For reaching essential business profitability goals, managers usually employ two strategies: they either try increasing sales or changing the pricing policy. But in a competitive market place, the reach of these initiatives is severely restricted, limiting the maximum profit that can be obtained. In these situations managers need to find innovative ways to raise profitability. Many times, they lose sight of the fact that the profit can also be raised by lowering costs.

For companies specialized in production and distribution stocks weigh heavily when calculating costs. Intelligent stock management can lead to considerable cost reduction and even a raise in revenues.



1. When calculating profit, include stock into the equation

Stocks influence both costs and revenue, and they can significantly influence your financial outcome. Keep in mind that stocks can generate a large number of costs besides the cost of acquisition. These are: storage costs, damage/expiry costs, indirect costs that stem from blocking your ability to store other resources.

Also, take into consideration that stock revenue generation is not limited to the sale of the stock. By meeting supplier targets, optimizing acquisition volumes to meet discount criteria and by choosing the most profitable suppliers for you, you can generate revenue comparable to sales margins.

2. Correctly predict market demand

Market fluctuations have diverse and sometimes unpredictable causes: the evolution of the economy, national and international political events, seasonality, etc.

Fluctuations in consumer demand are amplified along the supply chain. The longer the chain, the more the fluctuations are amplified. For example, if customer demand grows by 5%, the supplier for that customer will predict a 7.63% rise in demand. The supplier’s supplier will estimate a 10.31% growth for the next period. Following this algorithm, the longer the supply chain, the more the predictions varies from real demand. This is known as the bullwhip effect. These distortions can be minimized by using instruments that can be correctly parameterized and can make use of historical data to eliminate unneeded acquisition of stock.

3. Match stock purchasing to demand by taking into account:
  • Inventory turnover over one or more prior periods;
  • Minimum stock;
  • Supplier lead time;
  • Seasonality;
  • Preferred suppliers;
  • Stocks in all warehouses.
  • Information is lost at the launch of new orders:
4. Implement a standardized purchasing process

In most companies that have a large number of clients or an extensive product portfolio, purchasing tends to generate a significant amount of chaos:

  • Information is lost at the launch of new orders:
    • The best deals and commercial terms are not taken into account;
    • Client orders that were not filled due to lack of stock get ignored;
    • Long delivery times;
    • Stocks available in other warehouses;
  • No visibility for orders on route to being delivered;
  • A lot of time wasted on defining supply needs and what suppliers to buy from;
  • Most of the time, market conditions change before the purchase plan is defined, thus making the plan inefficient.

These challenges can be overcame by implementing a standardized purchasing process, adapted to your companies’ needs, that can be run quickly and effortlessly, so that changing market conditions can be avoided. This kind of process will give you transparency and flexibility and will greatly improve your operations.

We have identified 6 Best Practices for configuring you standardized purchasing process:

  • Store and use historical sales data;
  • Store supplier prices and commercial conditions in your system;
  • Define your own automated purchasing algorithm;
  • Test multiple scenarios (optimistic/pessimistic/expected);
  • Using your system, earn the ability to instantly turn data into information to support your fundamental management decisions;
  • Only buy what is necessary. Use the stocks you already have to the full extent.

The leader in business software solutions, SAP AG, published a list of benefits gained from using specialized purchasing instrument. The list was created using the experience the company has gained from customers that use their products.


Evidently, these benefits can only be obtained through adapting processes and solutions to your company’s specific requirements and calibrating your activities efficiently. Good standardized business flows that include knowledge and expertise gathered by the company, combined with industry best practices can decide the winner in free market conditions. Make sure yours are not holding you back.