Finding the Sweet Spot of Procurement - Small Retails

Let's be honest , Most small business retailers are in immense pressure from their large suppliers who typically serve a larger market and have a greater financial muscle power to control or threaten them with their brand image. As I have written my previous article on how small retailers who sell hard goods can reduce the holding cost by focusing on the movement analysis of the inventory and switch to a better method of sourcing based on the demand of the customer ( In case you missed it , here it is       The Small Retail Stock Liquidation Problem - How to avoid it ?    ) , I thought I will take a deeper dive in to it this time by addressing a more practical problem. How can small retailers source based on the demand of the customer by not annoying their large suppliers ?

Note: For obvious reasons, I will be talking about small retailers who sell hard goods when I refer "Small Business Retailers".

The Problem :

Here is a small illustration of what small business retailers face in todays market everyday ! While large suppliers offers them credit and turn over discounts based on their yearly purchase volumes, they also push their latest products and designs regardless of the retailers will or demand. The notion here is that the retailer should "Stock" and "Sell" whatever their suppliers will manufacture and distribute. Now before you disagree, let me tell you that its not the case all the time , the suppliers also supports the retailers when the demand of a certain product picks up, but in many cases, the small retailers are forced to purchase in bulk volumes to match the volume targets imposed by the supplier.

On the other hand , the highly competitive market demands quality products and services from the retailer at a very competitive price. The retailer has to stock in huge to make quick deliveries and to make sure all latest products are available. Any mismatch between market demand , the stocks that the retailer is holding and the products pushed from the supplier will hurt very badly to the small retailer as he will have to keep increasing the stock holding facilities which will in turn eat out the cash flows and the profit margins. This calls for a very crucial problem of finding the "sweet spot"of procuring and storing the right products at the right amount for the small retailers if they cannot truly source products only as per customer demand.

What can we do ?

If you look at the Venn diagram ( drawn from a retailers point of view ) above , you can see that the "sweet spot of the procurement "lies in the best interest of the small retailer with respect to fulfilling the customer needs and getting the best out of their suppliers.

Ideally this spot refers to procuring and storing a certain volume of products so that the retailer can have minimum holding cost with maximum profitability by maintaining high standards of quality services to their customers and building a healthy relationship with their large suppliers at the same time !

This might seem to be an impossible task for many small retailers but achieving this could be made as one of the business goals and any gap from this to the current situation could be taken up as one of the top priority problems that should be solved by a total involvement of the leadership, employees , suppliers and logistics partners.

How to do this ?

Now if you ask a small business retail owner , you will get the classic response " Well, we should improve our sales by doing more marketing so that we can achieve all the brand targets and have a continuous shipping pattern to improve our inventory turns"

While this seems to be a very logical explanation, it still does not addresses the question of demand mismatches that can happen in the supply chain . Also, there is a fact that the brand targets always go up when your retail sales improves ! Therefore, it is clear that more sales cannot solve this problem.

Now let us say that you are following the above process, while product movement analysis will give you an idea of what are fast moving and will help you liquidate the slow movers faster , you could also check if the products are not selling because the customer is not informed or educated about it. Sometimes those products could be more profitable too !

The most critical part of this process is to document a part order based on the movements of the products and based on the volume committed to the brands / suppliers. This can only be done by clearly knowing what is the maximum stock that we can hold even if something is fast moving ( reducing this will be a continuous improvement target ! ) . Sometimes , this could be lesser than the committed volume to the supplier. The difference shall be carefully analysed before documenting a part order based on the brand commitments. That is, a slight increase , say a 5 % increase in a maximum stock limits on a fast moving item is likely to have a lesser impact on your holding cost even if you comply to the ordering requirements of the supplier.

This way , you could start having more control over your holding cost and the profitability while still maintaining a good relationship with the supplier. Improving this process to an ideal state of the "sweet spot" can be one of your business goals which can have significant results in your business performances.

That's it for today , Hope you have enjoyed it . Also, please feel free to comment or suggest anything that could be worth discussing or writing in the future, Thank You !