By Vanessa Ting
Some retailers give you their purchase orders (POs) with plenty of lead time for you to turn around and place your orders with factories. For those of you who manufacture overseas AND sell to national retailers, you probably do not have the luxury of waiting for retailer POs before placing your production orders. In fact, you probably have to hedge and place production orders in advance.
Scary, right? I agree. You’re assuming risk when you do the above. But at the same time, there is risk either way you manage your inventory flow. Your decision as the business owner is to decide which risk you’re willing to take. There is no such thing as “no risk” when selling to retailers. Or in business for that matter.
To better understand the risks, read Romy’s blog post on the risks of fluctuating quantity orders
3 thoughts on how to manage the risk of fluctuating quantity orders from retailers:
- Safety Stock: Companies really should consider carrying larger levels of inventory on hand (“safety stock”) and decide whether the upside that presents is worth the downside. If it is too big of a financial stretch for you, that may indicate you’re not ready for big retail.
Note: The aforementioned applies to companies that are on replenishment cycles with retailers and have SKUs that are not unique to one retailer.
- Just-in-time manufacturing is great in theory, but is hard to manage unless you produce domestically.
- This dynamic is yet another reason why I do not recommend newer product companies sell to national retailers. Many cannot afford or know how to manage the risk.
3 Reasons retailers change their quantities forecast:
- Store counts can change. More on that below.
- Sales forecasts are updated based on new information available (e.g., changing market dynamics, updated sales history, marketing activity, etc.)
- Program length changes. By that I mean, if you are given a one-time purchase order that covers 8 week program, but the buyer had to change your program to 12 weeks, that would impact the purchase order size.
4 Reasons a retail buyer will reduce or increase store count: To answer this, first it helps to understand how POGs work.
- Any retailer using planograms (POGs) usually has many versions of POGs for their different store locations, store sizes and store configurations. The size of these POGs vary. Smaller stores get smaller POGs. So your product may end up on both the smaller and larger POGs – or just the larger POGs.
- Some POGs are localized to their region, so not all products will end up in all stores.
- Because POGs vary across a retailer’s chain, it opens up space that retail buyers use to test new products. This is the reason that many of you get test shelf space in limited stores.
- So why does a buyer change store count? POG assignments change for reasons that usually relate to efficiency, specifically sales efficiency or logistics efficiency. If your sales forecast changed, your POG assignment might change. If the buyer rolled up their financials and see that they can make more money by changing POG assignments, then they will do so and your store count or program length might change.
4 Ideas for what to do if your buyer cuts your quantity order: You’ll need to figure out what to do with all that surplus product.
- Build strong relationships with your factories so you can get out of inventory (“cancel”), especially if production is not yet finished.
- Keep unpackaged or packaged units on hand for future orders to any retailer.
- Take the excess inventory and sell it on deal sites like Zulily or Groupon (Groupon! Talk about deal sites we don’t talk much about anymore.)
- Don’t force the excess inventory on to the same retailer that just cut your order. You might end up having to pay markdowns on it or take the inventory back, which ends up costing more than just keeping the inventory in your DCs. Read more about the other downsides of this approach in one of my older blog posts (See Tip #2).
4 Ideas for what to do if your buyer increases your order quantities: You’ll need to ramp up production.
- Build strong relationships with your factories so you can turn up orders (who doesn’t want to make more money, even if it throws off production line schedules)
- Negotiate a replenishment schedule that allows you to deliver a smaller quantity first, then follow up with an expedited (e.g., air-shipped) replenishment order once product is off the line.
- Carry safety stock to mitigate the pain of chasing orders. Keep inventory state-side in a distribution center, in your office, in your garage…somewhere close by.
- Take inventory that was originally marked for another retailer (one that you have more flexibility with or is less important to you) and divert that inventory to chase this order.
As a good practice, you should always build a “chase or cancel plan”, which is a contingency plan that outlines what you do in either of the above 2 scenarios. Note that if you are placing production orders before receiving POs from retailers, that’s your risk to assume. The retailer has every right to change their forecasts at any time before they place orders. But if the retailer changes their quantities after an order is placed (which is not common in my experience), you have every right to go back and negotiate a remedy.
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