Tuesday, June 7, 2011

The Case Against Category Management – Exercise 5 -3

… Continued from the previous article

Now, wait a minute. At this moment you may be thinking, “Is this guy crazy? Who will keep track of all this stuff?” Every minute of every day, we know what comes into the store, leaves the store, and how many we have left. The SRCD computer accumulates the sales and through an automated bank transaction at the end of each day, transfers the supplier’s share of the profit for each qualifying sale.

If I am considering opening a new store and Vendor A will stock it for $60,000, and Vendor B can do a better job for $24,000, who do you suppose will get my business?

So far, the greatest concern has been the retailers’ perceived decreased profits on the sale of individual items; but 1) In recessionary times like these, retailers should be more concerned with cash flow than they are with profits and 2) If we can reduce the out-of-pocket cash expenditures by 60.3% or more, and increase retail sales by 28 – 40 percent through ‘Vendor Managed Inventory’, at the same time delaying half of the cost on purchases until AFTER the inventory has been sold, the increased profits from the increased sales will more than make up for the lower profits on the sales of the individual items, and then some.

Still, while this program is a slam-dunk for suppliers acquiring new business, even given the immediate advantage of increased working capital, established retailers may be harder to sell; so here’s the solution:

It all depends on how badly a supplier wants a retailer’s business. If he’s determined to gain the business of a 1,000 store operator, he simply gives his salespeople a tool for negotiation.

If you examine the lower table at http://www.cstorepod.com/html/exercise_5_-_table_3.html, you will see where a 35/65 percent profit split (first row) produces figures that are almost identical to the traditional way inventory is sold to retailers today (upper table). So, what the supplier does is negotiate when signing up existing retailers by allowing them to start somewhere in the middle of the lower table. Not only does it make good sense, it’s an excellent tool for the suppliers’ salespeople to use in closing the sale.

The value of increased working capital and a shared revenue arrangement cannot be dismissed. The seasoned retailer is given the incentive of starting at a split more to his liking, and as sales increase by 28-40% due to increased sales through vendor managed inventory, the percentage gradually leans more toward the supplier until it reaches 50/50, and then it freezes. By that time, the retailer is making more profit than he ever made before, and with the added increase in his working capital of 60.3%, he may soon forget about the percentages entirely. Also, at the onset, the supplier will not have to put the same amount of stock into an already full store.

Another point: All suppliers have products that are stacked in their warehouses and carried only as a service to a few customers. After talking this over with one supplier, I got another idea. True, with this kind of system, the supplier will be able to order ahead more efficiently, but why shouldn’t the supplier gain extra income for the penalty of carrying unprofitable inventory? So I began to think, not only can we vary the percentage profit split by retailer, why not vary the percentage by product? Have a 50/50 profit split on some items and others might require a 52/48 split so the supplier doesn’t lose money on the transaction?

One last thing: Suppliers’ sales people have to carry multiple price lists for every customer they call on. Using this method, every one of a supplier’s customers would pay the exact same price upfront and only the profit split variable would determine what the retailer’s resulting cost would be.

The main question I would ask a supplier is, “How would you like to compete against this sort of program, not IF, but WHEN it becomes common practice?”

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