Bridge Buyingvs. Just-in-Time Inventory
The Alberta hospitality industry continues to be challenged by competitors both within their local market and through the fast growing segment of online ordering. To further combat the competition, retailers have focused on driving a unique and convenient experience for consumers while maintaining a comfortable profit margin. One strategy that continues to be important is bridge buying product to supplement just-in-time inventory needs. To be successful buyers need to consider the pros and cons of each strategy to ensure the business is enhanced and cash flow is not tied up in inventory for long periods of time.
Just-in-time inventory allows for business owners to increase efficiencies and decrease overstock by making purchases based upon forecasted demand. For example, a purchaser would look at what they sold in their business over the last three to four weeks and review what they have on hand, then place an order for the difference. This would ensure that there are enough products available to consumers until the next order arrives, without going out of stock. This method relies heavily on distributors for inventory, but what happens if the distributors are out of stock, or consumers buy more than you thought?
Effects on Stock Levels
Purchasers have to plan for what they believe a consumer is going to purchase. Having too much inventory on the shelf is an opportunity loss, as the money used to purchase products that sit for a long time could have been spent to build the business in a different way. Conversely, a gap in the inventory would be created if not enough product was purchased or an unforeseeable out-of-stock occurred at the distributor level. The loss occurs when the consumer comes to purchase the item and it’s not available. Just-in-time inventory maximizes cash flow, but should really be used in conjunction with bridge buying to push profits of a business up significantly.
Purchasing techniques can achieve a higher than normal profit margin and can significantly impact the bottom line.
Benefits of Bridge Buying
Bridge buying has been used for many years by purchasers. The core purpose of bridge buying is to secure a large volume of product at a reduced rate with the anticipation of selling it in the future at a higher mark-up. Products are also secured to safeguard against inflation (think about some single malt scotches or Bordeaux), or when a buyer wishes to create exclusivity for their business by securing a container of wine being shipped to the province that no one else has access to. Two common methods often utilized by purchasers are making prearranged deals with an agent to buy products before they become available or purchasing large volumes of product on LTO. Both purchasing techniques can achieve a higher than normal profit margin and can significantly impact the bottom line if done correctly. Agents will often support large volume purchases with exclusive tastings, consumer education, on-packing, near-packing, and various types of marketing initiatives to ensure the product is sold quickly and to further enhance the consumer’s experience. Agent support works really well for multi-unit owners and those that have various license types in Alberta and can take advantage of licensee to licensee sales, or even make use of a central distribution channel for their stores.
Pitfalls of Bridge Buying
When bridge buying, purchasers need to consider some serious pitfalls if they don’t want to see all of their potential profits lost to inefficiencies. If done incorrectly, business owners end up with bloated shelves, aisles and back rooms that are stocked full of inventory. Cash flow can get tied up in inventory that sits for many months, and some owners buy stock on credit, so data analysis is critical.
Be sure to consider all costs when buying large quantities. Do the math, and calculate loan payback time and interest, storage costs, and employee labour costs to handle the product. Labour costs may double or triple, as product may move around between storage facilities before it gets sold. Consideration should be given to the opportunity loss should product not sell, become staled-dated, or breaks due to mishandling. All of these factors will come directly out of your profits.
Buying on LTO Boosts Profits
Here is a great example of how buying on LTO can boost your bottom line:
A top-selling 15-pack can of domestic beer goes on LTO for five dollars off per pack in January. Most retailers are aware that this is a top-selling SKU at any time of the year; therefore, purchasers will look at the prior year’s sales for the month of February, March and April and then will order all the skids they sold in these months plus some additional, based on their sales forecasting, budget, and storage abilities. The idea is that the retailer turns over stock within a 2-3 month period, thus achieving maximum profit per pack and bridging their inventory from one month to another.
Here’s what the math looks like on a pallet of domestic beer 15AR and 212 per pallet. No taxes or deposits have been calculated.
Wholesale Cost $20.44 $15.44
Pallet cost $4,333.28 $3,273.28
Retail per unit $21.99 $21.99
Gross sales $4,661.88 $4,661.88
Gross profit/pallet $328.60 $1,388.60
Remember, just because it is on LTO, does not mean products should be purchased with large quantity buying. A strategic purchasing method will maximize the return on each bottle sold and ensure inventory turns over quickly.
Follow this simplified checklist to ensure you are making the most of your buying:
- Plan purchases in advance and always make purchases based on sales history.
- Compare your top-selling SKUs in each category (i.e. beer, wine, spirits, coolers/ciders) with what is on LTO. Bridge buy your top-selling SKUs.
- Review the prior year’s sales history for the time frame you are planning to have the inventory in your store.
- When the product arrives, ensure till systems and labels reflect the correct pricing strategy so no dollars are lost.
Rebecca Hardin, Vice President of Rising Tide Consultants, has extensive operational experience in retail stores, analyzing business strategies, product selection and maximizing the return on investment for the hospitality industry.