Inventory – it’s something your business needs regularly. You can either conduct your own inventory in-house or outsource it to an inventory service provider.
Unfortunately, no matter which way you go there’s a cost involved. If you’re using your own employees, you either have to shut down your store or pay overtime to inventory your stock after closing. Aside from the cost, efficiently gathering stock data and aggregating inventory results requires a certain level of programming and engineering – an expertise that you may not possess.
Whatever the reason you’ve decided it’s best to outsource your inventory, the bottom line is that you should be able to save as much money as possible. Here are a few tips for getting the best price from an inventory service provider.
Search for Local Independent Inventory Service Providers First
For many business owners, 2 primary inventory service providers come to mind: WIS and RGIS. There are other growing inventory service providers like Accurate Inventory and Reliant Inventory that may come to mind, as well.
It’s true that there are quite a few remote areas in which these companies’ willingness to travel makes them about the only option. Generally speaking, though, there are local, less expensive inventory service providers in your area; you just have to look for them.
Much of the information you’re going to read in the following sections of this article applies to corporate inventory service providers – not small or family-owned businesses.
Remember that the larger a company becomes the more expenses it accumulates; so there is a combination of a variable cost model and corporate greed that causes rates to be increased over time. You should still take the time to compare rates, but you will most likely find that you get a much better offer from a local service provider rather than an international inventory corporation.
Understanding Inventory Service Billing
Every inventory service provider has different procedures for determining what type of billing should be applied, but there are general consistencies among them. Here are some important facts to know about standard inventory service billing practices.
Net Profit Target
The first thing you need to know is that – for many inventory service providers – there really is no set cost; it all depends on a variety of factors. Rather than a set cost, there is a target for a percentage of net profit from each inventory – generally above 50%.
For example, RGIS has a target net profit margin of 70%. Yes, that’s right: 70%; and it winds up getting as much as 85% to 90% from some customers. What’s the maximum net profit margin for your business? Is it less than 50% like most industries?
All that extra money they’re getting just goes into the pockets of executives at bonus time. Not to mention the fact that the sales representative quoting you quite possibly gets a commission, so there’s plenty of motivation to offer you the most outrageous price.
Do not accept the first quote from an inventory service provider. Counter offer at least 20%-40% less than you’re quoted. Sure, 40% may be excessive, but they know you mean business and they’ll come back with something more reasonable.
Trust in the fact that they can easily afford to meet operational costs and still make a profit by conducting an inventory for a price that’s well below their target range. Not only can they afford to do it, but they will also do it rather than saying “No” to income.
For most inventory companies, there are 3 basic categories for billing: Price per pieces, the price per dollar value, and price per man hour. There are some exceptions, but generally speaking, man-hour rates are a complete rip-off. The service provider intentionally over-staffs but goes a step further; they staff multiple salaried managers to “oversee” in an effort to bump up the cost.
That’s 2 or more people who are doing absolutely nothing but for whose presence you’re being charged. Unless it’s a very large inventory for a major store like Kohl’s, Lowe’s, etc; there is NEVER more than 1 salaried manager present…Unless a man hour rate is being applied.
Many customers do not know this and wind up just accepting whatever method is offered to them, unaware that it’s not fiscally in their best interest.
The price per dollar value method is generally reserved for grocery stores and other stores that have at least $500K-$1M worth of inventory and go by a price point inventory system rather than an SKU number inventory system.
The price per pieces billing method is the most commonly used and is billed according to how many products are scanned. More often than not, both of these rates are set at a ‘per thousand’ basis; so you may be charged $15 per thousand pieces counted or $5 per thousand dollars inventoried. For smaller stores with fewer products, a price per piece or per hundred pieces may be applied.
How to Choose the Most Cost-Effective Billing Method
The best way to make sure you’re getting the best price is to get basic information for each feasible billing method and so some math yourself. If you have a rough idea of how much inventory you have, it should be easy. If you’ve conducted an inventory in the past, use your last inventory results to determine how much product is on your shelves.
Next, consider how your product needs to be counted. Is it all individual SKU numbers that need to be individually scanned? Do you have rows of products for which an auditor could simply scan one and count back?
If you own a clothing store and each SKU needs to be individually scanned, assume that the inventory service will count 400 pieces per hour. If you have a breakable product that must be carefully handled and individually scanned, assume that it will be counted at 100 pieces per hour.
If you have groups of products that can be counted together, assume that it will be counted at 1,500 pieces per hour.
Divide your inventory total by the number that matches your type of product. For example, if you have about 150K pieces in your store and it’s a product that can be counted in groups, divide 150K by 1,500. For this example, you can see that it would take approximately 100 man hours to inventory your store.
Compare the man hour rate to the price per pieces rate to see which price comes out to be lower. If you have different types of product, try your best to determine the inventory levels of each so you can calculate the required man-hours as accurately as possible.
If you find you can logically save money by going with a man hour rate, make sure to set demands in your agreement. First of all, determine how long you want your inventory to last and make a provision that if it goes any longer you receive a discount. Also, place a limit on the number of employees allowed to attend the inventory.
If your inventory should take approximately 100 man hours and you don’t want it going longer than 6-8 hours, limit the number of employees to 20. This will give you 5 hours to complete the count and an additional 1-3 hours for identifying errors and wrapping up. During the inventory, the process makes sure that every person besides the manager running the inventory is actively counting.
Also, check to make sure that auditors aren’t taking excessive breaks.
Once you’ve negotiated the best possible price from one inventory service provider, let them know you’ll be in touch and use that offer as leverage for the next to see if you can get an even better agreement. If you live in a remote area that will require multiple vehicles to travel for more than 1 hour, make sure to consider the cost of travel in your negotiations (to be fair).
Be Careful About Committing to Long Term Service Agreements
Due to the competitive nature of inventory service providers, many try to get their customers locked into a legally binding contract to prevent future shopping around for competing services. Sometimes it makes sense to get involved in a long-term contract.
Not only are you generally able to save money, but you may also have additional service features offered to you like free mapping after renovations, shopping analysis based on product location, or other beneficial services. If a long-term inventory service contract seems appealing, make sure that you’ve done enough research to know that you’re getting locked into the best rates.
Also, try to get a progressive discount for your loyalty.
Make sure the contract you sign holds the inventory service accountable for certain standards like accuracy, professionalism, efficiency, and promptness. It is always recommended to have your own attorney review a contract to make sure there are no ‘traps’ which could cause you to default on your agreement simply by following your own business procedures or making a common mistake.
Make sure to plan your inventory well in advance. Many large inventory service providers can meet the demands of a last-minute inventory, but it’s not generally easy. It quite often requires auditors to travel from other districts to conduct what would be an otherwise local inventory. More often than not, this cost is transferred to you. Try to schedule your inventories at least 2-3 months in advance.
If you want to have your inventory in the beginning (January, February, or March) or middle (June, July, or August) of the year, you may want to seriously consider scheduling it at least 6 months in advance or earlier. These times of the year fill up very quickly, as these are the most common months in which the fiscal year ends and/or begins.
If at all possible, try to avoid the aforementioned months, as most inventory service providers are scheduled beyond staffing capabilities. As such, your inventory will most likely run much longer than it would if you had a sufficient number of auditors present.
If you are among the fortunate who have enough auditors, many of them will have been recently hired for the busy season and prone to mistakes.