A
common mistake we find among retailers is to on optimizing distribution
among stores once the inventory has already been received from the
vendor. In the worst of cases, the philosophy of these retailers seems
to be: “Get the merchandise in the stores as quickly as possible
and then we’ll figure it out.” Unfortunately, by the time
you are ready to start moving inventory between your stores, it may
be too late. Transfers are like an autopsy: the patient is already
dead. In this case, the retailer may be trying to accommodate inventory
that differs sharply from demand, i.e. he is moving merchandise around
that customers do not want. Purchasing, on the other hand, is more
like preventive medicine as the retailer uses Minimums & Maximums
to only order merchandise he knows is in demand. In fact, we believe
that the number of inter-store transfers is indicative of the effectiveness
of a retailer’s purchasing and initial distribution. A high volume
of transfers suggests the right merchandise was not ordered or distributed
to stores initially. While some transfers are not only inevitable
but also smart business (more on this below), a lower volume of transfers
is a sign of a healthy distribution system. Transfers between stores
are relatively expensive since they usually involve moving small amounts
of merchandise in a hurry.
Centralizing your purchasing will give you greater accuracy and flexibility
in your distribution. A general rule of statistics is that they are
more accurate the more aggregated they are. Thus, when the census
tells us that the average American family has 2.2 children, we know
this to be true for the country as a whole, but do not expect our
neighbors to have fractions of children living with them. The same
logic applies to a retailer’s sales statistics. Suppose a certain
item, the black size 6½ Marilyn woman’s dress sandal we
referred to earlier, sold on average 2.2 pairs in each store during
the last month and the retailer wants to restock. Now if every one
of the 40 stores is sending individual purchase orders to a vendor,
they risk ordering too many (120 pairs if they each buy 3) or too
few (80 pairs if they each buy 2). However, if the retailer orders
88 pairs for his 40 stores, then has the flexibility, for example,
to ship one pair to most stores, 2 pairs to certain stores, and hold
some 20-30 pairs in reserve to fill in where they sell fast or in
unexpected amounts.
The
benefits of centralized purchasing are even more apparent when your
vendor gives you no choice but to buy prepacks which are, after
all, a way of getting retailers to buy more merchandise than they
need. To use a very simple example, suppose the vendor of Marilyn
sandals insists on a minimum purchase of 6 pairs per size. In this
case, the 40 stores purchasing individually would buy 240 pairs,
over 150 more than they need! However, if all of the purchasing
is centralized then the retailer can buy 15 sets of 6 pairs instead
of 40. The example is a simple one, but the principle applies in
more complex cases. Centralized purchasing allows the retailer to
find efficiencies that can only be seen at the aggregate level.
One store may be ordering a lot of small sizes for a given style
while another store may be ordering a lot of larger sizes, depending
on the demographics of a store’s region. (As strange as it
may sound, there are cases where customers of one store or region
on average have bigger feet than customers at another store!) Combining
the orders of these two stores could reduce the total number of
prepacks that have to be purchased.
Having
a knack for fashion and choosing the right styles is an art, but
reordering the same styles to restock stores is most definitely
a science—and a very precise one at that! The beauty of Minimums
& Maximums is that there is no opinion involved—just hard
data. Often the best selling styles in the store are not the styles
you would expect to be popular. If you purchase merchandise according
to your Minimums & Maximums, you are purchasing merchandise
you know will sell; you have the evidence to back you up. If you
don’t use Minimums & Maximums, you are purchasing merchandise
you think might sell well.
There
are some retailers which allow each store to manage its own purchasing,
but we believe this is inefficient. Purchasing, as we have suggested,
is one of the most critical functions in any retail operation. Do
it right, and other functions such as transfers and markdowns become
less important. It is unreasonable to expect to have a purchasing
expert in each one of your stores. Is the store manager up to the
task of making 12,000 supply policy decisions every three months
and 12,000 supply stocking actions each week while managing the
store staff and hopefully doing some sales himself? Doubtful. On
the other hand, it is possible, and highly recommended, to have
one or two purchasing experts in your central offices whose only
job is to analyze sales statistics, set Minimums & Maximums
and create the necessary purchase orders. They will undoubtedly
do a much better job than the store manager for whom purchasing
is just one of many other responsibilities. Note that it is not
necessary that all merchandise be received centrally (though there
are advantages to having a central warehouse which we will see below)
but only that all orders be placed centrally. Many retailers prefer
to have orders shipped directly to stores, particularly if they
are buying on 30 days credit and hope to sell out the shipment before
payment is up.
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