Retail buying can be high cost

Roger OakdenGlobal Logistics

Grey imports.

A business today is most likely to make its profits from how well it purchases goods and services, rather than its selling margins. This is especially true in retailing because competition keeps retail prices in check.

It is retail buyers who purchase goods for resale through their employer’s physical and on-line outlets. All to often their measurement of success (and bonus) is gross margin; the difference between the selling and purchase price for each product. This provides a built in incentive to raise contracts for products that seem to provide a very high gross margin, but the hidden costs are not understood or are ignored.

The old saying ‘if the deal is too good to be true, then it probably is’ was on display this week. A major retailer was in court explaining why they acted ethically even though a brand of cosmetic they sold is claimed by the brand owner and manufacturer to be counterfeit.

In this case, the gross margin attraction must have been too much for a buyer. They jumped at the opportunity to sell a branded cosmetic at 40 percent less than the accredited retailers and still make a very high GM. The legal costs will substantially reduce these margins!

To acquire the goods required the buyer to work through a local agent, who dealt with an exporter in America, who in turn purchased from a sole owner business located on a highway in Texas, who obtained the product from – don’t know. This is called importing through ‘grey’ or parallel (unofficial) channels, which can be a lucrative buy so long as the product is genuine.

But does this sound like a professional way for a large retailer to buy its products and what appears to be management approval of the transaction?

A different way

In retail there most definitely is a role for people who understand the consumer and retail trends. These sales focused individuals must select the product ranges to be sold and to forecast the max/min sales range by period.

But should their job role also include the buying, or is this a job for a qualified professional? The case mentioned here shows the dangers of having people with a focus on sales being responsible for buying and hopefully managing the total landed cost. A similar situation occurs when engineers in projects do their own buying. Some years ago I worked with a State government in Australia as we enabled procurement professionals to take a major role when the government moved to outsourcing and public-private partnership (PPP) contracts; today there is no mention of the role, but some well publicised poor and expensive contracts. How many other businesses have untrained people spending the organisation’s money?

Your organisation would not employ an unqualified accountant to keep track of the money. Should you employ unqualified and inexperienced people to spend the money?

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...