more that society and businesses become dependent on technology, the more system downtime seems inevitable, but the loss can be mitigated using an experienced third-party vendor. If field engineers are able to arrive for repairs but parts aren’t readily available, the downtime worsens and costs rise. Depending on the equipment, downtime directly affects the quality of customer service and revenue.
Benefits from using a third-party vendor: Third-party vendors invest tremendous amounts of capital in training technicians. Vendors with ISO 9001:2008 certification offer greater assurance of capability and expertise. The expertise of technicians allows them to identify what is likely to go wrong long before it will and lengthen the lifecycle of parts and equipment. Third-party vendors build their business around fast, reliable services and have established depots in strategic geographic locations to ensure parts are ready when needed. The expanded footprint also offers savings on inventory management, infrastructure and system downtime, and they pass these savings onto clients.
Insurance and Taxes:
Inventory is considered an asset and to protect the company it must be insured. There are also taxes assessed for inventory. These costs fluctuate based on the value of the inventory and can often be difficult to calculate when creating a budget.
Benefits of a Third-Party Vendor: Costs associated with insurance and taxes remain with the vendor.
Investment Opportunity Cost:
In addition to the opportunity cost of storing inventory, there are other opportunity costs from purchasing the upfront inventory. Inventory that is not in use isn't producing revenue. There is the lost opportunity of investing this money in something that produces a return, such as a money market account or mutual fund.
Benefits from using a third-party vendor: Third-party vendors offer scalable solutions to best meet the operational needs of the business and at the most competitive price. This provides the opportunity for capital to be used for other business opportunities that support the core business.
While employee costs may seem straight forward, there are employees outside of the materials handling process to consider. This includes the percentage of time employees in the accounting department use to capture the costs of inventory, the cost of management time and supervision of the inventory process, and the high costs of training repair technicians.
Benefits from using a third-party vendor: Using a third-party vendor places the accounting and leadership functions on the vendor. Training qualified technicians and engineers on repair is also transferred to the vendor. At Key-Services, for over ten years our engineers have built a knowledge base that spans a variety of equipment made my several manufacturers. The field engineers test and service hardware from all the leading suppliers.
With business growth, there are the added costs of building out infrastructure to accommodate the growth.
Benefits from using a third-party vendor: Using a third-party vendor offers scalable, flexible service to fit the current and future business operations. Vendors, like Key-Services, also offer 24-hour, 365 day online support through a customized web portal.
As you can see, there are significant benefits using a third-party vendor for inventory management. Choosing the right partner is important. When looking for a partner in a third-party vendor, it’s important to look for these key capabilities.
- ISO 9001: 2008 certification, demonstrating a commitment to continual improvement and quality
- State-of-the-art infrastructure and extensive knowledge base to with the ability to manage all aspects of product support
- Responsive service available 24 hours per day, 365 days per year using a customized web portal.
- Ongoing training for technicians and engineers on a variety of equipment and manufacturers.
- Reverse engineering capabilities to assist with branded and non-branded parts repair.
- Scalable, flexible workforce with strategic partnerships for responsive, fast, reliable service.
- Customizable web portal for streamlined project and inventory management.
Learn more about partnering with Key Services and our capabilities at www.key-services.com or contact us at 336-768-4400.
This article was first published on LinkedIn by Michelle Deal.