Niche marketing is one way that independent jobbers can survive in today’s competitive business arena.
As more mass merchandisers penetrate the marketplace it becomes more important to fine-tune your game plan. A Wal-Mart across the street can be a bad news-good news situation. The bad news is the low prices on fast-moving merchandise. The good news is what happens to the size of the market.
Wal-Mart, for example, triples the market size wherever they locate. They also stock only fast-moving inventory. Jobbers that profile their inventory to include a wide breadth of coverage instead of just fast movers are in a position to service the new customers the mass merchandiser brings to the marketplace.
Proactive Gross Margin Return On Inventory and the Velocity Profits Index (VPI) (See AutoServiceWord.com “Education” for these) can help you tailor your key lines to build your niche.
Last month I described an automated process that optimized the profitability of our filter line. This month I will provide an overview of the basic VPI scenarios. The VPI scenarios will tell you which part numbers to buy by the unit, and which part numbers to buy by the case. It will also tell you how many gross profit dollars are provided by rebates, extra discounts, and dating. The VPI can be any size that fits the page.
The idea is to pick a range of margins and turns that cover all your purchasing and selling parameters. You could go for a one-size-fits-all strategy, but that would be pretty cumbersome. It would need to range from .5% GP to 50% GP and from 0 Turns to 30 Turns. It could take wall space instead of fitting on a sheet of paper. I suggest building a separate VPI for each product line to be analyzed. The first step is Scenario #1.
Baseline Scenario #1
This helps you establish your beginning purchasing and selling strategies. These strategies provide benchmark profitability for a product line. As you contemplate purchasing and selling changes, you can compare the new GMROI to the previous GMROI for each change of strategy you want to investigate.
Refer to the GMROI formulas and calculate Inventory Turn and GP% for each strategy. Plug the results into the VPI and note the GMROI.
Remember, each time you take advantage of a special deal it changes your profits. When somebody says “Boy have I got a deal for you!” check him out.
Hint: Inventory dollars at cost x GMROI = Gross Profit Dollars.
When GMROI goes up your gross profit goes up.
The following table shows a recommended ordering strategy.
Remember that the number of days’ supply you keep on the shelf has a huge impact on inventory turns, and inventory turns have a huge impact on GMROI.
The following spreadsheet shows the methods to determine when to buy by the unit and when to buy by the case.
There is a trade-off between case-lot discount and case quantity average quantity on hand. We should buy all part numbers above the line in case quantity. We should buy all part numbers below the line in per unit quantity.
The GMROI info in the above example was generated manually with the VPI.
It shows also that an across-the-board strategy of buying in bulk is not what generates profit. At least not always.
By the Unit Qty.
By the Case Qty.
Next month we will import real data into an Excel spreadsheet and generate the GMROI automatically and also measure gross profit dollars provided by rebates, extra discounts, and dating.
Jerry Loney is a professional consultant regularly hired by jobbers and retailers in the automotive aftermarket and other industries. He has given presentations to Canadian auto parts warehouse distributors, wholesalers and retailers on a number of occasions. Loney is also the president and co-owner of Walla Walla Motor Supply in Walla Walla, Washington and he has been a successful jobber for more than 30 years. Any jobbers or distributors who may wish to contact him with specific questions may do so, in confidence, through Jobber News Magazine by fax at (416) 442-2221.