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Changing your buying strategy
You do not have to buy like a big busines
There is a old story in retailing about a small ‘Mom and Pop’ business. The couple opened their business by taking loans against the retirement funds that had from their previous jobs. They were very careful in controlling the operating expenses as well being careful in controlling their inventory.
You could watch them as they worked with sales representatives that called on them. One of them would walk through an aisle with the sales rep at their side, looking at item after item and deciding how many to order.
“Give me two of this; give me three of that. No, make it four of that item.” The scenario would continue until they had walked past all of the items supplied by the vendor. Over a decade the couple continued this process with each of their vendors as they worked to grow their business.
Their strategy was successful as they earned a decent salary for both of them as well as paid back all of the money they borrowed from the retirement funds. The business continued to grow, but one day as they looked at their year-end financials one said to the other, “We have finally grown the business so that we can now buy in case lots like the big businesses.”
An interesting story, but it begs for a question to be asked. “If the couple grew their business by ordering merchandise on a ‘onesie-twosie’ basis, why would you change to a format that is different from the one that made the money?”
Perhaps in an economy that is very slowly showing signs of a rebound, the logic of ordering merchandise in small quantities makes a lot of sense. In any economy, it makes sense to ask the question of why should a business owner change their strategy?
If the business does not have the funds to purchase inventory in quantity, the discussion becomes a moot point. For the business that has sufficient assets to purchase in quantity, the strategy makes sense only if there is more profit to be made. How would you know which is better?
Consider an item that in season you sell six during each week. If the terms from the vendor are ‘net 30’, then any quantity up to 24 that is ordered, allows you to sell all of the merchandise before you have to pay the invoice.
You can apply the same math to any product. Go to a trade show and look at the specials being offered by any of the vendors. Consider the quantity necessary to get the special price, how fast you sell the item, and determine if you will sell all of the item before you have to pay for it. Of course, you also have to consider the discounted price and any difference in paying the freight for the delivery of the item.
Let’s apply numbers to the example. Let’s begin by stating you should not be lowering the selling price of any item because you can pay less for the item. Because you find a way to buy an item for less, that extra profit should go to your bottom line.
The item sells for $2.00 and when you buy on that ‘onesie-twosie’ basis, you are buying a dozen at a time and getting 30 days to pay for it with $1.20 being the cost. Your gross profit is eighty cents and your gross margin is 40%. Although it does not figure into your margin, it costs ten cents for the freight to get the item delivered. Selling that six each week, means you are definitely selling the item before you have to pay for it and if you were selling that same quantity every week of the year, you are getting an inventory turn of approximately 24 turns per year. (If only you could do everything like this)
Then comes the special from the vendor. You can now buy the item for $1.00 when you buy 108 at a time. There is no freight involved, and you get 90 days to pay for it. If you order the special, you would sell 96 of the item by the time you have to pay for it. That means you can make an additional twenty cents on each item you sell, plus you do not have the ten cent freight bill, for an extra thirty cents of profit on each item you sell. That is pretty good for a two dollar sale.
Of course, having sold 96, you have those last 12 on hand when the bill comes due. To be correct in our calculations, you would have to consider the cost of the 12 on hand with a cost of $1.00 each. Those twelve you have are costing slightly more than the $1.00 because you have to consider this is now your money sitting on the shelf and not the vendor’s money.
In this situation, the special from the vendor does make sense because we have made an extra thirty cents on the sale of 108 items, minus a very small amount interest on the last twelve. This is a part of good money management for your business.
The other aspect of good management occurs in the many situations where the ‘onesie-twosie’ scenario makes the most sense. In the situations where you are not stocking items in a case quantity, there seems to be a logic that says the money not being invested in inventory should be kept in the checking account – especially during a tough economic time.
The problem with that logic is that the money cannot be making any money for you. Even if that money were invested in a certificate of deposit, it would at best earn 2% over the course of a year.
Instead, that money needs to be invested in different inventory. The sound investment is to think of what other items your target customer could buy from you. Especially for those nurseries that decide they are not going to stock hand tools, long handle tools, garden hoses, nozzles, gloves and many other accessories. It could also be said for considering selling patio furniture, grills, outdoor lighting, outdoor sound and anything else that goes outdoors.
Put these items in your business and with a turn of only one time a year, you are making much more money than the 2% the bank is offering. The key is having additional items you can sell to your customer instead of having excessive depth of a limited number of items.
While the business that insists on be exclusive to be a nursery, the customer does not see it that way. They see an ‘outdoor room’, and they see items for that area every time they walk into the big box that stocks all those items. The question is simply where they are going to buy these items. The question is whether you are going to let money sit there on the shelf in the form of excessive depth, in a bank making little in return, or if you are going to let it go to work for you.
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|This article is copyrighted by Tom Shay and Profits Plus Solutions, who can be reached at: PO Box 1577, St. Petersburg, Fl. 33731. Phone 727-464-2182. It may be printed for an individual to read, but not duplicated or distributed without expressed written consent of the copyright owner.|
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