Buying in bulk and buying just in time relies on the friendly calculator to answer to all the particularities. No two items or brands are quite the same

The classic model for a stock discussion remains the basic supermarket – say an average modern behemoth of 50,000 square feet or so. These stores run the gamut for purchasing options, as they sell quickly perishable fish, meat, dairy, fruits and vegetables, time-sensitive (sell by date) packaged foods and timeless items like light bulbs, stationary and soap. At the same time, as U.S. consumers are aware, a grocery store does better when its shelves are seen as full. A store with one apple in a bin is generally a turn-off for customers.

Take your calculator to the frozen food or dairy aisles and you will quickly see how buying ice cream and milk in bulk works against you. Those refrigerators and freezers are expensive to run. But milk cooperatives and ice cream producers still appreciate large orders. There is an incentive for buying in large volumes (cheaper prices), but there is a penalty for doing so, as well (higher expenses).

A stop at the local auto dealership shows another side of bulk buying. Auto companies General Motors, Ford and Chrysler all appreciate a dealership that can move cars off their lots. Incentives for doing so are famously generous. But buying expensive cars in bulk is a very risky proposition. You can pass incentives on to customers in the form of lower prices, but only a calculator can tell you when to do so.

Passing on the benefits

Buying in bulk brings up the discussion of who gets the benefit of lower prices

If you buy in bulk and pass on the savings to customers, who benefits? How low do you have to go on prices before you begin to attract enough new customers to make up the difference with the smaller revenues and shrinking profits?

There are balancing points all around. Your business could build up a reputation as fair and community-friendly. If competition is scarce, yo may be able to put off that concern for another day.

Consider the following discussion points about just-in-time buying compared with bulk purchasing.

Storage

Not all storage is created equal. Different expenses apply. Dry goods, traditionally, are easier to store than perishables.

Product Deterioration

Obviously, items like flowers and perishables fade soon and quickly. Categorically, dry goods last longer. Hardware, if you can store it, has an almost indefinite shelf life, while buying energy-related or energy saving products in bulk is a safe enough bet. Light bulbs change styles, but they do so very slowly.

Style

I’m glad I’m not in the clothing business. Talk about a business fraught with irony. If a style catches on, suddenly it’s everywhere. Then the popularity collapses, because that style becomes too commonplace. It’s like you can’t win.

It takes tremendous intuition to anticipate style changes, beyond the obvious factors, such as the changing of seasons.

Hedging your Bets

Lastly, buying in bulk requires a rudimentary understanding of the concept of hedging prices. In simple terms, if you buy in bulk at low prices today and the price drops further, then you can’t justify making another purchase until your stock has dropped to the point where you can handle it.

In reverse, if you buy in bulk today and the price rises, then you’ve successfully hedged your bets. Pricing will be set, in part, by your competition, who purchased the same items at the higher price. This increases your profit margin simply because you anticipated the right buying time.

By Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles of partners on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to editor.webposts@gmail.com.

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