When Is Your Procurement Problem Not a Procurement Problem?

Stockouts leading to rushed orders. Increased procurement costs due to poor turnover. Poor lead time management leading to supplier penalties. These are just a few of the procurement problems organizations face today. But the question remains: Are these problems on their own or just symptoms of a larger inventory management issue?

Stockouts are bad for business

Inventory stockouts lead to lost sales and revenue, damaged customer relationships, and expensive operational disruptions. They occur when inventory levels are not accurately tracked or forecasted. Procurement is then forced to place urgent, last-minute orders at much higher costs due to expedited shipping or rush fees. So, are stockouts a procurement problem or an inventory management problem?

The underlying data indicates that stockouts are more of an inventory management issue rather than a procurement problem. According to the National Retail Federation, nearly 75% of stockouts are caused by mismanagement of inventory at the store or warehouse level. This means that even nominal inventory management practices and software should work to correct the burden that stockouts can place on an enterprise. Now, imagine what enterprise-grade inventory management could do. With tools like cloud-native inventory management, off-line mobility, and interoperability with any ERP, an organization could capture back the 4% of revenue lost due to stockouts.

The impact of overstock on operations

While stockouts are bad enough, having too much of something is equally bad. According to The Hackett Group, companies with poor inventory turnover tend to have 20-30% of their working capital tied up in excess inventory. This excess leads to liquidity issues for the organization, often resulting in the organization borrowing more frequently. Additionally, organizations pay higher holding costs for inventory as the days inventory outstanding (DIO) stretches from 30 days to 90 or even 120 days. This places a huge burden on cash flow. Worse yet, procurement buys the fast-moving inventory much more frequently and on shorter time frames with less working capital. But is this a procurement problem or an inventory management problem?

Inaccurate demand forecasting, ineffective reorder points, and a lack of real-time data contribute to poor inventory turnover. Those problems stem from poor inventory management, not procurement. An enterprise inventory platform provides tools for data-driven demand forecasting to accurately balance inventory levels, reducing both overstocks and stockouts. Using a cyclical counting method, aided by mobility, can focus on the high-turnover items and limit the procurement of low-turnover products. Data from the inventory management platform can help make decisions about clearance and liquidation strategies. Finally, an organization utilizing a modern inventory management platform can better understand the cash conversion cycle and turnover rates of inventory.

Poor inventory turnover ties up capital and drives up operational costs, impacting both profitability and cash flow. By implementing a cloud-native inventory management platform, organizations can gain real-time visibility into stock levels and optimize procurement processes, ultimately improving turnover and driving more efficient operations.

Poor planning strains relationships

Supplier relationships are critical to the success of any business. Good relationships can lead to cost savings, stability, quality, and differentiation. However, these relationships are strained by inconsistent ordering, failure to meet minimum order requirements, and contract breaches. So, are these potential strains on a supplier relationship a procurement problem or an inventory management problem?

According to Deloitte, 33% of companies admit that poor inventory planning leads to frequent rush orders. These rush orders disrupt suppliers’ production schedules, causing higher manufacturing costs, which are often passed back to the buyer. Suppliers may charge up to 25% more for last-minute orders, which can damage long-term relationships. Additionally, changes and adjustments to orders often place suppliers at a disadvantage after acquiring raw materials and planning production. This can lead to suppliers deprioritizing a buyer’s future order.

Advantages of a modern inventory management system

Cloud-native inventory management platforms provide real-time visibility for better forecasting. Stock levels are tracked and matched with sales trends from the ordering system, and inventory reorder points provide a clear picture of demand for an item. This information helps the buyer accurately communicate with the supplier and provides consistent lead times for production. Additionally, modern benefits like automatic reordering and notifications help smooth out procurement cycles.

Having a modern inventory management system also helps provide a faster response to demand fluctuations. Integrated AI tools provide the ability to quickly adjust inventory orders based on market trends, sales spikes, or seasonal demand. This is advantageous as it allows changes to be communicated with suppliers in real time, thus maintaining the relationship and staying ahead of breaches of contract or penalties.

Many of the procurement challenges businesses face today—whether it's stockouts, increased costs, or strained supplier relationships—are often symptoms of deeper inventory management issues. By addressing the root cause with a modern inventory management platform, organizations can gain real-time visibility, improve demand forecasting, and optimize reorder points, leading to smoother procurement processes.

Running a more efficient operation gives you a competitive edge, especially in a market where customer loyalty isn’t guaranteed. Modernizing inventory management isn’t just an upgrade—it’s a necessity for staying ahead.