What you need to know about consignment inventory

a person holding a light bulb with various icons surrounding it, such as a computer, a phone, and a tablet

What is consignment inventory, and is it the right model for you. 

Picture this:

You’re a manufacturer that produces high-end audio equipment, like speakers and headphones. You recently launched a new product line with innovative features. 

While you know the technology works and provides value, you’re unsure about the market reception, and so remain reluctant to mass produce this product.

What do you do? You enter into a consignment inventory agreement to test the market.

But, what exactly is consignment inventory?

Consignment inventory is a supply chain approach or business arrangement where a consignor (e.g., manufacturer) provides stock to a consignee (e.g., retailer) without receiving payment upfront. 

The consignor keeps legal ownership of the goods. At the same time, the consignee agrees to promote and sell the product, effectively handling the sales process. 

The retailer pays for the stock only when it’s sold and typically receives a commission or percentage of the selling price as compensation. This business arrangement is usually governed by a detailed consignment agreement that both parties must sign.

Are there any pros and cons of consignment stock?

Yes, the consignment model has benefits and drawbacks for both consignees and consignors. Let’s take a look.

Benefits of consignment inventory for consignors

  1. Market expansion. Manufacturers can expand their reach and distribution network without having to set up physical locations, as they can piggyback off existing retailers.
  2. Market testing. Manufacturers can test interest in their products in different markets. This allows them to gather feedback, iron out any kinks, and assess the potential for success before mass production.
  3. Supply chain efficiency. Manufacturers don’t need to allocate warehouse space to store stock, so they can control inventory carrying costs.

Disadvantages of consignment stock for consignors 

  1. No upfront payment. Payment is only received from consignees when goods are sold, which can potentially create cash flow problems.
  2. Great financial risk. If the products don’t sell, the manufacturer carries the losses.
  3. Sales dependency. The sales are dependent on the efforts and marketing capabilities of the retailer.
  4. Complex inventory management. Consigned stock needs to be tracked separately from other inventory for operational clarity and easier financial reporting. This can be an extra administrative and logistical burden.

Benefits of consignment inventory for consignees

  1. Reduced financial risk. Retailers don’t have to pay for stock upfront and don’t incur losses of unsold inventory.
  2. Greater product variety. There’s an incentive to offer a broader product variety, because there isn’t a financial commitment to one product.
  3. Competitive advantage. The improved product variety can be a differentiator for retailers.
  4. Better cash flow. Capital is freed up, because cash is not tied up in inventory.

Disadvantages of consignment stock for consignees

  1. Lack of control. Retailers don’t own the product, which can limit independent decision making around business areas, like pricing and promotion. 
  2. Limited product margin. Retailers earn a commission or percentage of the selling price for products sold, representing a lower margin than can be achieved with their own inventory.
  3. Pressure to meet targets. Small commissions can put unnecessary pressure on retailers to meet sales targets.
  4. Complex inventory management. As with consignors, there’s an extra administrative and logistical burden of tracking and managing consigned inventory alongside owned stock.

How to effectively manage consignment inventory

Given the complexity around managing consignment stock, you’re probably wondering: How do I effectively manage it? Here are two ways:

   1. Detailed consignment agreement. 

The success of a business relationship depends on a mutually beneficial agreement that clearly establishes expectations. While the exact details will differ between agreements, you generally want to:

  • Identify both parties with legal names and contact information.
  • Describe the goods being consigned.
  • State that ownership remains with the consignor until goods are sold.
  • Establish the pricing: Will the consignee receive a fixed amount, commission, or percentage of the selling price?
  • Specify the consignment period.
  • Detail the consignee’s role in promotion and selling.
  • Include details about dispute resolution and confidentiality.

   2. Invest in a robust inventory management system (IMS). 

An IMS is software that lets you manage and optimize inventory levels from a centralized platform. Use it to automate everything from inventory counts to stock replenishment and access real-time reporting to make better financial decisions. 

While basic software exists for managing simple operations, more advanced IMS solutions can handle the complexities of inventory management, like that of managing consignment inventory. 

For instance, Fishbowl provides the following features to help you manage consignment inventory:

  • Separate consignment inventory tracking for operational clarity and easy reporting (side note: you can assign stock to certain consignees and locations)
  • Consignment revenue and purchase tracking to track sales orders and invoices
  • Consignment agreement management, so you can store and easily access any agreement and related documents
  • Consignment stock replenishment abilities that let you set up automatic reorder points and create purchase orders
  • Reporting abilities to analyze consignment inventory performance, sales trends, and other key metrics
  • Integrations with essential business apps, like Shopify, QuickBooks, and Salesforce

So, is a consignment model right for you?

There’s no right or wrong answer. The consignment model has pros and cons, and you’ll need to weigh these up when making a decision while also considering your unique situation. 

Does your current cash flow situation allow you to withstand payment delays from retailers? Is expanding market reach and testing new products a main priority? Are you comfortable with the financial risk of unsold inventory?

Just know that if you decide to use this model, it’s probably wise to diversify: use the consignment model as one way to get your product into customers’ hands. 

Also, don’t forget to invest in the right software to make managing consignment inventory a breeze. Learn more about how Fishbowl can help by booking a demo today.

8 Effective Ways to Reduce Manufacturing Waste

large industrial factory with many machines and equipment

In this article, we’ll take a look at what manufacturing waste is and how you can reduce it.

Producing some manufacturing waste is part and parcel of the manufacturing process. 

But if left unchecked, it can quickly accumulate to unsustainable levels, leading to environmental damage, costing your company money and potentially damaging its reputation.

Need help getting it under control? Here’s what you need to know.

What is manufacturing waste?

Manufacturing waste refers to any materials discarded during the manufacturing process that doesn’t form part of the final product, as well as unnecessary production steps that don’t add any value to the end item. Examples include scrap material, excess inventory, defective products, redundant inspections, unnecessary transportation, waiting times, and overproduction.

With the introduction of lean manufacturing, organizations have become more aware of wasteful practices and their implications—leading to the development of a company culture that values waste-reduction initiatives.

So, how can you reduce manufacturing waste?

Waste reduction strategies will typically differ between industries, because different manufacturers will generate different types of waste at different stages of the production process. 

That’s why, before even considering what strategies to use, it’s wise to map out your waste streams by conducting a complete waste audit. 

From there, you can dive into specific strategies to keep waste under control. Here are eight of the most effective ways to do so. 

   1. Manage inventory more efficiently

Better inventory management helps maintain optimal inventory levels to meet production demand without carrying excess stock that can tie up resources, use unnecessary warehouse space, and increase the risk of spoilage. 

A few ways to improve inventory management and minimize wastage include:

  • Adopting a just-in-time approach to managing inventory, where you order materials and components just in time for production.
  • Investing in inventory management software to help track inventory in real-time, automate manual processes, like stock counts, and gain visibility into stock across locations, so you always know exactly how much stock you have.

   2. Reduce packaging materials

Redesign the product packaging so that it uses less materials. You could eliminate unnecessary components, reduce their size, switch to more sustainable and efficient materials, or incorporate reusable or recyclable packaging content, like air packs or corn-based packing peanuts that are non-toxic and decompose in water.

   3. Recover, reuse, resort

Recover as much waste as you can from on and offsite locations using techniques like electrolysis, filtration, reverse osmosis, centrifugation, and a popular one—recycling. 

Recycle materials, like paper, plastic, and metal, regularly and avoid recycling hazardous materials, as it rarely has any environmental benefits.

Industrial shredders are crucial in this process, as you can use them to reduce waste by condensing asphalt, wood, rubber, and plastics to a fraction of their original size. Sorting the waste into bins ensures recyclable items are getting to the right place. 

Just make sure that you assign someone the responsibility of monitoring the bins, that there’s a standard documented recycling procedure, and that everyone is trained on and understands the recycling protocols. 

This ensures your recycling process remains efficient and environmentally compliant at all times and that you’re maximizing your cost savings.

   4. Follow waste volume reduction techniques

Waste-volume reduction refers to waste techniques that reduce the overall quantity and cost of waste generated. Volume reduction can be broadly divided into 2 categories—waste concentration and source segregation. 

Waste concentration involves techniques that reduce the concentration of waste, like dehydration and evaporation. This helps minimize transportation and disposal costs while increasing the chances of reusing or recycling materials.

Source segregation, however, involves separating different types of materials for easy treatment and handling. This helps recover any valuable resources from waste, like valuable metals.

   5. Establish a preventative maintenance schedule

General wear and tear may be normal in any manufacturing process. But if you don’t perform regular maintenance, you’ll waste time and money on expensive, last-minute repairs. Preventative maintenance (PM) helps reduce waste by:

  • Minimizing downtime, which leads to production interruptions, unnecessary overtime, and increased shipping costs.
  • Improving equipment efficiency to avoid energy wastage.
  • Optimizing material usage for accurate handling and processing.
  • Minimizing defective product output caused by malfunctioning equipment.

To set a PM schedule, create an inventory of all your assets, set the maintenance cadence (weekly, monthly, yearly, etc.), and work with the right vendors.

   6. Label and organize the warehouse properly

Clearly mark the locations for all tools, supplies, and assets necessary to manufacturing processes in your warehouses. This makes it easy to find items and identify hazardous materials.

Over time, the markings may get faded, non-existent, or outdated. While this may not hinder longtime employees, new hires may have difficulty navigating a warehouse that isn’t properly marked and organized. 

This can lead to incorrect products being shipped, or more time spent searching for the right tool for an urgent repair. So, replace the faded tags and repaint the floor lines regularly.

   7. Adopt a closed-loop manufacturing process

Green chemistry is an excellent technique to reduce waste generated by various processes. But if it isn’t viable for you, consider a closed-loop manufacturing system: a process where used products are recovered and fed back into the system to be reused, recycled, or remanufactured. Closed-loop systems help improve resource efficiency to create more sustainable production processes. 

   8. Minimize water usage

Industrial sludge and wastewater make up a significant portion of manufacturing waste. You can reduce these elements by minimizing water usage through chemical drying agents, reverse osmosis, dry machining, or membrane biological reactors. 

The bottom line

An amount of manufacturing waste will always be unavoidable, but you can keep it under control with proper waste management strategies. 

We explored several, from managing inventory more efficiently and reducing packaging materials to establishing a preventative maintenance schedule and minimizing water usage. 

The only thing left to do—if you haven’t already—is to start implementing these strategies as part of your efforts to control manufacturing waste.

How to improve warehouse efficiency

a warehouse with shelves and boxes stacked high on the walls a forklift moving boxes around in the middle of the room

The efficiency of your warehouse is an integral part of your business. Find out how to improve your warehouse efficiency with these 4 strategies.

A warehouse that’s operating efficiently allows you to control costs, maximize productivity, improve overall customer satisfaction, and ultimately, boost your bottom line.

But how exactly do you improve warehouse efficiency? Let’s take a look.

4 Ways to improve warehouse management and Efficiency

    1. Optimize warehouse space 

Are you making the best use of available warehouse space? 

While you may need a larger warehouse if you’re growing, it’s always wise to first determine whether you can better use existing space. For instance, you could expand vertically using different pallet storage methods, like push-back or single deep racks.  

These pallets also allow you to better organize your inventory so it’s easier to track and locate specific products, which reduces picking errors and excess stock. Plus, well-organized pallets, with clear spaces between aisles, provide easy product access for more efficient picking, packing, and inventory replenishment. 

    2. Redesign your warehouse layout 

Warehouse layout is closely linked to warehouse space. But, where space refers to the available square or cubic footage, layout refers to the arrangement and organization of different warehouse elements that affect the flow of activities and inventory. It includes equipment, storage racks, workstations, inventory, and other key elements. 

By redesigning and optimizing your layout, you can maximize space while streamlining warehouse operations. For instance, with some warehouse software, you can identify what products are commonly ordered together by customers and what the top products are. 

You can then reorganize your warehouse by combining those products to reduce walking and travel time between workstations, improve workflows, and speed up order fulfillment.

   3. Improve inventory management

 Better inventory management helps improve warehouse efficiency in many ways, including better space utilization and faster order fulfillment thanks to better inventory tracking. 

A few ways to improve inventory management include:

  1. Determining when to replenish stock by calculating the reorder point (ROP). The ROP is simply the inventory level at which companies should replenish stock to avoid shortages and stockouts. 
  2. Accurately forecasting demand by using historical data and market trends. This helps maintain optimal inventory levels.
  3. Investing in the right technology, like inventory management systems (IMS), to streamline the warehouse process and help with real-time inventory tracking. 

   4. Invest in technology to automate 

Technology helps automate warehouse processes, removing manual input while minimizing human errors that cost you time and money. Examples of technology that can improve warehouse management include:

  • Conveyor systems to transport products within the warehouse 
  • Robotic systems for picking and packing
  • RFID technology for inventory tracking
  • Warehouse management systems (WMS) for streamlined order processing and fulfillment, as well as reliable automated purchasing and vendor management. 

For instance, using software like Fishbowl, you can streamline order fulfillment by implementing routing capabilities for picking, automating documentation for packing, and printing labels directly from the platform to eliminate manual steps. You can even expedite the order process with preferred vendors and automatically create important documents, like purchase orders.

Improve warehouse management today

Improving warehouse efficiency doesn’t have to be hard. You just need to take the right approach—from optimizing warehouse space and redesigning your layout to improving inventory management and investing in the right technology. 

Do that, and you’ll not only run a more efficient warehouse but reduce costs and maximize profits.

A Guide to Eco-Friendly Shipping

Read about the importance of sustainability in e-commerce and describe how businesses can implement more eco-friendly packing and shipping protocols. 

brown paper package tied with twine with a green recycling symbol tag attached to the front

Today, e-commerce plays a more significant role in our economy than ever. The COVID-19 pandemic seemed to accelerate the shift toward online shopping in 2020, but worldwide yearly e-commerce sales have steadily increased since 2014. This trend is expected to continue even as the pandemic fades from headlines, with online sales in multiple industries projected to keep growing through 2024.   

While e-commerce is making our lives easier in many ways, it undermines global sustainability efforts and poses a substantial environmental threat. One of the most concerning effects of e-commerce on sustainability is the increasing use of packaging materials to ship products. Along with creating more waste, this trend may accelerate the destruction of trees by increasing the demand for paper materials like cardboard. 

Additionally, transporting and delivering all of these goods requires companies to use a greater number of vehicles, most of which are still powered by fossil fuels. Because of this, e-commerce produces a significant amount of greenhouse gas, contributing to climate change and adversely impacting public health.  

Fortunately, growing concern about the environment among consumers and businesses has led to a stronger emphasis on sustainability that will likely shape the shipping industry’s future. To prepare for the future and ensure continued success, e-commerce businesses must take proactive steps to make their shipping and packaging processes more sustainable.  

For most e-commerce businesses, the best shipping strategy for their online store is the one that’s the most efficient and makes the most money. However, you don’t need to sacrifice profitability for sustainability. There are several ways to improve sustainability that simultaneously tackle efficiency. Specifically, there are several distinct business benefits associated with implementing eco-friendly shipping and packaging practices. 

Benefits of Eco-conscious Business Practices   

Integrating eco-friendly practices into your business strategy can offer a wide range of benefits. Reducing your business’s environmental footprint can positively impact the fight against global issues like pollution, climate change, and resource depletion. You can set a positive example, leading other organizations to do the same. It can also help you save money, build your brand, and improve the efficiency of your operations.    

Brand Recognition 

As awareness of environmental issues has grown, sustainability has become a major concern for many consumers. According to a 2020 consumer sentiment survey, 60-70% of U.S. consumers said they would pay more for a product that used sustainable packaging. For businesses, this means committing to sustainable products and practices that can build customer loyalty and increase revenue.  

Recruiting and Retention 

In addition to being a prominent issue for consumers, sustainability is also a priority for a significant portion of workers. In 2022, around 70% of employees and job seekers reported that sustainability programs make employers more appealing. In a competitive labor market, this can help employers attract and retain a more motivated and skilled workforce, comprised of people who share their brand values.   

Risk Mitigation  

Engaging in unsustainable business practices can damage your brand’s reputation over time, but it can also increase your risk of a surprise public relations scandal related to your environmental impact. In many cases, these scandals can attract negative media attention that may seriously harm a business’s recruiting and customer relations efforts.  

Additionally, dealing with such a scandal can cost you directly by forcing you to divert money, labor, and attention away from your core business. Implementing and adhering to sustainable practices before a scandal occurs helps minimize risk and protects your organization’s resources and reputation.

Costs of Eco-Friendly Packaging and Shipping  

Though more e-commerce businesses across industries recognize the benefits of eco-friendly shipping and packaging practices, many leaders are still concerned about the initial costs of switching to more sustainable methods. While becoming more sustainable requires an initial investment, implementing green shipping and packaging practices can save your business money over time.   

For example, switching to green packaging methods can reduce the amount of material needed to pack and ship each item, which can help you save money when purchasing these materials. Additionally, many types of green packaging materials are lighter than more traditional ones, allowing you to save on your total shipping costs by reducing the weight of each package. 

Throughout their lifecycle, sustainable materials tend to have a more minimal impact on the environment. Because of this, products made with these materials can be produced with less energy, and disposed of or reused more efficiently when they reach the end of their usable life. In the long term, investing in green packaging and shipping can yield significant financial returns and enable you to reduce your business’s impact on the environment. 

Best Practices for Eco-Friendly Packaging   

If you’re considering switching to eco-friendly packaging materials, it’s important to plan carefully and make sure that your implementation strategy fits your organizational needs and goals. Efforts to become more sustainable can backfire if you don’t have the right information. There are several things to keep in mind to ensure the success and profitability of your green packaging initiative.  

Recyclable, Reusable, and Biodegradable Compostable Materials  

The primary consideration for eco-friendly packaging is the type of material you’ll be using. A significant portion of all packaging is still made from materials that are not fully biodegradable, like plastic, making it a major contributor to pollution around the world. In fact, 40% of all plastic produced globally is made for single-use packaging.  

To avoid adding to this problem, it’s essential to use packaging that incorporates recyclable, reusable, and biodegradable materials that are safe and responsibly sourced. Single-use plastics, polystyrene foam (styrofoam), and microplastics should be eliminated whenever possible, as these materials contaminate soil and water and cause serious long-term damage to ecosystems.  

On the other hand, several sustainable materials can be just as durable, secure, and cost-effective. All the while, users don’t have to worry about polluting the environment. One of the most widely used is corrugated fiberboard, an alternative to traditional cardboard that’s made from mostly recycled paper and does not contain bleaches or dyes. Corrugated packaging is highly renewable and is recovered from the recycling process more than any other packaging material

There are also some revolutionary alternative materials derived from unconventional sources. For example, packaging material made from mycelium has been developed as an alternative to traditional plastics. Also called ‘mushroom plastic,’ this material breaks down naturally after use and can be made cheaply with minimal processing. 

As an additional sustainable alternative, bioplastics are a category of plastic-like materials made from renewable biomass sources, such as vegetable oils and starches, rather than fossil fuels. Unlike conventional plastics, these materials are biodegradable in most cases, and can be recycled naturally through biological processes.  

Minimizing Waste  

Even if you use environmentally-friendly materials, your business’s sustainability efforts may still be compromised if your packaging methods aren’t designed to minimize waste. Optimizing your packaging strategy to prevent waste can help you save money, reduce your environmental impact, and fulfill your orders more efficiently.  

One of the most common ways to reduce waste is to eliminate excess packaging. While many businesses prioritize secure packaging as they prepare their client’s orders for shipping, using too much unnecessary packaging can increase waste without providing any practical value for the business or the client. To avoid this, you should use only enough packaging to keep a product safe as it’s being transported to the consumer.  

For some items that are already secured in their own packaging, it might be worthwhile to consider shipping them ‘in their own container’ rather than replacing or adding to the existing packaging. If feasible for your business, shipping pre-packaged items as they are can save you a significant amount of money, time, and materials. 

When minimizing waste, ensure you’re shipping items in the smallest possible box needed to keep them secure. Along with creating more trash, packing and shipping orders in oversized boxes can waste transportation and storage space, drive up shipping costs, and create unbalanced loads that increase the risk of accidents. 

Best Practices for Green Shipping  

E-commerce shipping is a major source of emissions around the world, and this is likely to stay the case as the industry continues to grow. To help address this issue, any businesses that sell goods online should consider implementing more eco-friendly shipping practices. 

While it will likely require some reorganization, making your shipping methods more sustainable can greatly benefit your profits and brand. Not every strategy will work for every organization, but there are several green shipping best practices that all e-commerce businesses should understand. 

Consolidating Orders Into Single Shipments  

In many cases, e-commerce customers will order multiple items to the same shipping address at the same time. If these orders aren’t handled correctly, multiple delivery vehicles may need to make trips to the same house over a short period, which can create a significant amount of unnecessary pollution. However, these issues can be mitigated through order consolidation.  

Order consolidation is sending out several items from the same order in a single shipment. In addition to reducing shipping costs and fulfillment times,  consolidating orders can improve customer satisfaction by ensuring that buyers receive their complete order in one delivery, rather than waiting for some items to arrive later. 

Route Optimization  

When delivering packages to multiple e-commerce customers, the efficiency of your driving route can substantially impact your bottom line. This is especially true for e-commerce websites offering last-mile delivery, as they must transport orders directly to their customers’ homes. While highly advantageous for customers, last-mile delivery can complicate the fulfillment process for businesses.  

To reduce their environmental impact and support efficient deliveries to all customers, e-commerce businesses must optimize their driving routes to avoid waste and maximize the number of orders they can fulfill each day. Creating an optimal route can help you keep your customers satisfied with on-schedule deliveries and avoid producing unnecessary emissions. 

Sustainable Returns  

Return shipments are a major source of e-commerce-related pollution. Retail return rates have increased as online shopping has grown in popularity. From 2020 to 2021, the average retail return rate jumped from 10.6% to 16.6%, fueled heavily by rising e-commerce sales. As e-commerce returns become more frequent, retail inventory management will become more important for businesses.  

There are several ways to implement a more sustainable return policy for your e-commerce business. One such method, omnichannel delivery, gives customers multiple options to return products, including bringing them to a nearby store location (if one exists) rather than shipping them back to a centralized warehouse.  

It is also highly beneficial to combine multiple return orders into the same shipment, similar to how you would consolidate deliveries to customers. Doing this instead of shipping returns individually can help you substantially reduce emissions by completing the same number of returns in fewer trips. 

Use Ground-based Shipping When Possible 

While everyone loves next-day delivery, a significant environmental impact is associated with faster shipping methods. Fulfilling next-day shipping orders gives e-commerce businesses far less room to be efficient, as they must keep more vehicles in service at once, and will likely have fewer opportunities to consolidate shipments.  

Ground-based shipping is considered a much more sustainable alternative to expedited or next-day shipping. Switching to ground-based shipping can reduce the emissions created by delivery vehicles. Although it is slower, customers may be incentivized to choose ground-based shipping because of its lower cost, or because of their own environmental concerns. 

Utilizing Technology  

Just as technology has brought about the rise of online shopping, it has also given businesses new tools to manage their e-commerce orders more effectively. Tracking your orders and inventory can be very tedious, especially as your business grows. 

However, using the right technology can help you save money, operate more efficiently, and reduce waste within your organization. Integrated tools like enterprise resource management (ERP) software can help businesses streamline essential processes and consolidate important information into a single platform.  

There are a variety of specialized ERP software programs with features designed for businesses of different shapes and sizes, including inventory management systems for warehouses that offer features like automated purchasing and vendor management, and small business inventory software created to meet the needs of growing organizations. 

What are the primary reasons for holding inventory?

Learn the reasons for holding inventory and its effects.

view of a warehouse shelving aisle

Picture this:

You’re a manufacturer who produces high-end furniture for your clients. You source raw materials from suppliers with three to four weeks lead time, and your entire production process takes another two. 

To ensure you can meet customer demand quickly and efficiently—and to keep customers happy—you keep raw materials and the finished products on hand. 

This ability to meet customer demand without delays is but one reason for holding inventory. 

Five additional reasons for holding inventory

Holding inventory offers a host of other benefits—from helping you reach your profit targets and avoiding costly stockouts to reducing costs and protecting against unforeseen supply chain disruptions that can really throw a wrench into your operations.

  1. Reach your profit targets. Meeting customer demand promptly means you’re better poised to reach your revenue and profit targets.
  2. Reduce customer lead times. You can fulfill orders immediately without having to order from suppliers and wait for delivery. Faster order fulfillment keeps customers satisfied and loyal.
  3. Avoid stockouts. Stockouts occur when you run out of a particular product, which can be costly, leading to lost sales and customers. This is a distinct possibility during busier periods, and it’s why, for example, retailers hold extra inventory during the festive season. 
  4. Reduce costs. You avoid having to place last-minute orders, which usually cost more, and you can take advantage of quantity discounts and reduced shipping costs by ordering in bulk.
  5. Avoid supply chain disruptions. Unforeseen disruptions in the supply chain can lead to order delays, unhappy customers, and lost profits. Maybe a manufacturer had to shut down their operation for a few days due to health and safety concerns. 

Perhaps the lead time on a particular component is longer than usual due to labor strikes in a factory. Regardless, by having safety stock on hand, you protect against these scenarios—avoiding delays in shipping and production—and can continue to meet customer demand. 

A word of caution on holding inventory

As important as holding inventory may be, carrying too much can be detrimental. With too much capital tied up in stock that you could use elsewhere, your carrying or holding costs will soar, where:

Carrying cost refers to all the costs of storing and maintaining inventory, including warehousing, wages, transportation, insurance, security, depreciation, rent, utilities, and taxes. 

You can calculate it using the inventory holding cost formula:

Total Holding Costs / Total Annual Inventory Value* 100

For example, if you hold $200,000 worth of inventory and your total holding costs are $15,000, then your holding cost percentage is 20%.

By analyzing your carrying costs, you can make better inventory management decisions to boost your bottom line, including determining the optimal amount of inventory to hold and pinpointing strategies to control holding costs. 

One way to keep carrying costs in check is to calculate the correct reorder point: the inventory level at which you should replenish stock.

Learn more by reading our short guide on the reorder point and how to calculate it.

Decentralized vs. Centralized Manufacturing: What’s the Difference?

Learn about the benefits and differences of both approaches.

view of a warehouse shelving aisle

It’s no secret that manufacturing is crucial to the global economy. It transforms raw materials into goods we consume daily, drives economic growth, creates jobs, boosts innovation, and helps countries participate in global trade.

But not all companies use the same manufacturing approach, with some opting for decentralization over centralization and vice versa. 

What’s the difference? Which approach is better? Here’s what you need to know. 

What is centralized manufacturing? 

Centralized manufacturing is a production model where manufacturing occurs in a single central facility. 

What are the pros of centralized manufacturing?

  • High economies of scale. Companies that produce large volumes of standard products often use centralized manufacturing. Higher product volumes in a single factory lead to lower per-unit costs as fixed costs can be spread across a larger number of units. 
  • Consistent product quality. Products are produced in the same factory with standardized processes and procedures, allowing you to better control quality.
  • Lower initial capital and investment costs. A single facility generally requires a lower capital investment than multiple ones.
  • Easy coordination and management. It’s easier to manage production processes in one location compared to many.

What are the cons of centralized manufacturing?

  • Inflexibility due to the cost of customization. A product change often requires an entire system change.
  • Longer lead times. Because production is centralized, products must often be transported to various distribution points before reaching customers.
  • Higher transportation costs. Shipping distances can be longer, leading to higher transportation costs.
  • Greater supply chain risks. Any disruptions in one central facility can significantly impact the entire supply chain, as production cannot easily be shifted to a new location. 

What is decentralized manufacturing?

Decentralized manufacturing is a production model where manufacturing is distributed across multiple plants to provide coverage to larger areas. Plants are usually located near customers.

What are the pros of decentralized manufacturing?

  • Shorter lead times. You can more easily set up production closer to your market so products reach customers quicker.
  • Lower transportation costs. Shorter shipping distances between production and customers lead to lower transportation costs. 
  • Flexibility to meet local demand. You can quickly scale production up or down across facilities, making you more flexible and responsive to meeting demand.
  • Lower supply chain risk. The impact on the supply chain from a disruption in one factory is less severe because production is spread across facilities.

What are the cons of decentralized manufacturing?

  • Higher production costs per unit. You don’t achieve the same economies of scale compared to centralized manufacturing. 
  • Higher investment costs. It generally costs more to set up multiple locations compared to one.
  • Inconsistent product quality. Different locations have different standards and processes, so maintaining product quality can be tricky. 
  • Difficulty in coordinating production. It’s harder to manage different processes across multiple locations.

 

Centralized vs. decentralized manufacturing

By now you can likely infer what the differences are, but for clarity here’s a side-by-side comparison. Keep in mind that these differences may not always hold true.

 

Centralized Manufacturing

Decentralized Manufacturing

Production

Concentrated in one or a few facilities

Dispersed across multiple plants

Economies of scale

High

Low

Product quality

Better due to standardized processes in one facility

Can be inconsistent across locations

Lead times 

Longer as production may be farther away from the market 

Shorter as production may be closer to the market

Transportation costs

Higher with longer shipping distances

Lower with shorter shipping distances

Initial investment 

Lower for one location

Higher for multiple

Coordination and management

Easier to manage processes in one location

Harder to manage operations across locations

Supply chain risk

Higher as a disruption in one location can impact the entire supply chain

Lower as production is spread across locations

Flexibility 

Production cannot easily be scaled up or down to meet demand.

Production can more easily be scaled up or down to meet demand.

 

Which manufacturing approach is right for you?

Neither approach is right nor wrong. The answer to this question will depend on thoroughly analyzing all relevant factors. First, weigh the pros and cons of each approach by considering all factors like lead time, economies of scale, and supply chain risk.

Next, consider other factors like market demand, customer base, company culture and values, type of product, and growth strategy. For instance, if you have a concentrated market, it may make sense to centralize manufacturing. But if your market is spread out across different regions, decentralization is probably the better choice. Similarly, if your company prioritizes sustainability, decentralized manufacturing may be more practical in helping you keep emissions down due to shorter shipping distances.

You may even choose to embrace both approaches. In fact, it’s common practice to begin with a single, centralized location at launch and then transform into a decentralized structure in response to growing demand.

Regardless of what approach you choose, Fishbowl is here to help. Gain complete visibility into your manufacturing workflows, streamline processes, and grow your manufacturing business with the industry’s most flexible ERP software solution. 

Book a demo today.

Reorder point formula and calculator: A quick guide

In this quick guide, you’ll learn what it is, why it matters, and how to calculate it using a handy reorder point calculator.

white man with glasses wearing a reflective vest reviewing architectural paper work

What is the reorder point? 

Constantly experiencing stock shortages? Unable to meet demand? Need more cash? The reorder point (ROP) can help. 

The reorder point or ROP is the inventory level at which a company should replenish stock to avoid shortages and stockouts. This level varies depending on factors like demand variability, lead time, safety stock, basic stock, and supplier reliability. For instance, if a supplier always delivers a product promptly—and sometimes even ahead of time—you’ll have a lower ROP. 

Knowing the ROP benefits established businesses that have been selling products for years and new ones that are just starting.

But why exactly is the reorder point important?

There are several reasons:

  1. Avoid stockouts: The correct ROP helps you order stock at the right time to replenish it promptly to avoid stockouts and shortages.
  2. Optimize inventory levels: Replenishing stock at just the right time helps you maintain an optimal inventory level where you have just enough stock to meet demand without having too much capital tied up.
  3. Boost cash flow: Minimizing the capital tied up in stock improves your cash flow, giving you money for other important business purposes like expansion. 
  4. Reduce lead times: Having the correct ROP ensures you receive new inventory on time to fulfil customer orders promptly.

How do you calculate the reorder point?

You can calculate your ROP using our handy reorder point calculator. Simply fill out the fields and click Calculate.

This calculator is based on the following ROP formula:

(Lead Time + Safety Stock + Basic Stock) * Unit Sales Per Day

Where:

  1. Lead time = the days between issuing a purchase order and receiving the product(s).
  2. Safety stock = the number of days’ worth of inventory you keep in case of emergency.
  3. Basic stock = the number of days’ worth of inventory you usually keep on hand.
  4. Unit sales per day = The average number of products you sell daily.

For example, let’s assume that for a particular product, you have a lead time of 5 days, a safety stock of 15 units, and a basic stock of 35 units. If you sell an average of 80 units per day, your ROP will be:

ROP = (5 days + 15 units + 35 units) x 80 units per day

ROP = 55 x 80

ROP = 4400 units

To avoid stockouts, you should order new stock when you have 4400 units left.

Easily calculate reorder point with Fishbowl today

Fishbowl’s reorder point calculator helps you maintain the right inventory levels to meet demand without carrying excess stock. It’s a small part of the advanced inventory management features in Fishbowl Manufacturing and Fishbowl Warehouse. 

Not only can you use it to automatically update and calculate your optimal ROP overtime without any manual calculations—thereby reducing human error and increasing efficiency—but you can track factors influencing it like sales trends, demand changes, and supplier history. Want to see it in action? Join thousands of businesses that use Fishbowl to simplify their inventory management. Book a demo today.

How inventory management software can help set your brand apart

How and why an integrated management system can benefit your organization through increased efficiency and set you apart from the competition.

digital computer

For SMBs looking to create a website and build a brand, it can be difficult to reach new customers. After all, the marketplace is competitive, and large e-commerce heavyweights can justify a lower price point due to large volume purchases.

How do you compete?

One way is to invest in the right inventory management software (IMS) to improve efficiency, reduce costs, and make better business decisions. 

What is an IMS?

At a high level, an IMS is a software that helps you manage and optimize inventory levels. Use it to track purchase orders, sales, shipping information, and inventory levels. Then access all this information from a centralized database.

Many systems are available on the market today, each offering different features. These include everything from basic software for managing simple operations like stock counts to full-fledged advanced IMS solutions tailored to handle all complexities of inventory management. 

So, be sure to do your due diligence when choosing an IMS by considering everything from pricing and usability to integration options and how your business requirements align with the software’s features. 

Key features to look out for include:

  • Real-time inventory tracking and traceability across all locations
  • Detailed reports for better decision-making
  • Integration with other popular business tools like QuickBooks and Shopify

Three ways an IMS helps you compete

Here are three important ways an IMS can help you compete.

1. Improved inventory accuracy and efficiency

Accurate inventory records are crucial to running an efficient business as it allows you to fulfill orders on time without carrying excess stock.

The right software can track inventory in real-time and automate tasks like stock counts. This means you save time and reduces errors by not tracking inventory manually and become more efficient than those who do.

A robust IMS also gives you visibility into stock from anywhere, anytime, regardless of the number of locations you have, so you always know what you have on hand for future planning. You can also quickly identify the location of any stock that needs to be recalled and excluded from orders.

All in all, this enables faster and more prompt delivery, improving overall customer satisfaction and brand loyalty.

 2. Reduces costs through automation 

Keeping costs down allows you to protect margins and better compete with other businesses. 

One way to do this is through automation. A robust IMS lets you automate everything from stock counts, purchase order creation, and stock replenishment to barcode scanning, sales tracking, and report generation.

Not only does this type of automation help avoid costly errors that often arise from manual input, but it can actually help you reduce and control your costs in the first place.

For instance, by using automatic stock replenishment when inventory levels reach a certain point, you can maintain optimal levels to avoid higher inventory carrying costs. You also avoid having to place last-minute orders with suppliers to meet demand which usually comes at a hefty price tag.

Need help leveling up your inventory management to reduce costs? Read how Prince Michel Vineyard & Winery did it.

 3. Better business planning through data insights

Valuable data helps you make better decisions around inventory that can reduce costs, boost your bottom line, and give you a competitive advantage.

An IMS provides this valuable data through real-time reporting on things like sales trends and even asset tracking. For example, a flexible IMS like Fishbowl gives you access to over 150 standard reports. This includes everything from COGS, bill of materials, and gross sales to product margin, inventory availability, and reorder reports.

Invest in inventory management software today

It can be hard for you to compete in today’s competitive online space. But, with the right IMS in your corner, you’ll have a leg up on the competition through improved inventory accuracy and efficiency, reduced costs, and the ability to make better business decisions.

Fishbowl is the industry’s most flexible and popular IMS. Rated as the top IMS for QuickBooks for 20 years and providing the same functionality of an enterprise ERP at less than 20% of the cost, Fishbowl helps growing businesses efficiently manage their inventory from a single platform.

Book a demo to learn more.

How Fishbowl’s CFO prioritizes operational efficiency

Fishbowl’s CFO, Brian Lanier, shares the importance of driving operational efficiency with data. 

gears with icons in the middle

Making data a priority seems fundamental, but when you think about it at a high level, for a finance leader to make their company operate more efficiently, data takes the highest priority. 

Throw in the fact that a CFO also must look at other priorities, like cost management, performance, growth, talent, and compliance, and the list of priorities gets stacked a little tall. But can a CFO truly master those other areas if their data isn’t prioritized and understood? 

 Brian Lanier, CFO at Fishbowl, gives us a peek at his experience with driving operational efficiency at Fishbowl and other SaaS companies he has had the privilege of leading. Brian’s main responsibilities as CFO are reporting financial metrics, gathering the data needed to help different departments identify operational efficiencies and opportunities to eliminate waste, and implementing controls and risk mitigation across the company. 

Suppose you are a finance leader or interested in how SMBs can prioritize operational efficiency. In that case, Brians offers a few suggestions from his experience that can help identify the relevant insights and dig deep to make sense of the data. 

The importance of metric reporting 

“Not only are we talking about tracking metrics for different departments and individuals, but it’s my job to look at the company as a whole and how everything ties together.” 

“For SMBs, I begin with high-level metrics to assess the overall health of the company, in order of priority,” such as: 

  1. Cash flow and runway 
  2. Total revenue and growth rates 
  3. Profitability, such as net income 
  4. Balance sheet strength, including debt and liabilities 

“After having these things in order, I can now dig deeper. I look at our overall pricing structure to make sure we are aligned with the value we deliver to our customers, as well as how we compare to competitors. This is a starting point that will drive your subsequent analysis and is essential to understand.” 

“Next, I look at the gross margin and departmental costs, and continue to dig where the data leads me. The more data and metrics you uncover, the more clearly you can understand your company and where the opportunities for improvement lie. Every company will look different, but the analysis is similar. Do the costs make sense for your company or compared to industry benchmarks? What are the levers you can pull to impact the financial performance of your company?” 

Utilizing a CFO dashboard 

“Once a finance leader understands the metrics critical to your business, you focus on the levers, where you have the most leverage in the company.” 

“For example, every company’s largest expense will look different. Assuming your largest expenses are labor and materials, a small change in your materials cost could have more impact on your business than a drastic change in marketing spend. Once you identify that lever, based on your cost structure, you can see where to focus your time.” 

“Once your dashboard is built and you have access to data for your most critical levers, then you can track the health of those levers, such as: 

  • What is the gross margin for our products? 
  • At what rate are our customers churning?
  • What is our revenue per employee? 

“For best results, continue to monitor those levers against benchmark expectations, as well as changes and trends over time.” 

Operational efficiencies   

“It’s very hard to identify where you can become more operationally efficient without having access to the data. As an example, if you’re in manufacturing and you don’t have the right data to identify what your cost per unit is or what the most important cost levers are, you won’t be able to identify which products might be losing money, or how to best correct the problem.” 

“It all starts with data. Once you have a system that can capture the data on a granular level, you can see where waste could exist. Also, having a system that provides access to data gives you the opportunity to drop manual processes to automate them, which can drive a powerful dashboard and workflow. This gives you real-time information about your products, costs, and trends.” 

“Data prioritization is what’s going to lead to greater operational efficiency and transformation. With data at your fingertips, you can expect a return on your investment, a more prepared finance leader, and a more efficient business.” 

The rise of the subscription model and how any business can start selling it

The subscription business model is on the rise, with 70% of business leaders saying it will be critical to their growth in the coming years.

an infographic walking through how of how a subscription business model works

This model is not new, but new technology is driving growth. Just think of the growth in streaming services and how smartphones have made subscriptions more accessible globally. It’s also taking root in industries where it hasn’t traditionally, like manufacturing and specialty markets.

But what’s fuelling growth besides technology? How can you ride the wave? Here’s what you need to know.

What is a subscription business model?

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