DeadStock: Distributor’s Deal Dilemna

September 30, 2009

Here’s  a dilemna frequently faced by small and medium sized (“SME”) distributors / wholesalers:

You’re preparing an order to replenish a particular product. You usually purchase 3 months’ worth of estimated sales volume at a time, due to vendor lead times, etc. Right now, your vendor is offering a limited time extra discount of 10%, for a minimum quantity of slightly more than double what you would normally order. And there’s the dilemna: do you order 7 – 8 months’ worth of demand, or do you forgo the additional discount?

Most SME business owners find it hard to resist a deal that will increase their gross margins. In the above example many (if not most) would take the deal on offer. And that may sometimes be the right choice – but it will also very frequently be a poor decision. Why? Well, there are a number of other factors to take into account, and while some of these may seem somewhat theoretical to a hands-on trader, they are in fact very real and very important.

First,  does the additional margin you’ll earn when you eventually sell the products offset the extra holding and financing costs associated with handling, stocking and financing the additional inventory? This question alone will often refute the apparent value of the extra discount.

Additional aspects to consider include:

  • Changes in demand are harder to predict the further out you go – you may never sell the additional items. Scrapping a small portion of a shipment could than wipe out all the extra margin earned.
  • Tying up your working capital and warehouse space could hamper your flexibility to react to other changes in product lines and demand.
  • The longer you hold products in inventory, the more vulnerable you become to being saddled with discontinued or superceded items.
  • Currency fluctuations:  if you buy in a foreign currency, a drop in that currency’s value could allow your competitors to import the same products at a lower cost. You know what that would do to your margins.

In the real world, many discount deals lead wholesalers and distributors down the dead stock alley. Following up on a previous post about Dead Stock, I ran something called a ranking report against one particular customer’s inventory. We identified over 200 SKUs as probable dead stock. More than half of these were only in stock because of past price-based purchase decisions. In comparison, less than 20% of the remaining SKUs had been available on any bulk quantity / price deal in the preceeding couple of years.

Essentially, a properly designed and carefully thought out, systematic approach to inventory replenishment will almost always pay off big time. (I say “almost” because there are a handful of exceptions to this, typically industry-based. ) Such an approach will allow you to calculate on replenishment quantities and frequencies based on all relevant factors – price and discount being just one of them.  

I’ll share more on inventory ranking reports and dead stock analysis in future posts.

I’d be very interested in your comments, particular if you disagree with these thoughts. (I love a good argument.)

Found by Accident: Tips & Tricks

September 23, 2009

Did you ever accidentally discover a useful feature or function in a software package, or on a website, that you’d never previously known or realized? Most of us have, over the years. And when we do discover something, we seldom share this revelation with others; hopefully we remember it ourselves for future use, but that’s usually as far as it goes.

So I’d like to share a couple of my “finds” with you here, in case you don’t already know them (and find them useful).

  1. Google as an all-purpose calculator: type an equation into the Google search bar, and the answer displays above the list of search results. This is not limited to straight math. You can search for conversion between metric and imperial: type “2 miles in km” and Google will show the following: 2 miles = 3.218688 kilometers. Exchange rate conversion works too: “1 USD in GBP” returns 1 U.S. dollar = 0.609681746 British pounds. Experiment with this – it saves me a lot of time on a regular basis.
  2.  Microsoft Word: use Shift+F3 to toggle the current word (or currently highlighted words) between lowercase, mixed case and uppercase. It’s a really quick way to correct, for example, a heading that you inadvertently typed in lowercase instead of mixed case. And of course when you type an entire sentence before realizing Caps Lock was on….need I say more? [Note this can also work in Outlook, depending on version and editor settings.]

As I remember or notice more of these, I’ll keep a list and periodically post some updated hints here.

Please feel free to share your own discoveries by posting comments to this blog.

The Windows 7 Outlook Crashing Blues

September 15, 2009

Edit October 30, 2009: see possible solution at the bottom of this post.

[Sung to the tune of an old blues standard]

My notebook was running the..Release Candidate
Since early in springtime, and all was just great
When final release code, was shipped to my door
I left it alone there, sayin’ I don’t need no more

The programs were runnin’, the data was hot
The widgets so useful, I had such a lot
So no need to install, the RTM disc
When everythin’s alright, then why take a risk?


But oh, oh, oh, tell me it ain’t so
I got the Windows 7 Outlook crashing blues (yeah yeah)

Twas only last Monday, started out strong
But purty soon I noticed something was wrong
Cause every few minutes, my Outlook would crash
And then it would restart, with full memory cache

There’s no way of workin’, you cannot progress
When crashes are reg’lar, much to your distress
I tried to reboot it, I started to fuss
But nothing could stop this, not even a cuss

 (Repeat Chorus)

 So now I’m alone here, the reformat starts
The first stage of install, in so many parts
And finally farewell to Release Candidate
Hello to release code, you’d better be great

(Final Chorus)

Cause oh, oh, oh if you ain’t good
I’ll have the Windows 7 Outlook crashing blues forever more.

[Since determined that part of the problem is the Office 2003 junk mail filter that Windows Update insists on installing unless you switch it off. Hope that helps those who get with the same problem.]

Projections for Purchasing – a Perilous Proposition

September 8, 2009

My Crystal Ball will tell you exactly how much of each SKU to purchase, and when to place the Purchase Orders. Will it work for you? Well, it will give as accurate a view of future demand as that used by many buyers in small and medium sized wholesalers and distributors.

“But,” says the purchaser, “I use past demand (eliminating standard deviations) and average lead times per vendor. I calculate economic order quantities and safety stock levels. I plug this all into my inventory replenishment software, generating all the necessary purchase orders at exactly the right time.”

If this is you, you’re certainly ahead of the curve compared with your peers. And most of the time you will quite possibly be spot on in your purchasing – or at least ahead of my Crystal Ball users. There’s just one snag: you’re assuming that past demand will always accurately predict future demand. That may be true much of the time, but what happens when it isn’t?

This is the trap into which many companies, large and small, fell into as 2008 turned into 2009, and many were left with large inventories and diminished demand. This even includes companies who had recognized the implications of the looming recession and adjusted their sales forecasts accordingly.

The underlying problem is our business culture of relying on budgets and estimates as if they were accurate projections of the future. They are not. I urge you to read The Prediction Trap by Randy Park for an excellent assessment of why and how we paint ourselves into corners by using these techniques that are so ingrained in corporate culture and philosophy.

Sadly, I predict that most readers won’t do so.

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