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Help grow the bottom line by controlling cost PDF Print E-mail
Written by Alixe MacRae   
Image"I don't want to business with those that don't make a profit, because they can't give the best service." This tiny piece of truth was written by Richard Bach, the American author of Jonathon Livingston Seagull and it holds a number of important lessons for independent retailers.

Profit is the lifeblood of every business; but in this case of every independent retailer, that blood must be black not red. The simple definition of profit is "the positive gain after subtracting all expenses" and the key to ensuring a healthy profit is the full accounting of all expenses.

Cost of the product, what is built into this cost?
Is there a warranty that is seldom used? Can the cost be reduced by buying without this warranty? Retailers should consider ensuring there's an "epidemic failure clause" in any supply agreement to protect any serious product flaw (for example, if more than 5% of the chairs are defective).

Does the product price include a royalty for a designer's name? Retailers should determine, in every case, whether the designer is worth the premium. If not, ask for something similar that doesn't have the added expense. This could reduce the price by as much as 20%.

Secondly, ask whether there's an advertising allowance included in the price? Then determine how difficult it will be to collect these monies? It may be that getting a cost reduction equivalent to the allowance makes more sense.

Another key factor is freight. If freight is included, it might be good for the store or, it's very possible the merchant could up overpaying for this vital service. Compare the included freight factor against the store's own freight provider before swallowing these added costs.

Get all the details possible before issuing the first purchase order. Consider things such as the frequency of promotional costing; floor sample discounts; volume rebates; point-of-purchase materials; early payment discounts (are they worth it?); payment terms; and, turnaround or replenishment lead time (can you operate your inventory on a sell/buy basis?)

Dig for every detail and don't be afraid to negotiate a better price if the offer doesn't benefit the company.

Freight
When ordering small quantities out of the U.S. (and sometimes even from the other side of this country) freight costs can be higher than first costs. Ensure the company will be doing enough business to justify the larger shipments, or develop a vendor closer to the store's location. Saving $30 on a Parson's chair is false economy when the shipping bill is $50.

When shopping for a freight company, consider the store's normal shipment size. The freight provider with the lowest full truck rates may be the worst for minimum loads. Buy only what the store needs and don't forget to consider the shipping terminus: your dock or theirs?

What is high season for containers? Can the store save money by ordering a week earlier than planned?

Develop a freight tendering sheet that puts all prospective vendors on the same page. There are a host of factors to consider: insurance (‘no' is the right answer if the store already has adequate coverage); in transit-time range; export not exworks (exworks adds cost); delivery to the store's dock; 48 hour pre-booking of your dock; customs handing (or not); rates (determine whether cube or weight or a combination is best); and, is expedited service available and at what additional cost?

Exchange rate
Every company that buys in a currency other than their domestic one builds in a cushion. So should the independent retailer.

It may be as little as 5%, or as high as 15%. If the store is buying from a vendor that is purchasing their stock in U.S. dollars, ask how high the discount would be if you paid in U.S. dollars? Some vendors will happily discuss this. Others won't entertain this idea at all but it never hurts to ask. Remember, the cushion is always better in your hands, not theirs.

A store's internal currency cushion should always be a minimum of 5%. One adverse report or global scare can wipe out 5% in a nano-second, so if a higher cushion can be built in without creating too high a ticket price, don't be afraid to add it in.

Duty, taxes and brokerage fees
The government always gets their due (death and taxes are still the two remaining certainties of life) and so do custom brokers. Before placing a purchase order from a foreign vender, know exactly what the duty is from each country as it can affect the buying decision.

Regularly review brokers rates. The store may be able to save serious money if imported goods are a significant part of the assortment on the floor by simply managing duty, taxes and brokerage fees well.

Using all of these factors, you can complete a landed cost worksheet. The formula is fairly straightforward:

First cost plus freight plus exchange rate plus duty and taxes plus brokerage fees equals landed cost.

There a number of software programs that have been developed to assist in this calculation and looking at acquiring one for the store is always a good idea. But, remember, no matter how good the program is you must continually update the information it contains.

The next article will discuss the costs incurred after the product hits your dock. These costs can turn a potential profit into a massive loss.

A regular contributor to Home Goods Online, Alixe MacRae is one of this country's best known merchandisers, having held senior positions at a variety of well-known Canadian retailers including Stoney Creek Furniture, Sears Canada and The Bay. She recently started her own business Concierge Relocation (www.conciergerelocation.com). Her company specializes in move management, especially for those dramatically downsizing seniors and their overwhelmed children.

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