October 7, 2014 —
When it comes to buying merchandise, don’t just think about how much you’ll be spending. Think about how much you can save.
I was in a store recently watching the owner look over the inventory with a sales rep in tow. The rep was holding a note pad while the two of them walked each aisle and looked at the bins of parts.
The owner of the store would pull out a bin so that he could see how many of that part he had, and with a brief hesitation would say to the rep, “Give me two of this.”
You could tell much thought was being given to the process because he would occasionally correct himself: “Give me four of this … no, make that just two.”
In today’s world, that technique for ordering has given way to automation. As dealers sell furniture and home furnishings to their customers, their point of sale system tracks how many and when each item is sold. The system then calculates a frequency rate and produces a report telling the buyer how many to reorder.
This usually works, but what happens when the store has a transaction out of the ordinary. Perhaps a customer orders an abnormal quantity of something. Maybe a manufacturer ships an incorrect piece or color. The retailer decides to keep the error and does sell it but does not want to stock the item. Yet the system doesn’t know this and wants to reorder in advance of this unusual order happening again. When the merchandise does not sell, the store finds itself in an overstocked position.
Inventory control is important to any store. With most stores, inventory represents the biggest investment of money; the only possible other sizable investment being the building that houses it.
I remember attending a class on inventory control where the teacher told a story of a small mom-and-pop business. The couple began the store out of their garage and slowly grew the business to where they had the need for a shop and sizable warehouse for all the products they had added to their selection over the years.
What had started as a hobby while they worked their day jobs grew to the point they both quit and were now working full time in their store. They managed to pay off their home, the building they bought for the business and were in the process of developing a sizable nest egg for retirement.
Their method of ordering was the same as the example previously described. However, when they added their newest warehouse, the couple decided they no longer had to order on a ‘onesie-twosie’ basis. They figured they could finally order in larger quantities and get a better price.
The teacher in my class correctly asked, “Why would a business that has profited so much from ordering in a conservative manner change to another manner?”
When you are ordering merchandise there is a lot to be considered. The cost of any item is more than just the price you are paying. With many manufacturers, they have minimum quantity or minimum dollar amount for orders. Perhaps the manufacturer has a service fee for orders that do not meet this minimum. Either or both of these charges should be a component of what is referred to as the ‘landed’ cost.
For example, let’s say you order lamps. If you do not meet the minimum and incur a service fee, the cost of this fee should be added to the cost of the item before you consider the selling price.
Landed cost also refers to an item once it has arrived and is placed on the shelf in your warehouse. There is an expense your business incurs with the person taking a case or pallet off the truck, unpacking it, and placing the items on the warehouse shelf. Add to that the freight factor and/or the service fee and you likely have a very different cost for that item.
How much warehouse space does that product consume? If you look at your storage area and consider all of the operating expenses for that area, the rent or mortgage payment, you can determine a “cost per cubic foot” regardless of whether or not an item sits on the shelf. Traditional retail uses a “cost per square foot.” However, because we have shelves with items stocked above each other, we could use a cubic foot consideration.
A big consideration is the money being saved as well as the money being spent. Yes, there are savings you may have by buying in quantity. However, you have to consider what else that money could be doing for you if you did not buy so many.
This could be a sizable addition of business for the store, but only if there was money available to put the necessary parts on the shelves. Past the consideration of adding this new category of products, any inventory sitting on a shelf can become expensive.
Think about purchasing any part. Our example manufacturer gives terms of 30 days to pay for the item. If the item is sold within the 30 days, our store has received the item and received money for the item before having paid the manufacturer. We refer to this as “playing on house money” because the store has no exposure.
The other side of the scenario occurs when the store pays the manufacturer with a credit card. If the credit card is charging interest from the time of purchase, then that interest should actually be a part of the cost of the item.
If the store owner buys a dozen of an item and has that initial 30 days to pay for the twelve, then any of the items still sitting on the shelf after 30 days is also incurring interest. While this interest may not be paid to a credit card, this is interest that your money could be earning if it were doing something else for you.
Think if you were to invest that money in a money-market fund that earns 1.3 percent over a year. Now that product that is sitting on your shelves after the thirty days is costing you the opportunity to earn that amount of money.
This is not to be a long and complicated calculation that you should be doing with each and every item that you order. Instead, these examples are cause for you to think about how you buy.
Once you have paid the manufacturer and it is your money that is sitting on the shelf in the form of product, you need to ask yourself if that is the best place for your money to be sitting.
If the answer is ‘yes’, then congratulations! You have demonstrated some savvy buying decisions. If the answer is ‘no’, then as you sell down that inventory, look for other products, or ways, to get the most from the investment you have with your money.
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