Improve Inventory Purchasing To Reduce Dead Stock And Maximize Profits 

December 16, 2022
18 min read

In this article:

Ordering just the right amount of inventory to meet demand is no easy task. Luckily a deeper understanding of the different inventory purchasing methods can help.

Meeting customer demand and delivering great customer experiences — that’s the goal for every direct-to-consumer (DTC) brand, right? As simple as that sounds, it’s hard to have enough stock to meet demand without accumulating excess inventory

In a perfect world, all your replenishment orders would be totally accurate and arrive on time. Unfortunately, the reality of inventory purchasing is usually far from perfect.

So, let’s aim for progress over perfection. Here are concrete steps to improve your inventory purchasing process and maximize profits. 

What is inventory purchasing?

Inventory purchasing is when DTC brands buy products from suppliers that they will resell to their customers. 

Retailers aim to make inventory purchases at the right time and in the right quantities to meet demand. That way, your supply flows smoothly, and sales can happen without the risk of stockouts or dead stock

Retailers also aim to secure the lowest price for these products, so they can turn the biggest profit. Often, this means buying in bulk.

However, most suppliers implement minimum order quantities (MOQs) to unlock bulk pricing. If that MOQ is more units than your brand demands, buying in bulk might not justify the discount. And the added carrying costs can wreck your profit margins. 

That's why you need to pay extra attention to your inventory purchasing process. 

7 inventory purchasing procedures

The inventory purchasing process includes 7 steps that stretch from when your brand first forecasts its inventory needs to when your supplier invoices you for those products. 

1. Demand planning

Without demand planning, inventory purchasing is like trying to find a light switch in the dark: aimless and a little scary.

That's because demand planning predicts future sales for your brand's products using historical sales data. Then, with that information, you can map out your inventory needs for the next 3-12 months (anything past that 12-month mark will be wildly inaccurate). 

You can then cross-check that map against your weeks of supply to determine exactly how much inventory you'll need to order and when. 

Admittedly, this can get complicated quick. Especially because every time new information becomes available, you'll need to update that demand plan to ensure its accuracy. 

Otherwise, you might think you have enough inventory for the next 2 months. But a really good sales weekend left you only 5 weeks of supply. If your order lead time is 4 weeks, you need to submit your next purchase order by end of week or risk stocking out. 

Alternatively, Cogsy's planning feature can build accurate demand plans for you in seconds. Plus, the demand planning software tracks your inventory levels in real-time. So, it'll even send you a replenishment alert, notifying you when it's time to start building your purchasing request. 

2. Purchasing request

Once you have your demand plan in place, it's time to submit a purchasing request to the appropriate stakeholder at your business. Typically, this will be someone in your finance department.

Think of a purchasing request like an unofficial purchase order. Meaning you're not ordering any inventory yet. Instead, you're proactively getting the green light from your internal team to do so when needed.

This document should include details about the items you need to restock, like the SKU, the number of units, the per-unit price, and the date you need to receive those items. (Keep in mind that this request can be edited until it is officially submitted as a purchase order.)

That said, there's no need to create double work for your team. So, rather than creating a separate purchasing request document, slide a draft of the PO across finance's desk for approval.

🔥 Tip: Want to speed up this step of the purchasing process? Draft your POs with Cogsy. With only 1 click, you'll have a ready-to-submit PO that reflects all your inventory replenishment needs. Try Cogsy free for 14 days.

📝 Note: You might have some back and forth with finance on your purchasing request if they decide to reject or flag it. If this happens, it'll likely lead to further discussions with the finance team. Once approved, you can shift the purchasing request into a PO.

3. Purchase order review

Once your purchasing request is approved, you'll want to wait until your stock levels hit their reorder point before reviewing your purchase order. That way, you avoid submitting POs too early and collecting excess inventory. 

Once you've hit that reorder point, give your purchase order a final once-over before sharing it with anyone outside your company — namely, your preferred suppliers. 

You'll need to double-check that there's no new information available since you first drafted the PO (which was likely as soon as your purchasing request got approved).

For instance, say you drafted a PO for hand sanitizer in February 2020. By June 2020, it would've been obsolete because demand for that product exponentially spiked over a few weeks.

The idea is to ensure your demand forecasts and this PO still line up. If it doesn't, make the necessary adjustments before officially submitting the purchase order.  

4. Vendor negotiations and PO approval

After thoroughly reviewing your purchase order, you can submit it to suppliers and negotiate vendor terms

Don't be discouraged if, at first, your purchase order is rejected. This often happens when vendors have limited bandwidth or your PO doesn't meet their MOQs. If your purchase order is denied, you may need to draft another purchasing request or look for a different supplier.

Once approved, your supplier will take care of the next steps to fulfill your PO — like arranging manufacturing, if needed.

But say you want some supply chain security. Then, you can agree (in writing) that you'll do most of your business with a preferred vendor. That'll help you lock in a better price and speed up the purchase order approval process. 

How do you do this exactly? Well, vendors usually start negotiations after receiving your PO. But if you demonstrate you're looking for a long-term partnership, you can negotiate POs in bulk. For example, the Cogsy platform lets you share your 12-month production plan with various vendors so you can shop around for the best price. 

Does this really work? Sure does! Lalo, a leading retailer in the baby and toddler space, reduced its vendor down payments by 50% using this strategy. And by freeing up that capital, Lalo's been able to experiment with new growth initiatives (like opening up a flagship store) and unlock 400% year-over-year growth.

5. Shipping

When you’ve secured your vendors and approved your purchase orders, it’s time to move to the shipping phase. As the name suggests, this is when vendors send your purchased inventory to the designated warehouse or fulfillment center.

Shipping plays a crucial role in the purchasing process. Not only do shipments need to be delivered on time, but the contents of each shipment must match what’s on your PO. 

Why are timing and accuracy so important? Well, delayed or incorrect shipments are inconvenient and expensive, and they can have a big impact on customer retention. In fact, 58% of consumers said they’d stop buying from a brand altogether after 1-3 supply chain delays. 

That’s why it’s important to work with reputable suppliers who’ll ship orders on schedule and follow your POs to the letter. 

6. Three-way matching

Three-way matching is a quality check of sorts where your brand compares 3 different types of documentation, including:

  1. The purchase order you submitted to your supplier
  2. The goods receipt note your supplier sent
  3. The supplier's invoice sent to your company

We've already touched on POs. But a goods receipt note is a record of goods received from suppliers, proving that the ordered products had been received. Meanwhile, the invoice is the bill from the supplier for that inventory. 

Retailers and finance teams can use these documents to confirm that they got what they paid for using three-way matching. Typically, three-way matching is done post-shipment but before paying the supplier's invoice to confirm:

  • Your company actually requested the invoiced items
  • You received said items from your supplier

Along the same lines, three-way matching provides a paper trail that makes it easy to review the contracts, processes, and history with your suppliers. 

If your brand ever wants to run a procurement audit to ensure supplier contracts are accurate and complete, you'll lean on these documents. You can also use this paper trail to inform future invoices and add color to inventory data. 

For instance, you might look into a stockout and realize it happened because the supplier didn't send what you needed in the agreed-upon time frame.

7. Invoicing

Finally, we've reached the final step in the inventory purchasing process. Ideally, all invoices come after your brand receives its shipment from your supplier, and you only pay that invoice if your three-way matching goes off without a hitch. 

While this is the best-case scenario, it's not always the reality.

Most retailers must pay at least part of invoices upfront (commonly known as the down payment). Then, retailers pay the remainder within the net terms (60 days is average).

Over the last 2 years, however, lead times have encroached the 6-month mark (well above the 60-day net terms). Even in these scenarios, retailers still have to pay the invoice on time — despite not yet receiving their shipment. 

As a result, this payment structure creates issues with your working capital — especially with the cost of goods rising thanks to inflation and supply chains taking 3x longer than usual (as of 2021). 

This perfect storm of problems means payment could be due long before your order arrives, leaving your brand cash negative (or maybe totally in the red).

What if you just don't pay until you receive your shipment? Bad choice — ultimately, this decision will put both that vendor relationship and your reputation with suppliers at risk. 

The most common inventory purchasing methods

Although inventory purchasing can look different for many brands, a few methods are more common (and efficient) than others. 

Just-in-time (JIT) purchasing

Just-in-time (JIT) purchasing is where retailers receive goods from suppliers only as needed. This means your inventory is delivered at "just" the right time to fulfill customer orders. 

In practice, JIT procurement strategies look like placing smaller orders more often. As a result, you hold less on-hand inventory, minimizing inventory costs and making it easier to adapt to changes in demand.

But with JIT, you have to manage your inventory levels closely. Why? Because ordering smaller quantities is a recipe for stockouts if you don't play your cards right or if anything changes along the supply chain.

For example, many mass-market retailers like Target and Walmart found success for years using just-in-time purchasing. However, that changed with the pandemic-driven supply chain disruptions

Suddenly, both big box retailers found themselves stocked out and overordering to compensate. Fast forward to today, these retailers are falling short of Wall Street projections as they struggle to eliminate this excess stock.

Pros: Lowered inventory holding costs and more available space at your warehouse

Cons: You need to manage inventory carefully; otherwise, you could encounter stockouts

Economic order quantity (EOQ)

Economic order quantity (EOQ) is an inventory purchasing method where brands order the ideal amount of stock to meet demand while reducing carrying costs.

While JIT and EOQ may seem similar, the main difference is that EOQ maintains a fixed amount of inventory. Meanwhile, just-in-time meets demand with the minimum amount of time and materials (which can vary).

So, while EOQ has a cost advantage for high-demand products, JIT is preferred for periods of low demand.

To calculate economic order quantity, you'll use the formula:

EOQ = √{[2(setup costs)(demand rate)] ÷ holding costs}

When done successfully, the EOQ procurement method reduces buying, delivering, and storing stock costs. However, figuring out your brand's EOQ can be tricky. That's because there are many moving parts to calculate before you plug those costs into the equation.

To complicate things even more, the EOQ formula assumes your customer demand, ordering costs, and holding costs all remain constant. But this is rarely the case for ecommerce brands. This alone makes EOQ useless for brands that experience inventory shortages, inventory surpluses, or seasonal spikes in demand (Black Friday, anyone?).

Pros: EOQ calculates and streamlines the total costs for buying, delivering, and storing your inventory

Cons: The EOQ formula isn't the easiest to use and doesn't account for a variety of issues DTC brands often experience 

Reorder point method

The reorder point (ROP) method watches stock levels to determine when to replenish. When your inventory falls below its ROP, you know to submit your next purchase order ASAP. (Most brands will lean on their EOQ with this method to determine how much to reorder.)

To calculate your brand's reorder quantity, use the following formula: 

reorder quantity = [average daily usage x average lead time] + safety stock

The reorder point method helps you avoid stockouts to continue making sales and fulfill incoming orders. That improves your bottom line since inventory shortages mean lost revenue and disappointed customers.

However, the downside to using the reorder point method is that it relies on accurate calculations. If your EOQ or ROP is off, you'll likely order the wrong amount of stock or place that PO at the wrong time, respectively (leading to either a stockout or overstock).

Pros: Helps avoid stockouts and keeps your inventory at optimal levels

Cons: incorrect ROP calculations can cause stockouts or overstock

Bulk buying

Bulk buying is when brands purchase a large volume of inventory all at the same time. Why is this a popular strategy? Because suppliers will often give you an enticing discount for buying in large quantities.

As such, bulk buying cuts down on your cost per unit, which ultimately reduces your total inventory costs. And on top of saving you cash upfront, bulk purchases also require less transit time than multiple smaller shipments (a great perk, especially from an environmental perspective).

The tricky thing about bulk buying is you could wind up with way more inventory than you need. Because storing more inventory means paying higher holding costs, you might not save any money in the long run. 

For instance, let’s say demand shifts. Suddenly, customers are no longer buying a SKU that was once super popular. But you’ve already bought hundreds (or thousands) of that product. Then, there’s a good chance you’ll get stuck with a bunch of expensive dead stock collecting dust on your warehouse shelves. 

On average, dead stock costs a whopping 30% more than the inventory’s value — and that doesn’t include about 15% missed opportunities you miss when your cash is tied up in unsold stock. With all that in mind, calling dead stock “expensive’ feels like an understatement.

Pros: Suppliers offer a bulk-buying discount, which reduces your total inventory costs

Cons: Ordering more inventory than you need will create expensive excess stock

Dropshipping

With dropshipping, you don't maintain inventory on-hand for your listed products. Instead, you offer a virtual inventory (or digital collection of available products). Then, when a customer makes a purchase, you fulfill that order via a 3rd-party supplier. 

Meaning, the biggest difference between dropshipping and more traditional retail models is that your brand doesn't own its inventory. You're more of a middleman in this situation — which leads to a lot of savings since you don't have all the upfront inventory and warehousing costs.

That said, dropshipping has its drawbacks as well. At the top of the list is the fact that you'll have really low profit margins (after all, when you put less money in, you get less money out). 

Along with that, dropshipping gives you far less control over your supply chain. That's a dangerous position to be in, especially given all the supply chain disruptions over the last few years.

If that wasn't enough, studies show that dropship brands have lower customer satisfaction because they don't control how their products show up or how the vendor handles delivery.

Pros: Outsourcing all aspects of buying and managing your stock

Cons: Lack of control over the supply chain as well as lowered profit margins

Order pattern method

The order pattern method makes regular, fixed purchases for the same volume of inventory. These purchases happen at fixed intervals, like once a quarter, twice a year, and so on. That way, the order pattern strategy is rooted in consistency rather than customization.

Although the order pattern method won't work for every brand, it's helpful for retailers with sales orders that rarely ever change. 

For example, shampoo and toothpaste don't experience the seasonal shifts in demand that other products do. Running a promotion could cause sales to fluctuate, but toiletry sales generally remain steady.

With this method, you'll need to do inventory audits 1-2 times a year. Because of this, the order pattern method creates a lot less work. It also requires much less inventory management for brands (but the brands that can use this strategy effectively are few and far between).

Pros: Minimizes your workload by scaling back on total purchases each year

Cons: Only works for brands with consistent sales year-round

Control rhythm method

In contrast to order patterns, the control rhythm method dictates that brands check on their inventory at fixed intervals and adjust inventory purchasing accordingly. 

In other words, this strategy looks at what’s happening with your stock every 6 months (you can substitute your preferred period). So, you can purchase the precise amount you need.

The control rhythm method is a solid choice for retailers with a good grasp of their customer demand and those that can generate reliable inventory forecasts. On the flip side, it won’t work well for brands that have trouble forecasting accurately since their replenishment likely won’t match up with actual demand.

Similarly, the control rhythm method won’t work if demand increases unexpectedly. This again leaves brands stocked out until they hit the scheduled restock time.

Pros: Accounts for everything going on with your inventory to enhance ordering accuracy

Cons: Your forecasts can’t have any errors to use this method properly

7 tips to improve your inventory purchasing process 

On top of choosing the right purchasing method, you can do a few other things to improve your inventory ordering process. 

1. Take advantage of volume discounts

If your brand has a flagship product that's always selling well, take advantage of bulk discounts. After all, buying in bulk is cost-effective — but only if you're confident you'll sell all those units. Sometimes, this confidence can come from collecting pre-orders or selling on backorder

In both situations, you'll have a good understanding of how much product you need. And you can purchase more inventory in one fell swoop. The point is, if you buy in bulk (and get a juicy discount as a result), you'll want to be absolutely sure you'll be able to sell everything you bring in.

2. Keep the costs of holding extra inventory in mind

The costs to hold products comprise 20-30% of your total inventory costs on average. That's a big chunk of change, regardless of the size of your business. And it's exactly why retailers always look for ways to reduce these expenses. 

As you're working through inventory planning and preparing for replenishment, bear in mind the costs of holding any extra inventory. 

To calculate your potential holding costs, you can use this formula:

holding costs = [inventory holding sum ÷ total value of inventory] x 100

📝 Note: Your "inventory holding sum" comes from adding up capital costs, inventory service costs, inventory risk costs, and storage costs.

Don't have a lot of funds to allocate to your carrying costs? Then, a purchasing method like just-in-time or economic order quantity might be a better fit for your brand.

3. Know your supplier's minimum order quantity

MOQ is the smallest number of units you must purchase in a single order from a supplier. MOQ keeps suppliers from wasting resources — time, money, and materials — on smaller orders that offer little-to-no profit. 

Of course, different types of products have their own MOQs. A product that costs more to manufacture will likely have a lower MOQ than items that are cheap and easy to produce.

Logistics aside, knowing the minimum order quantity for your suppliers is important. Purchasing the MOQ might be your most cost-effective option, especially if that amount is aligned with customer demand.

However, keep in mind that when suppliers set MOQs, it's typically the required minimum number of units you have to order. So, if your supplier's MOQ is way more than you need to fulfill demand, consider shopping for another vendor with a far lower MOQ. Otherwise, you could end up with a bunch of dead stock.

4. Track inventory levels in real-time

Let's face it: It will be tough to make accurate purchasing decisions if you don't know what's going on with your inventory at any given time.

Tracking inventory in real-time is the only way you'll purchase exactly what you need (nothing more, nothing less). But you'll need the help of some sophisticated software or a bunch of time-sucking inventory audits. 

Because manual audits eat so much of your brand's resources, a robust operations platform is the way to go if you want to save time, money, and human resources.

And Cogsy is just that kind of platform. Cogsy tracks your inventory around the clock and gives you 24/7 visibility into your products — which is the key to placing orders faster, reducing stockouts, and minimizing excess stock.

On that note, Cogsy even offers restock recommendations that account for factors like supplier MOQ and your 12-month demand forecasts to ensure your inventory purchasing is as precise as possible.

5. Perfect demand forecasting 

Perfecting your demand forecasting is definitely easier said than done. Still, there are many ways your brand can improve your forecasts' accuracy and efficiency moving forward. 

Your best bet is partnering with an enterprise resource planning (ERP) or demand planning operations platform. Both tools track inventory performance and deliver essential insights that inform your inventory purchasing decisions. (However, an ops platform tends to be lightweight and wildly cheaper.)

For example, Cogsy is an ops optimization platform that unlocks more visibility into product movement and supply chain activity. With these insights into how products sell, you'll know exactly when to replenish your warehouse shelves and how much to reorder. That way, you always have the right amount of inventory to keep your customers happy.

🔥 Tip: While bigger brands will benefit from an ERP, smaller retail brands will be better off using an operations optimization tool. That's because ops tools are cheaper, more adaptive, easier to use, and just as powerful as the leading ERPs.

The bottom line is this: Better forecasts translate to smarter, better-timed replenishment.

6. Perform regular inventory audits

Inventory audits compare your actual inventory levels to your current financial records. This ensures accurate accounting and also cuts down on inventory shrinkage.

Sometimes, brands perform audits in-house with a simple count of your existing items in stock. But other times, retailers might call for a 3rd-party auditor — especially brands with a large volume of inventory or multiple warehouses. 

While tedious, the more you do inventory audits, the more accurate your records will be. And this kind of precise recordkeeping and inventory data also means more accuracy for your brand's forecasting, purchasing, and fulfillment. 

That's why it's so important to conduct audits regularly, like counting 1 SKU daily until you've gone through your entire inventory.

7. Always have a contingency plan in place

A contingency plan is all about helping your brand respond to negative events that affect your inventory purchasing, like a lack of raw materials or supply chain delays. 

Even brands that have perfected the art of inventory purchasing aren't immune to supply chain issues. Often, these issues double (or triple) how long it takes to receive purchased inventory — leading to stockouts and tied-up cash flow.

That's where contingency plans come to the rescue. Undoubtedly, moving to a backorder model is the best contingency plan whenever your inventory purchasing goes awry. 

By selling on backorder, you can convert demand into revenue while waiting for more inventory to arrive. Backorder sales mean customers can still buy your out-of-stock products instead of looking elsewhere. This keeps them happy, but it also keeps your cash flow, well, flowing.

Backorders work because if you're stocked out due to supply chain issues, your competitors are likely in the same boat. So, selling on backorder gives customers a way to accomplish their goal instead of waiting to buy from whichever brand gets their stock first (which might not be you).

And unlike most other inventory software, Cogsy automatically showcases delivery updates in the product listing and receipt. So, customers clearly expect delivery windows and know when their backordered products will arrive.

How Cogsy supports better inventory purchasing decisions

Cogsy's full suite of ops tools is just the ticket for not only placing orders faster but making smarter inventory purchasing decisions. Here's how:  

Demand forecasting

Not only does Cogsy track all your inventory data in real-time, but it uses this data — coupled with historical insights — to build forecasts with pinpoint accuracy for your business.

With this forecast, you'll have complete visibility into how many of your products are expected to sell. That way, you can make accurate inventory purchasing decisions.

Cogsy also automatically updates these forecasts whenever new data comes in. That way, you always work with the most up-to-date information (a far cry from using static, mind-numbing spreadsheets to guide your inventory purchases).

But more than that: Cogsy's planning feature can create plans for your inventory needs up to 12 months in advance. This foresight is great for order management and shortening your lead times. But it also helps you negotiate better terms with your vendors. 

(Remember how Lalo cut PO down payments by 50% by sharing their 12-month production plans with suppliers?

Automatic replenish alerts

When you team up with Cogsy, you get 24/7 eyes on your brand's inventory. The platform constantly monitors your current stock levels and historical demand, looking for emerging trends like shifting reorder points and optimal order sizes. (Better yet, it identifies these trends more accurately and long before a human analyst.)

Using what it finds, Cogsy automatically emails replenishment alerts, notifying you that it's time to reorder. This way, you can ensure you stay in stock – without constantly logging into your dashboard to check your inventory levels. It doesn't get much easier than that!

Simplified purchase orders

Speaking of easy, convenient workflows... Cogsy's purchase order feature helps you replenish at the press of a button. With just 1 click, Cogsy creates optimized POs tailored to your exact inventory needs in seconds. That way, there's no guesswork or gut feelings involved!

With Cogsy, you can finally say "goodbye" to ordering too much (or too little) stock. And instead, make informed and confident purchasing decisions that fuel your company's growth. 

Efficient backorders

Even though Cogsy helps you purchase inventory confidently, there might be times when demand spikes and your actual sales overtake your previous projections. The good news is, Cogsy has your back in these situations, too.

As we mentioned earlier, Cogsy makes it easy for you to sell on backorder. That way, you can convert demand into revenue while you wait for your stock to be replenished. With backordering, customers can still buy your products rather than heading to your competitors.

But the best part? Backordering converts customers at almost the same rate as selling products in stock (so there's no chance of leaving any cash on the table).

Want to simplify inventory purchasing and make your replenishment more accurate than ever? Try Cogsy free for 14 days. 

Inventory purchasing FAQs

Get answers to the most common inventory purchasing questions. 

How often should inventory be purchased?

The frequency of inventory purchasing depends on your business needs and how quickly you’re selling through your stock (or specific SKUs). Some brands might replenish inventory monthly, while others may only purchase merchandise twice a year. 

How often you order will depend on whether your stock levels are running low and if you’re expecting a surge in demand soon. That said, placing smaller purchase orders more frequently will offer your brand the most agility while freeing up working capital. 

How do you account for inventory purchases?

To account for inventory purchases in a given period, use the formula: inventory purchases = (ending inventory - beginning inventory) + cost of goods sold. 

Does purchasing inventory affect net income?

Inventory purchases appear as line items on your balance sheet. Along with your cost of goods sold (COGS), you can use inventory purchases to calculate net income on your larger income statement. A lower COGS expenditure will likely increase your net income since you’ll have taken a smaller percentage of your incoming revenue to pay for what you sold.

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