Wednesday, 1 June 2011

The Lost Art of Buying

There was a time, long ago when distributors could get bold and sassy and buy cleverly to 'corner the market'. This meant they could, for a short period, control the 'supply and demand' and create some extra profits.

Today, the sophisticated relationships between big vendors and big distributors mean there is little scope for creativity. The market is fed what the vendor wants, by and large. There are rules of purchase like 'weeks of stock gates' which govern how much a distributor can buy based on previous months' sales out and the like. Break the rules and the already pressurised margins could be eroded by as much as 25% for an entire quarter's worth of sales.

Distributors now have centralised teams of buyers who comb their systems to find gaps in their key SKUs and items that have aged in a constant preening process to refine the stock position and create the maximum Return on Capital Employed. In many cases, by adjusting their pricing algorithms to squeeze the last basis point of margin on a line rather than looking to buy cleverly to get bigger effects. In a perverse world, the more complicated to sell a product is, like complex servers and storage, the lower the margins are and as these are more expensive products buyers are paralysed with fear to bend the rules.

Largely this is a good thing. As margins become wafer thin, stock write-downs can kill a business from within particularly as large vendors offer little or no price protection or stock rotation anymore. Risks on stock have become a thing of the past. Gone are the days of distributors ringing up vendors at month end to speculate or vice versa.

But where has the entrepreneurial spirit gone that once drove this market and created growth opportunities?

In reality, most of the vendor moves came out of the overwhelming need to be 'fair' in the eyes of the EU Competition Law. Plus the fact that many US firms rightly see moving stock from themselves to distributors hardly constitutes selling it (which begs the question, why is stock rotation so taboo these days?). The fact is that limiting how much stock distributors can buy based on sales out is inherently anti-competitive.

What if a distributor wants to gear up or down on the gain or loss of a particular client? What if they want to buy stock and decrease the selling price so creating a more competitive end user price? What if distributors want to try and control the demand more and solidify margins by speculating? What happens if they simply just want to steal a march on their competitors?
In the stifling world of purchasing created by vendors and distributors, there is less room for margins of error but that is more because of a paralysing fear of getting it wrong than an innovative spirit to create opportunity.

New, aspiring vendors can take a look at this and make some interesting decisions on channels and their stock policy. The innovative can win, even if they are taking on the big guys with a simplified and enterprising approach to the supply chain.

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