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Inventory Turns Can Make All The Difference To Retailers

My interest in supplier/dealer relations was heightened recently when I sat in on a meeting between a retailer and his manufacturer representative. Following the usual exchange of trade gossip and an off-color joke or two, the get-together got down to business.

Specifically, the rep was looking for a re-order of a certain SKU that the retailer had been carrying for some time at a most respectable profit for his efforts. I paraphrase:

“At the $400 price you’ve been asking and getting for this one, I figure that, with a $300 cost of goods, you’re making a gross margin of 25 percent on every piece you sell,” the rep said with a smile.

“Tell that to my banker,” the merchant replied. “I’m in the midst of negotiating another loan to pay for the inventory filling my warehouse. That’s adding to the cost of your goods. I could make up for it by increasing my retail price, but the fact that you’re also selling to my mass merchant competitor rules that out. What I really need from you in order for me to make a decent living out of this business is…”

“…better inventory turns,” I interjected.

With an encouraging nod from the retailer, I continued to explain how an increase in inventory turns can often be better than a lower purchasing price. A dealer’s inventory is the largest investment he makes in his business, I noted, and his success is based upon how much of a return he makes on that investment.

If he operates on an overall before-tax net profit of, say, 6 percent of sales, that means a net of $24 on each $400 sale. If his merchandise cost for that sale is $300, that’s an 8 percent return on that investment. That’s not too bad, but what happens when he must add interest on an inventory loan to his costs? Borrowing money for that purpose is no different from adding to the cost of merchandise. It cuts the return on investment.

If we look at this from another angle, we see that the perfect way to buy and sell products for resale is to sell the item before the supplier’s invoice comes due. Six or more inventory turns in a year with net 60-day terms from the supplier would be ideal.

The “big guys” know this lesson well. That’s why they carry fewer brands in their large stores. This allows them to operate on 12 or more inventory turns with lower unit costs on concentrated purchases.

Suppliers can help reduce the likelihood of those added expenses by arranging to keep field warehouses stocked with fast-selling SKUs, so that merchants can draw on that stock as needed, even if it slightly adds to the cost of goods.

Retailers can better compare the profitability of one brand vs. another by taking into account the supplier’s willingness to carry some of that backup stock.

Properly executed, it is a win-win situation for both supplier and dealer, I told the retailer and his rep.

“I’ll check with the main office, and be back with you,” the rep replied.

Jules Steinberg, a former executive VP of NARDA, is president of Jules Steinberg & Associates, 425 Sunset Rd., Winnetka, Ill. 60093. Phone: (847) 446-7412. E-mail: [email protected].